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Pricing Your Way To Profitability
Dr. Charlie HallEllison Chair in International FloricultureTexas A&M [email protected]
Website:Website: Ellisonchair.tamu.eduEllisonchair.tamu.edu
Blog:Blog: Ellisonchair.blogspot.comEllisonchair.blogspot.com
Today’s Topics …
Pricing PrinciplesPricing Principles
Rational RantingsRational Rantings
Costing ConcernsCosting Concerns
Ominous OverheadOminous Overhead
Careful ComputationsCareful Computations
Terrific ToolsTerrific Tools
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We Must Raise Our Prices!Value of a 5" Poinsettia corrected for inflation, 1965‐2007
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
$45.00
1965 1975 1985 1995 2005 2007
Retail ‐ INF Whole ‐ INF Actual Wholesale
Percent of managers indicating they were well-informed regarding factors affecting pricing decisions
84%
81%
75%
71%
34%
21%
Variable costs
Fixed costs
Price of competing products
Value of product to consumer
Consumer response to price changes
Consumer willingness to pay
Source: Note on Behavioral Pricing, Harvard Business School, 9-599-114.
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Cost of goods sold (COGS)
Product price (P)
Perceived value (PV) = ∑ of perceived benefits
Objective value (OV) = ∑ of all benefits
{Firm’s incentive to sell: (P-COGS)>0
{Consumer’s incentive to purchase: (PV-P)>0
$0
Marketing efforts
Prices of substitutes
Value Pricing and the Economic Perspective
Source: Note on Behavioral Pricing, Harvard Business School, 9-599-114.
?
Relationship between price elasticity and total revenue
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Product Life Cycle
Time
0
Dol
lars
Intro
duct
ion
Gro
wth
Mat
urity D
eclin
e
Sales
Profits
Long-run Industry Pricing Equilibrium
Price SMCS1
S2
D2
D1
LS
MCAC
Output
(a) Typical Firm0
Price
Quantity
(b) Total MarketQ2
0 q1 q2 Q3Q1
P1
P2
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The Cost-Price Squeeze for Growers
Retail consolidationFewer buyersOversupply
Specific buyer requirements:
• product tags
• JIT delivery
• barcode stickers
• returnable shipping equipment
• shelf life
• take back unsold product
• consistent pricing
• continuous replenishment
• volume
““These staggering costs have us scared to These staggering costs have us scared to deathdeath””““We are surviving, but profitWe are surviving, but profit--wise, itwise, it’’s a s a squeeze.squeeze.””““Costs of energy, labor, fumigants, pots, Costs of energy, labor, fumigants, pots, polyethylene, delivery polyethylene, delivery –– everything is everything is going up. Itgoing up. It’’s really beginning to hurt.s really beginning to hurt.””
Emotional reactions to rising costs?
Quotes from article in Quotes from article in FloristsFlorists ReviewReview..
MAY 10, 1979!MAY 10, 1979!
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How do I enhance margins?
1.1. Increase price (differentiate products & services)Increase price (differentiate products & services)
2.2. Decrease costs (labor vs. mechanization/efficiency; Decrease costs (labor vs. mechanization/efficiency; outsource inefficient activities; increase volume outsource inefficient activities; increase volume -- spread spread per unit costs)per unit costs)
3.3. Increase inventory turnover (scheduling; product mix) Increase inventory turnover (scheduling; product mix) and decrease age of accounts receivablesand decrease age of accounts receivables
4.4. Decrease overhead expenses and/or refine overhead Decrease overhead expenses and/or refine overhead allocation methods.allocation methods.
5.5. Horizontal/vertical coordination (B2B alliances; forward Horizontal/vertical coordination (B2B alliances; forward integration)integration)
Costs vary from grower to grower due to:
Product mixProduct mixAvailability of laborAvailability of labor
Greenhouse layoutGreenhouse layoutType of heating systemType of heating system
Volume of productionVolume of productionMarket channelMarket channel
Time of yearTime of yearManagerial practicesManagerial practices
LocationLocationSize of operationSize of operation
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EveryoneEveryone’’s costs s costs are different!are different!
You have to calculate the You have to calculate the costs for your firm!costs for your firm!
……or be eaten alive!or be eaten alive!
What’s my point?
Why do we not determine costs?
Fear of unknown???It takes too much time!Content with status quoIt’s boring!
Whatever the reason, it is mindWhatever the reason, it is mind--boggling to me because a cost boggling to me because a cost analysis is the only way to make analysis is the only way to make accurate product mix and accurate product mix and pricing decisions!pricing decisions!
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A more enjoyable way to view cost accounting methods!
Lemon SorbetMoose tracks
Double-FudgeRocky Road
Cost accounting methods:
Lemon Sorbet
VC + variable laborFC + salaried labor
TC
Moose tracks
VC – laborFC + labor
TC
Double-Fudge
VC x 2
Rocky Road
TR-TC
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Tools for Cost Accounting
Income Statement or Income Statement or General ledgerGeneral ledger
Production recordsProduction records
Spreadsheet or #2 pencil Spreadsheet or #2 pencil and notepadand notepad
A desire and inclination to A desire and inclination to increase profitsincrease profits
A few cold, rainy daysA few cold, rainy days
Overhead Costs
Also referred to as fixed or Also referred to as fixed or indirect costs.indirect costs.
