Fresh produce pricing strategies: 3 ways to improve profit
In 2019, president and CEO of the United Fresh Produce Association (UFPA), Tom Stenzel, described the fresh produce industry as “the ultimate supply-and-demand economy.” This is a neat summation of the unique profit challenges faced by fresh produce businesses in the 21st century. In this industry, strategy is overwhelmingly influenced by demand and the window of profitability for produce is very small.
It’s this combination of factors that makes businesses vulnerable. These vulnerabilities hand more power to retailers, allowing them to drive down the prices they pay and cut the profit margins of producers. In this environment, smart and, crucially, dynamic pricing is essential for any fresh produce business to maximise profit potential. This article sets out the tools required to build a smart pricing strategy.
Can you accurately allocate production costs?
In an ideal world, the basis of your pricing strategy would be a firm grasp of what your product has cost you to produce. However, it can be easy to undervalue the resources that have gone into a line of fresh produce by the time it is ready for market.
Direct costs associated with a range of produce will include:
The price of the seed and fertiliser
Any regulatory costs associated with the product in question
Indirect costs will be more difficult to calculate and may include:
Machinery costs and depreciation
Labour (both contracted and your own)
Property costs and maintenance fees
Combining all outgoings for a product line and dividing by its yield will allow you to determine the cost per unit or kg. However, this is not a realistic aim for many businesses - calculating production costs to this degree of accuracy is very difficult without large amounts of yield data and sophisticated software to interpret it.
It is at this early stage that an integrated approach to data recording can reap the biggest rewards when pricing produce.
Strategies for selling to retail
It’s counterproductive to consider strategy in terms of pricing high vs pricing low, for two main reasons:
- As discussed before, retailers are in control when it comes to the rough value of produce at any given time.
- While pricing at very close to or below the cost of production (loss-leading/ penetration pricing) can help build market share and relationships with wholesalers, in an industry where profit margins are so slim this is dangerous. Moreover, it devalues the produce being sold in a wider sense, deflating the market.
Instead, we’ll assess three common pricing strategies that focus on smart and subtle positioning rather than significant hikes or cuts.
Flexible pricing based on supply and demand
Pricing in line with demand is a strategy based on making logical decisions relative to the real-time state of the market. Rather than targeting a set return on investment, this strategy aims to hit a price sweet spot between maximising profits and appealing to the retailer or wholesaler.
To execute a supply and demand strategy well, accurate market insights are essential. Obtaining this insight is likely to lead to additional expenditure which will have to be priced into the cost of production.
In theory, the demand of any product should allow for it to be optimally priced in line with the market. However, it’s necessary to appreciate that this kind of value-based pricing is ultimately led by the consumer. In the supply chain, fresh producers are the party most removed from consumers, meaning changes in demand take time to become apparent by which point it may no longer be advantageous to change pricing.
This strategy requires growers to constantly be flexible - with what they grow, in what proportion and how they price it. Some fresh produce businesses simply can’t shoulder that much uncertainty.
This strategy entails using the pricing of rival fresh producers as a guideline. Of the pricing methods we’ve covered, this is arguably the most suited to less established businesses trying to nail down the best price for their goods. This is because of its simplicity and the relatively low risk.
Market data is again critical. Some is publicly available - for example the UK government records data on the average weekly wholesale market prices of some fresh products.
However, this kind of data can be problematic, with markups varying from wholesaler to wholesaler. It may be necessary to conduct less formal research by talking to fellow fresh producers to determine the consensus within growing communities.
Despite this, using rival growers to set pricing is not viable in the long-term as a lone strategy. It removes the opportunity to steal a march on the competition while effectively turning the market into a “race to the bottom” on pricing.
Essentially, a cost-plus model involves setting a fixed markup and pricing consistently in this manner. For example, if you settle on selling tomatoes to wholesalers at 35% over the cost of production, a batch which cost £0.75/kg to produce would be priced at around £1.01/kg.
Cost-plus pricing is simple and easily justifiable to the purchaser. A fresh producer opting for a cost-plus strategy would reason that staying true to what they value their product at will deliver greater profits in the long run.
However, the strategy requires fresh producers to know their cost of production to a high degree of accuracy, something not all are equipped for. It also means the product needs to be of higher quality or have extra inherent value over its cheaper competitors to be attractive.
This means cost-plus pricing will be more effective for businesses with access to and understanding of enough production cost data, and on products which are less price-sensitive.
How ERP can help price produce profitably
While cost-plus pricing is the strategy most dependent on the accurate calculation of production costs, knowing how much each line of produce costs to bring to market is always essential to getting a fair price.
Harnessing all the information needed to produce this and using it to provide genuine insight is a major undertaking, and highlights the need for an integrated approach to fresh produce. No aspect of a fresh produce business is more sensitive to the real-time situation than when it comes to pricing.
Enterprise Resource Planning (ERP) software provides the most effective way to accurately track real-time cost of production. It can empower businesses with the true value of their produce, allowing them to price appropriately and hold firm against retailers who value it too low.