Pricing is a challenging aspect of running a small-scale food business. Food is exceptionally competitive, especially when you are competing with big-box convenience and grocery stores.
It is important to remember that the current system does not reflect the true cost of food production. Current prices found in grocery stores and fast-food chains are the result of government subsidies, unfair employment standards, large scale production, and unethical, unsustainable farming practices. Instead of focusing on being competitive with these production methods, small-scale farmers must instead focus on educating their customers.
If you want to survive as a farm, you have to operate as a business. By operating efficiently and effectively, over time, you will find ways to reach all customers. When is the last time you reviewed your prices? A slight increase in price can make a massive difference in the long run.
Here’s why increasing your prices by only 5% will make you 8.5% more money:
Step 1: Determine previous gross profit per year
To determine your new profits, you must determine your profits from the previous year. To do so, you must subtract the cost of goods sold from the total revenue.
For example, let’s say your total revenue from last year was $250 000, and your cost of goods sold was $100 000. Your current gross profit per year would be $150 000 ($250 000 - $100 000 = $150 000).
Step 2: Calculate new revenue with the price increase
To calculate your new revenue (if you were to increase your prices by 5%), take your total revenue per year ($250 000) and multiply it by 5%. Next, add that value to your total revenue per year to get your new value.
New Total Revenue per Year = ($250 000 x 5%) + $250 000 = $262 500
To determine your new gross profit per year, you would subtract the cost of goods sold (which would remain the same), from your new revenue.
New Gross Profit per Year = $262 500 - $100 000 = $162 500
Step 3: Calculate the increase in profit
The final step is to see how much your profit increased with a 5% price increase. To calculate this value, you would subtract the new gross profit per year by your previous gross profit per year.
Profit Increase ($) = $150 000 - $162 500 = $12 500
To calculate your profit increase by percent, you would divide your profit increase value by the previous gross profit per year value.
Profit Increase (%) = ($12 500/$150 000) x 100% = 8.33%
As you can see, if you increase your prices by 5% next year, you would increase your profits by almost 8.5% at the end of the year. To help you play around with the numbers, we’ve created the Price Increase Calculator. You can find it here.
Increasing your prices can be an intimidating task, but increasing them slightly, can have a significant impact on your final profits. A customer may not notice the rise in price from $4.50 to $4.73, but you definitely will!