Pricing Livestock products: Pricing Methods

For a livestock farmer to say I want to make profit he/she must first set the right price to his livestock that will lead them to making the projected profits. But how do you reach that price? This article focuses on the pricing strategies that livestock farmers can adopt in order to price their produce.

To start us off there are a few questions that you might be asking yourself and the following maybe one of those questions:

  • how do I price my goats/sheep/cattle/pigs?
  • what does my pricing involve?
  • who is the price set to?
  • what is the objective of setting the price? Is it to reach a certain profit or breakthrough or what??
  • will I underprice my livestock or overprice them?
  • what is the market asking for in terms of price?

So many questions and they all seem to be very stressful when you think of the answers. I will try to explain the ways in which you can answer such. But another way will be to hire an expert to do the Job for you. Hope the little I provide will help you.

Pricing Objectives

Pricing objectves differ from farm to farm, but they are classified as; Profitability objectives, Volume objectives, Competition objectives, Prestige objectives, Strategic objectives, Relationship objectives. These objectives will be discussed in the next article on pricing at the farm.

Pricing methods

  1. Cost-based pricing

Cost-based pricing is where the price includes the cost of items that are used to grow the livestock and cost of operating the business. This method mainly focusses on the costs that comes with rearing and maintain an animal/livestock, feed, water, shelter, etc and the operation of the farm business; transportation, advertising, wages, rent and other costs incurred in producing the product. After determining the base cost then add the profit level you want for the farm business to the product cost subtotal to determine your product price. Profit level adding can be done by using the different methods which are explained in the table below.

Cost-based pricing methods Description Example
include a profit percentage with product cost (mark-up pricing) -This method is favoured by farm businesses with a lot of livestock

-because it is simple to calculate.

-express the profit level you want for the farm business as a percentage. This percentage is added to the production cost to set product price.

-Mark-up pricing is common in retail business because of so many types of products and purchases from many vendors.

Theo`s farm sells goats. They set up a small shop in a local mall to sell their goats. It costs them P100 to grow 1 goat to the right selling age and weight. The mark-up pricing percentage Theo`s farm plans to use is 10%. 1 goat will cost P110.00 in the shop
add a percentage to an unknown product cost (cost-plus pricing) -Cost-plus pricing works well if you do not know your production costs.

-This method is very similar to mark-up pricing. The big difference between mark-up pricing and cost-plus pricing is that both buyer and seller settle on the profit figure or percentage, accepting that the cost of production is an unknown.

-If you produce custom order products for other companies or individuals, a cost-plus pricing method could reduce your risk. Rather than take a risk on input costs increasing during the project, you could use a cost-plus pricing agreement.

You have agreed to act as a supplier of cows to a meat processing company. You rear the cows and maintain them, but you are not sure about the costs of keeping the cows. Kabelo`s butcher then signs a contract with to pay for costs to producing the cows and transporting them at P100.00/cow.
price is a blend of total profit and product cost (planned-profit pricing) -this method ensures you will earn a total profit for the business.

-It differs from the first two types of cost-based pricing as they focused on a per unit price.

-Planned profit pricing combines per unit costs with output projections to calculate product price.

Break-even analysis is used to calculate planned profit pricing. Planned profit pricing is well suited to manufacturing and farming businesses,  the two entities often has the ability manipulate production depending upon the demand or profit available.

A farmer Theo can set the price looking at how many sheep are ordered from different customers. A price break is given to customers who order 10 or more sheep at a time.

The main advantage of planned profit pricing is that it allows the farmer to consider how various levels of output can affect the product price. As well, the farmer can examine how various prices will affect the amount of output needed.

NB: All types of cost-based pricing will be more accurate if you use a complete product cost subtotal. The key to accuracy is to ensure all cash and non-cash costs (raw material, labour and operating costs) are included in the product cost subtotal. You need to set a value for your management expertise and labour. The use of your land or capital equipment also must be valued along with depreciation on your machinery and buildings. These values are included in the product cost subtotal.

Dis-Advantages of Cost-based Pricing

  • Cost-based pricing does not consider how customer demand affects price. Demand for a product will directly affect how much people will pay. If, due to heavy demand, customers believe a product is in short supply, they may be willing to pay more. On the other hand, if demand is very low the customer will look for a discount on the price.
  • Competition is not included in cost-based pricing methods. Competition should affect how you price your product. The idea of simply adding a profit level or percentage to a product price will only work in industries with limited competition. In a competitive market, cost-based pricing may encourage competitors to enter the market with a lower price.

2.Competitive-based pricing

The big advantage of competition-based pricing is that you are focused on your industry and, therefore, your competition. The industry focus associated with competition-based pricing looks closely at the types of existing and emerging competition. Once you know what your competitors are doing, you can better decide how you will manage your business. You are able to charge a higher price if you can show how the product has a uniqueness or innovative quality and is ‘worth’ more for the value.

One needs to understand the competition and this may take some bit of research. You need to understand:

  • what you are selling (sheep,goats,cows etc)
  • the types of farms/cattle-posts you compete with (direct competition)
  • the amount and types of substitutes (indirect competition)
  • how many farms/cattle-posts operate in the livestock industry
  • are my competitors larger or smaller than me?
  • are my competitors close by or far away?
  • does my industry have barriers to entry such as legislation, extremely expensive or specialized capital equipment or unique ingredients?
  • is it difficult for new competitors to enter the industry?
  • what types and number of products do my competitors sell?
  • what pricing method(s) do my competitors use?

There are three methods of competitive-based pricing and they are explained in the table below.