Total overhead costs remain Total overhead costs remain constant as production constant as production increases.increases.
Cost per unit decreases as Cost per unit decreases as more units are produced.more units are produced.
Allocated on a per square Allocated on a per square foot per week basis.foot per week basis.
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Overhead (fixed) Costs
Salaries + burdenSalaries + burden
DepreciationDepreciation
InterestInterest
RepairsRepairs
TaxesTaxes
InsuranceInsurance
Land RentalLand Rental
ContributionsContributions
Heating expensesHeating expenses
Other UtilitiesOther Utilities
Advertising/marketingAdvertising/marketing
Dues & SubscriptionsDues & Subscriptions
Travel & EntertainmentTravel & Entertainment
Office ExpensesOffice Expenses
Professional FeesProfessional Fees
Bad DebtBad Debt
Allocating Overhead Costs
1.1. Determine total annual overhead costsDetermine total annual overhead costs
2.2. ÷÷ the # of weeks greenhouse is fully utilizedthe # of weeks greenhouse is fully utilized
3.3. ÷÷ the # of square feet of usable bench spacethe # of square feet of usable bench space
4.4. = overhead costs per square foot per week = overhead costs per square foot per week
5.5. x the # of weeks plant (flat) is in productionx the # of weeks plant (flat) is in production
6.6. x the # of square feet occupied per plant (flat)x the # of square feet occupied per plant (flat)
7.7. = Total overhead per plant (flat)= Total overhead per plant (flat)
(square(square--footfoot--weeks method)weeks method)
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Allocating Overhead Costs
1.1. $125,000$125,000
2.2. ÷÷ 52 weeks = $2404 /week52 weeks = $2404 /week
3.3. ÷÷ 12,000 sq. ft. 12,000 sq. ft.
4.4. = $0.20 per square foot per week = $0.20 per square foot per week
5.5. x the # of weeks plant (flat) is in productionx the # of weeks plant (flat) is in production
6.6. x the # of square feet occupied per plant (flat)x the # of square feet occupied per plant (flat)
7.7. = Total overhead per plant (flat)= Total overhead per plant (flat)
(Example for small greenhouse)(Example for small greenhouse)
Overhead Allocation Refinements
MultipleMultiple--spacing cropspacing crop
Actual space used vs. total spaceActual space used vs. total space
Hanging basketsHanging baskets
Unheated space adjustmentUnheated space adjustment
Seasonal variations (e.g. utilities)Seasonal variations (e.g. utilities)
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Overhead Allocation Refinements
MultipleMultiple--spacing crop (e.g. poinsettia)spacing crop (e.g. poinsettia)
$1.366.851.3614x14
$1.82Grand total
$0.261.330.448x8
$0.201.040.256x6
Overhead costs ($)
Sq. ft. weeks
# of weeks
Area per plant (ft2)
Spacing (inches)
Overhead Allocation Refinements
Actual space used vs. total spaceActual space used vs. total space
1. $125,0002. ÷ 52 weeks = $2404 /week3. ÷ 12,000 sq. ft. x 80% = 9,6004. = $0.25 per square foot per week
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Overhead Allocation Refinements
Hanging basketsHanging basketsAssume that hanging baskets occupy an area equal to the space occupied as if they were being grown on a bench.
Effectively increases the production area during those months and spreads overhead costs over a larger area – reducing costs per sq. ft.
Overhead Allocation Refinements
Unheated space adjustmentUnheated space adjustmentIt can be useful to separate overhead costs for different production areas and remove the line items that should not be attributed to lower cost production facilities.
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Overhead Allocation Refinements
Seasonal variations (e.g. advertising, Seasonal variations (e.g. advertising, heating, electricity, water/sewage, heating, electricity, water/sewage, interest on operating capital)interest on operating capital)
Overhead costs that vary seasonally can be tabulated on a monthly basis and applied via a monthly square-foot-weeks cost accordingly.
Variable Costs
Also called Direct Costs because they increase in Also called Direct Costs because they increase in direct proportion to the level of production direct proportion to the level of production –– variable variable costs increase as production increases.costs increase as production increases.
Include costs of plugs/cuttings/seed, potting media, Include costs of plugs/cuttings/seed, potting media, pot/flat/insert, tags, fertilizer, plant growth regulators pot/flat/insert, tags, fertilizer, plant growth regulators and pesticides, sleeves and shipping materials, and pesticides, sleeves and shipping materials, machinery operating costs, interest on operating machinery operating costs, interest on operating capital, and production labor.capital, and production labor.
Labor is the most difficult variable cost item to allocate Labor is the most difficult variable cost item to allocate on an individual crops and/or plant basis. The key is to on an individual crops and/or plant basis. The key is to keep good records (time/motion analysis) until more keep good records (time/motion analysis) until more generalized benchmarks can be established.generalized benchmarks can be established.
