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!