Competitive-based pricing methods Description Examples
price your product the same as the competition

 

-This market pricing method aims to make your product comparable to competitors. Scout out competitors and find out what they charge for similar products. This type of pricing works well if you make standard products. Carry out a survey to learn of the prices that they offer for zero tooth heifers.
-If you make unique products, you need to decide how specialized your product is. Goat meat is a homogeneous products. A highly differentiated product would be European market packed goat meat.
set your price to increase customer base (market penetration pricing)

 

-To improve your market penetration, you need to select a price that will lure customers away from the competition.

-This type of pricing intends to improve market share or penetrate the market.

To motivate customers to notice your product, and to make a purchase decision, you likely will need to lower the price.

Market penetration pricing works well in the introduction stage of the product life cycle. In highly competitive markets this strategy will sell product quickly, creating economies of scale and market penetration. As you increase production, some of your costs will decrease because of economies of scale. You will save when you buy materials and ingredients in larger quantities. The lower costs per unit may be due to bulk buying of raw materials, marketing costs spread over more units, or more efficient labour.

Farmer Theo is a good producer of beef cows, she then decides to use market penetration pricing at a local butcher. A study of other butcher stores shows a price range for beef mass P50.00-P60.00 per a kilogram. Theo decides to sell her cows at P45.00 per a kilogram to sell larger volumes.
seek larger market share through price (market-share pricing) -You need to select a price that will attract and hold as many customers as possible.

Most businesses would adopt market-share pricing after market penetration is achieved. Market share happens when you sell large volumes of product into a market.

-Companies who seek market share describe the amount of market they supply as a percentage. (Market share is calculated by dividing the amount each company sells out of the total market)

-This pricing method is used mainly by larger, established businesses. The typical user of market share has many economies of scale and wants to measure the success of a marketing campaign.

If Theo`s farm sells 1,000 sheep daily into a market of 2,000 sheep, they hold a 50% market share.

 

-Marketers rely heavily on market share to evaluate their success in promotion, pricing, distribution and product strategies.

Dis-Advantages of Competitive-based pricing

  • you may ignore your own production costs if you focus too closely on the prices set by competitors
  • more time is needed to conduct and update market research to know the competitor`s prices
  • competitors can easily mimic/imitate whatever price you select

Customer-based pricing

Knowing your customer ensures you take a market focus with your business. You need to find out how your customer feels and their attitudes about various product prices and price changes. Customers change their buying habits according to product price. As a seller, you need to find out how your target customers view your product. Think about your target customer and try to answer the following questions:

  • does your customer assume price indicates product quality?
  • will customers think they are getting their money’s worth from your product?
  • do your customers care more about prestige than product price?
  • what are target customers prepared to pay for your product?

NB: If you are starting a business or targeting a new customer group you may have trouble answering these questions. To find answers, you could casually talk to potential customers or develop a more formal interview questionnaire. Before you decide to conduct a target customer survey, check into the costs of the project, as they can be very expensive.

There are five methods of Customer-based pricing and they are explained in the table below.

Customer-based pricing method Description Examples
use price to support product image -be consistent with the product pricing.

-You want your price to say exactly the same thing as the product image. (Prestige-oriented consumers believe a higher price means higher quality, while bargain seekers will only be happy with lower prices)

Cow producer, farmer Theo, follows the European market requirements of keeping her cows, she targets customers who like their cow meat more tender and succulent and she provides full detail about the cow`s rearing. Her prices are P200.00 per cow which is P50.00 more than the market price.
set price to increase product sales -Promotional pricing uses lower prices to catch the attention of busy consumers, so be creative here.

-Methods you can use to expand customer interest include:

-loss leaders (products at extremely low    prices)

-coupon books

-holiday specials

-buy-one-get-one-free promotions

Farmer Theo advertises her sheep on the farm`s facebook page, for customers to come and buy a herd of 10 sheep and they get a buck for free.

 

design a price range to attract many consumer groups -Segmentation slices a market into definable groups, you could design a range of prices that would appeal to several or all of the groups.

-examples of market segment groups could include income levels, age, social class, geography, amount of product consumed, willingness to switch to substitutes, etc.

Farmer Theo segmented her customers by geographical location. Those districts with high demand she sells 100-200 goats and for districts with lower demand she sells less than 100.

 

set price to increase volume sales -Volume pricing is where sellers discount larger volume sales to sell more product.

-In most cases, large, well established customers are offered volume pricing. This method makes sense when you have economies of scale.

Farmer Theo sells her pigs at P50.00 per pig or 2 pigs at P70.00 during parturition time. At the end of the parturition period the pigs may be placed at a 10% discount.

 

price a bundle of products to reduce inventory or to excite customers -Slow-moving inventory can get a boost when packaged with a group of popular items. Bargain seekers will be drawn to product bundles that offer good value. Farmer Theo sells her goats to farmers with their kids to customers.

Disadvantages of customer-based pricing

  • If you are too focused on the customer, you may:
    • ignore production costs
    • forget about the competition

Tips for Successful Pricing

Good product prices are important to any successful business. Pricing takes creativity, time, research, good record keeping and flexibility. You need to balance the costs of producing a product with competition and the perceptions of your target customer to select the right product price.

  • Be creative: think of new ways to sell more to existing customers or to attract new customer groups.
  • Listen to your customer: Make a point of noting customer comments in a journal or file. Review them periodically for new ideas.
  • Do your homework: Keep good notes of how you arrived at a price so you can make similar assumptions in the future.
  • Boost your records: Good record keeping will help you to set a price and to track the performance of your pricing.
  • Cover the basics: The three basics of pricing are product price, competition and customers. Blend pricing methods to ensure the three basics are in balance.
  • Be flexible: Constantly review both internal and external factors and calculate how a price change would affect the new situation.

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