MASTERING MARKETING
extension.umd.edu/agmarketing
Ginger S. Myers
MARKETING SPECIALIST,
UNIVERSITY OF MARYLAND
Photo Credit: pixabay.com
EXTENSION
DIRECTOR, MARYLAND
RURAL ENTERPRISE
DEVELOPMENT CENTER
gsmyers@umd.edu
301-432-2767 x338
As the marketing and cropping season gets into full swing, there are
always questions about product pricing, marketing costs, and decision
on what to produce. In the pricing module I use to teach the “Food for
Profit” classes, we approach pricing by looking at both fixed and variable costs. These are terms most business folks are very familiar with
but don’t often set down and really pencil out for their operation.
Most prices get set by calculating production costs and then adding a desired amount of profit per unit.
Seems like a pretty straight forward approach. But, it only gives you static data and not predictive data.
When in your sales cycle will you start making a profit? Or, of all your product offerings, which one has
the most potential for growing you bottom line? Determining the contributive margin of each type of
products or profit centers will give you that kind of information.
In the “Food for Profit” classes I use the following example, provided in Penn State Extension’s curriculum, to give budding food entrepreneurs an example for calculating how much of a product they need
to produce just to break even.
First calculate all your costs, both fixed and variable. Fixed costs are the things that don’t change
whether you make one jar of salsa or 10,000 jars. These costs include rent, basic utilities, insurance, salaries, and taxes. Variable costs include such things as ingredients, packaging, labels, shipping, advertising, promotion, supplies, etc. Variable costs go up or down in relation to sales volume.
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MASTERING MARKETING
MAY 2016
Determine Your Contributive Margin before Setting Your Price Continued From Page 1…
The sum of your fixed and variable costs is your cost of production. To find your cost of production per
unit, divide the total costs by the number of units. Add the profit you want to the cost per unit of product. This gives you your initial selling price. This is only a starting place for pricing your product
(see examples on the left).
Knowing your break-even point is
important and can provide the
information you need to make the go,
no-go decision to start a product or
enterprise. But knowing the
contributive margin of a product also
allows you to determine the scale of
production you’ll need to reach to
EXAMPLE
obtain your profit goalSELL
You sell gourmet apple butter for $10.00 per jar.
Selling Price:
$10.00
Variable Costs:
Raw Material ---------------------- $3.00
Hourly Labor ---------------------- $1.00
Sales Commission (10%) ------- $1.00
Shipping Charge ----------------- $0.50
Total Variable Costs:
Price Minus Variable Costs:
$5.50
$4.50
The $4.50 is called the contribution margin because it
represents how much is “contributed” from each unit of
sales toward paying for fixed costs and profits.
The bottom line here is to look at
your total contribution margin and
make financial management
decisions, set prices, or look at
possibly adding new enterprises
based on this metric and not just per
unit cost of production.
EXAMPLE
Fixed expenses (per month)
Lease Payment-------------------- $800.00
Telephone ------------------------- $100.00
Insurance --------------------------- $ 50.00
Bookkeeping ---------------------- $100.00
Loan Payments ------------------- $300.00
Total Fixed Expenses:
Paul Neiffer (http://www.agweb.com/
article/the-farm-cpa-contributionmargin-a-key-financial-metric-naapaul-neiffer/) posted an excellent
example of how farmers should
determine the contributive margin to
their cash flow when considering
renting ground or adding production
acres rather than simply calculating
total costs per acre.
$1,350.00
Question: How many jars of apple butter do you
have to sell each month to pay for your variable and
fixed expenses?
Answer: 300 jars
2
An excellent worksheet for penciling
out your fixed and variable cost is
available from Penn State Extension
at http://extension.psu.edu/
publications/uk178