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How to Price a Product (Part 2/2)

The second aspect of pricing a product, then, is “what do you need to make?”  There’s room for some artistic license here, but “two times variable costs” is a good rule of thumb.  To explain, let’s start with two definitions:

Fixed Costs:  The money it takes to run your farm or business, without ever making a product.  This includes property taxes, building maintenance, and most electricity bills.  Conveniently, in a small farm, many of the fixed costs are part of running your household anyway. 

Variable Costs:  These increase when you make a product.  For example, chicken feed for broilers is a variable cost.  It increases only when you’re feeding a chicken for sale.  Packaging for eggs is also a variable cost.  Labor directly related to production is a variable cost, like the hourly rate for feeding the chickens. 

Lets go back to the egg example, a dozen eggs selling for $6.  As mentioned before, the variable cost (also known as cost of goods sold in this case), should be half of the selling price.  Thus, if you can make a dozen eggs with $3 in variable cost, and sell it for $6, you make a $3 gross profit per dozen, and should be decently happy with yourself. 

The gross profit, of course, exists to first absorb your fixed costs (if you sell 1,000 dozen eggs, your gross profit can absorb $3 x 1,000 or $3,000 of fixed costs).  Once your fixed costs are absorbed, the rest is PROFIT!

To summarize, (1) the market determines price in direct competition.  You determine price when you have a unique product that customers want.  (2) You should be happy to sell your product for two times the variable costs you spent to produce it.  And (bonus), once your gross margin (the money left over after variable costs are covered) exceeds your fixed costs, you make a profit!

That’s a mouthful, I know.  Write me a note or a comment with any questions!

Christian

 

 

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2 thoughts on “How to Price a Product (Part 2/2)

  1. Hello love the page 🙂

    I currently run my backyard farm of chickens. What I have noticed that profiting off eggs is that it is not so easy to do, depending on the area in which you live. I feed mine 100% organic feed. I have pasture in the spring to turn them out on but its only for health purposes since with the risk of loosing free range chicken in my area is high. And in the summer there is nothing growing but my garden and they just tear it up. But.. their massive pen is well kept and adequate for their needs, and they get scraps from the kitchen, weeds from the garden, clippings from my law and I use no pesticides whatsoever. My organic feed is top notch and soy free as well as low in corn and high in protein.

    I have dual purpose hens since I butcher for meat to feed the family, but it takes about 6-8 months depending on gender for them to get meat size. So I sell the eggs to help offset the cost of feeding and the cost of my meat.

    They are of high quality beautiful rich yolks, loaded in vitamins and omegas. The flavor is off the charts goodness.

    Plus my sweet little hens are happy which seems to account for egg health as unhappy hens are stressed and the eggs seem to have deformities. For example Bertha laid massive eggs, the size of my ducks eggs. You could tell when she laid because she would not be quiet about it. I think the though of laying another one stressed her out so her eggs had a ridge in it and the yolks were a lighter color. Granted this isn’t proven by any means, it’s just my personal observation.

    The feed alone runs about $7.50 per month per bird. I do feed roosters too so the cost to me goes up, but I don’t factor that into price.

    On average a dual purpose hen will lay about 20 eggs a month, maybe more. That’s $.375 per egg coming to $4.50 a dozen. Granted this does not include the cost of water, straw for nests, time and effort, or costs of other supplies.

    Some people will pay $4.50 a dozen but most won’t unless they are getting it through some organization like the grocery store (which often has sales, but the eggs are terrible). Granted if I lived near a city like Sacramento or Alameda I could sell for far more. I have heard for up to $8 per dozen. But in this more low income geared country setting people turn their nose up to it. Especially when Costco sells 18 packs for $6. I sell my chicken eggs for $4 a dozen. And they sell, otherwise my fridge gets overloaded and the eggs go to waste in time, even at $4 a dozen. So I down sized.

    If I wanted to include all overhead. Its probably about $4.75 and if I sell for $6 a dozen I would make some profit once the cost of building things is finally paid for.

    I am now breeding a rare variety in hope to sell a few chicks, sell eggs, and have meat to eat. But my prices must stay the same. I also have a means to sell all my eggs through a friend who does organic food boxes at a great price. So I will be happy to not have any go to waste ever again. I am now returning my flock to 40+ hens.

    So all in all location, client base, numbers of laying birds, and availability/cost of feed all factor into profiting or not. Which would explain why farmers crowd in order to make a profit or else no one could afford eggs. And buying feed in bulk has its advantages as well.

    I have noticed that most organic feed is simply ‘pesticide free’ which doesn’t compensate for ‘what’ the animal is being fed, or the lack of nutrients you are getting in your eggs. My eggs are filling and once the body is used to them most other eggs make you feel kinda sick. (At least in my families case). So enjoy your eggs and happy breakfast 🙂

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  2. Cheryl, thank you for your comment! Yes, availability of feed, competition, and brand differentiation are all very real challenges. You are not alone! Any effort spent to build a brand that makes YOUR eggs different is time well spent, and makes it easier to charge the higher prices that the quality warrants.

    Like

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