Pricing begins with costs, but doesn't end there

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Pricing is a tough subject to tackle for a few reasons. First, many greenhouse operators don’t have a good idea of their costs. Second, math often isn’t as much fun as growing plants. Third, there is as much art to pricing as science.

May 27, 2010

Pricing is a tough subject to tackle for a few reasons. First, many greenhouse operators don’t have a good idea of their costs. Second, math often isn’t as much fun as growing plants. Third, there is as much art to pricing as science.
 
The math part isn’t calculus, but it does take time. Cost calculations can be a real issue for many companies. But cost is only one piece of the pricing puzzle.


Tracking costs
One of the first challenges for any business is to get a good idea of costs. How do you track costs and how much detail do you have about them? It takes a commitment to track costs and then requires a time investment.
 
At Michigan State University we’re developing a cost accounting system adapted to Excel for greenhouse growers. Greenhouse Cost Accounting Software (www.cook.rut gers.edu/~farmmgmt/ghcasestudies/RMA CostAcct.pdf) is a resource available from Rutgers University. The key is to find an accounting system you’re comfortable with and then commit the time to use it.
 
No one person has the perfect system for dealing with costs. If you’re starting a business, start small by dividing expenses into two piles: direct and indirect costs. Direct costs go into production and selling. Indirect costs are overhead and everything else that didn’t go directly into production and selling.
 
The hardest part to tracking costs is getting started. Begin with three to five key products. If poinsettias, 4-inch annuals and 12-inch hanging baskets are key products for you, that’s where to start figuring your costs. Make an effort to re-visit those costs at least twice each year, working to add more detail about those costs. The more you work at it, the more concise your costing system will become.
 
Initially the trick is to not try to make it very detailed. Work toward more detail as you get more comfortable with the system of tracking costs.


Gathering more details
If you’re already tracking costs, the next step is to increase the level of detail. If you want to know how much you’re making on seedling plugs vs. vegetative cuttings, you’ll need to delve into the costs to see how these products differ. Then you can calculate how much margin you’re making on both.
 
What are the direct costs for seedling plugs and cuttings? It’s likely that the direct costs for containers, tags, growing media, fertilizer and chemicals will be the same. The difference will be in the cost of the seed and the cuttings.
 
If you can incorporate a system that tracks costs per container, you can change the plant that goes into a container. By comparing prices you can calculate the difference in profit. This applies to hanging baskets and other container sizes. The same type and amount of growing medium, tags and chemicals will be used for identical containers, but the starter plant material that goes into the containers may differ in cost.


Labor costs
Labor is another piece of direct costs that can be difficult to allocate. I encourage growers to include labor costs. The level of detail can be developed over time.
 
It can be tough to track labor directly related to production (versus retail), but do the best you can.
 
Try to determine total labor hours per dollars that went into production. Consider dividing labor costs by crop or by number of containers produced. Trying to gather better detail is more helpful than doing nothing at all.


Pricing
The art of pricing comes into play with how much further can you increase the margin, still appeal to a broad base of your customers and continue to raise profits. Most business owners have a fear of raising prices. However, if selling a product is costing a company money, financial disaster isn’t far away, especially in the current economic climate.
 
You don’t need to know the margin for every item. It would be enlightening to know the net profit (sales – cost of goods sold – indirect expenses for the crop) of three or five key products. But you can’t calculate the net profit or net profit margin (net profit/net sales) if you don’t know your costs. The art and science of pricing begins and ends with keeping good records, developing detail and then doing the math on a regular basis.
 
Pricing begins with understanding costs and that starts with good records. Don’t obsess about detail, but build to a higher level of detail. Don’t try to tackle every product you grow or sell. Determine your costs and see how much the key products really do cost to grow. Then, look at costs on the retail side by looking at the cost to sell your products, primarily labor, but also facility costs.


Profits
How much are you making in profit for your key products? You may need to consider raising prices. The consequence of not improving your margin is giving it away. 
 
Are you prepared to send some of your hard-earned cash out the door? If you can’t make more money by raising prices or lowering costs, it may be time to consider not growing some products. After all, you don’t want to work to give your money away. 
 
Bridget behe@msu.edu. Behe is professor, Michigan State University, Department of Horticulture, (517) 355-5191;