For us, employees weren’t the main cost; feed and infrastructure was. But we did include employee time for all our products so that we’d know not only how many hours it took per product, but also how much that labor cost us.
We then looked at what we were charging, versus what that product cost us to produce. In a few instances we were already priced just about right, but in many instances we were priced too low. For ag products it’s relatively easy to raise prices during winter because the products are seasonal, and there’s a bit of a gap in between the last of our sales, typically around Thanksgiving, and the first sales of the new year, typically March. Sticker shock from the holidays has come and gone, other prices have already crept up and folks have resigned themselves to things costing more in the new year. So during that break even analysis last year, we set our 2013 retail prices at just about 10% above cost. Interestingly enough, that happened to be where my “feel” for the “right” price also happened to be, and where the going rate typically hovered.
Having said that, though, we did discover that the more basic the food item, the more pushback there was with the pricing. We also found that the market venue had a dramatic effect on whether our prices were perceived as “right”. For instance, consider the standard carton of 1 dozen eggs. If you go to the grocery store, you’ll find a wide range of prices, with the top-end egg easily costing 3x as much as the bargain egg. When we raised our prices away from the bargain basement price (which was below our cost), to that 10% above cost, we started getting complaints from customers that they could buy eggs at the grocery store for less. Yet, they were very quick to point out that our eggs were better than even the best of the eggs from the grocery store. So there was a definite disconnect between the price they paid and the quality they received. Frankly, they wanted the best egg at the bargain price. I even had one gal tell me that it was my duty as a farmer to go into the red so that her family could afford to eat our good eggs. When we lost her as a customer, that didn’t bother me in the slightest.
Yet compare our experiences with that batch of customers (along the lines of a CSA), to folks who would buy from us at the farmer’s market. We went there with higher prices than what we charged folks who came to the farm, because it took more work for us to get to the market, do the setup, booth rental, etc. So imagine our surprise when we were told that our egg prices were still too low, and we HAD to raise them. Excuse me? The folks who went to the farmers’ market were expecting higher priced items, and they became suspicious when those prices were too low. Okie dokie, so we raised our prices there and no one batted an eyelash. We’ll be going back there this year specifically for that reason.
I know you’re not selling eggs, but perhaps that gives you some food for thought (no pun intended) that it’s not just the markup; it’s also how you’re marketing and to whom. I do think that 10% markup is just about perfect, at least for our range of products. And if you’d like to see an example of our breakeven analysis, I’ve got them all in one Excel file, with each income stream on a different tab. Maybe that will give you some ideas for your own calculations. But yea, heck yea, any business who wants to stay in business has GOT to know those types of figures.