How to price a branded commodity

A brand "premium" refers to the amount you can charge above and beyond the usual market price for a product. In agriculture, entrepreneurs attach premium prices to commodities that reflect superior quality or value: Premium apples (or tomatoes or ice cream or lumber — you name it) at a premium price!

Determining an appropriate premium price is difficult. Essentially, you must calculate your costs, determine profit margin and use the margin to determine the premium you charge for the brand.

Here’s a brief how-to …

Core business costs

Identification of costs begins with good management records, from which you can calculate:

• Fixed overhead costs (e.g., land, taxes, insurance, depreciation, labor, equipment, etc.)

• Ownership costs (your paycheck for managing the operation)

• Variable costs (e.g., sprays, fertilizer, equipment repair, maintenance, etc.)

Add-on costs

With core business costs in hand, it’s time to identify the add-on costs associated with creating the new brand. These might include:

• Depreciation and interest on your capital investment (e.g., infrastructure, equipment)

• Product development (e.g., label design, processing, packaging)

• Marketing expenses (e.g., promotion, Web site, trade shows)

• Trade association membership

• Staff development and training

Knowledge of your base cost plus add-ons helps you set your selling price and determine if you can afford to provide discounts to retailers to ensure favorable shelf space (see box).

Of course, if you have competitors, your selling price must compete with their prices. In that case, you will be forced to adjust your add-on costs. Once you identify the cost to bring your product to market, determine your break-even price.

Differentiate with marketing

Marketing is critical when introducing a brand. Typically, commodity producers concentrate on cost in order to sell as the “low-cost” producer. Cost still rules with branding, but your investment in marketing adds a new dimension, one that allows you to charge a higher price, or “premium.”

Premium products rarely sell themselves. The target market must learn about them first. The critical step is to differentiate by identifying your “unique selling proposition.” This is the one factor that sets the product apart from the competition and provides a reason for paying a premium. You must aggressively promote that differentiation so the target market can recognize its value.

Keep in mind that marketing to build brand awareness may incur significant front-loaded costs. You may want to amortize those costs over the time that you have pricing power in the target market (in the same way that you depreciate capital assets). This helps you create a more realistic add-on margin to your product.

The challenge never ends

In a branded market, competition is brutal. As soon as you have a bright idea, imitators jump into the market. Before you know it, your branded product is a commodity again. To keep your edge, continue to market and reinvent yourself. (Click here to read the cover story for a case study in just how to do this.) For help identifying your business costs, add-on costs and break-even price, contact your Farm Credit business consultant.

Contact us at info@farmcreditwny.com for more information today!

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This article first appeared in the Spring 2005 issue of Financial Partner magazine.

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