UnUn--allocable labor is handled as a fixed cost.allocable labor is handled as a fixed cost.
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Variable Costs - LABOR
““PottingPotting”” process generally accounts process generally accounts for 20for 20--25% of total direct labor.25% of total direct labor.
““Care as neededCare as needed”” cultural practices cultural practices account for about 25% of total labor.account for about 25% of total labor.
““Harvesting and shippingHarvesting and shipping”” process can process can consume up to 50% of direct labor.consume up to 50% of direct labor.
Look for the repetitive, tedious, time-consuming tasks and look to automate!
Variable Costs - LABOR
Every time you touch a plant, Every time you touch a plant, it costs money!it costs money!
Source: J. Bartok, GPN, June 2003.
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Variable Costs - LABOR
Find a plant handling system that Find a plant handling system that works for you and minimizes costs!works for you and minimizes costs!
Source: J. Bartok, GPN, June 2003.
Why is automation important?“I’m convinced the major production profitability difference among greenhouses is the use of labor‐saving devices.
Greenhouses that use automation to replace hand labor are positioning themselves to compete in our ever‐changing industry.”
‐‐ P. Allen Hammer, GrowerTalks, April 2008.
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Variable Costs –Rules of Automation
Keep things simple!Keep things simple!
Analyze your needs thoroughly!Analyze your needs thoroughly!
Install equipment that reduces peak period labor Install equipment that reduces peak period labor requirements!requirements!
Select equipment that will pace workers!Select equipment that will pace workers!
Standardize your operations!Standardize your operations!
Consider alternatives to purchasing equipment!Consider alternatives to purchasing equipment!
Select equipment that is manufactured with Select equipment that is manufactured with standard parts!standard parts!
Variable Costs –Automation: 1st places to look
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Variable Costs –Tips for increasing shipping efficiency
Select teams of 2 or 3 experienced employees for order pulling and truck loading.
Label or tag plants when they are transplanted to reduce labor during shipping.
Limit the number of container sizes & shapes that you use to make load assembly easier.
Develop a plant location ID system that reduces the time needed to find plants.
Market plants by full carts or pallets to reduce errors in both assembly and delivery and to make invoicing easier.
Shrink wrap carts and pallets to contain plants and reduce damage.
Purchase a hydraulic tailgate to speed loading and unloading of carts.
Tools for Calculating Variable Costs
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Tools for Calculating Variable Costs
Tools for Calculating Variable Costs
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Tools for Calculating Variable Costs
Virtual Grower 2.0
Tools for Calculating Variable Costs
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Farm Management
GREENHOUSE COSTS OF PRODUCTION BUDGETS
1. Interactive Greenhouse Crop Budget with Five Crops
2. Five Examples of Greenhouse Costs of Production Budgets: 1. Bedding Plant Example 2. New Guinea Impatiens Example 3. Poinsettias 6-inch Pots Example 4. Geraniums-Flats Example 5. Geraniums 4-inch Pots Example
3. Bedding Plants
o Greenhouse Overhead Costs o Labor Inputs for Seedling Production o Seedling Production Costs o Finished Flat Production Costs Using Grower Produced Plugs o Finished Flat Production Costs Using Purchased Plugs
4. Fuchsia - Hanging Baskets
o Prices Received for 8in.and 10in. Hanging Baskets in the Wholesale and Retail Markets
o Greenhouse Overhead Costs o Labor Inputs for 8in. and 10in. Hanging Baskets o Costs of Producing 10in. Hanging Baskets Grown on 17in. Centers for 14
Weeks
5. Geraniums o Cutting Production and 4 in. Pots from Unrooted Cuttings
Geranium Cutting Production Cost Labor Inputs for Cutting Production Greenhouse Overhead Costs Production Costs for 4 in. Pots from Unrooted Cuttings Labor Inputs for 4 in. Pots from Unrooted Cuttings
o Finished Flat Production Costs o 4in. Pots from Seedlings/Plugs
Production Costs
Rutgers Cooperative Extension is an Equal Opportunity Program Provider and Employer
©2003 Rutgers, The State University of New JerseyLast modified October 20, 2003
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Summary Thoughts
1.1. Knowing your production and marketing Knowing your production and marketing costs is important in establishing a price costs is important in establishing a price ““floorfloor””..
2.2. Knowing what your customers want and Knowing what your customers want and how much they are reasonably willing to pay how much they are reasonably willing to pay is important in establishing a price is important in establishing a price ““ceilingceiling””..
3.3. Push the pencil (or spreadsheet) to Push the pencil (or spreadsheet) to determine sales and profit goals and determine sales and profit goals and develop a pricing strategy to meet them.develop a pricing strategy to meet them.
For more information For more information …………..See See ellisonchair.tamu.eduellisonchair.tamu.edu + + hbin.tamu.eduhbin.tamu.edu
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Questions?
Ellisonchair.tamu.edu/MidSouth.pdfEllisonchair.tamu.edu/MidSouth.pdf
Dr. Charlie HallEllison Chair in International Floriculture
Texas A&M [email protected]
