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Making High Tunnels Pay
- 1. Economics in High Tunnel Production
Making High Tunnels Pay
Minnesota Statewide High Tunnel
Season Extension Conference
December 3, 2009
Alexandria, Minnesota
Karl Foord
MN High Tunnel Season Extension 12/3/09 - 1
Karl Foord
© 2009 Regents of the University of Minnesota
- 2. Key to making high tunnels pay
Maintain good margins
Review factors affecting margin
Cost side – harvest labor
Revenue side – price and customer value
perception
Consider two margin influencers
Reference pricing
Customer experience upgrade
MN High Tunnel Season Extension 12/3/09 - 2
Karl Foord
© 2009 Regents of the University of Minnesota
- 3. Both costs & price affect margin - I
Cost side
Tomato budget
Breakeven analysis
Critical factor– People Skills
Labor – Managing other people
MN High Tunnel Season Extension 12/3/09 - 3
Karl Foord
© 2009 Regents of the University of Minnesota
- 4. TUNNEL CROP BUDGET - TOMATOES
$/Tunnel (20' x 96' - 5 rows - 320 plts/tunnel)
Yield (lbs. per plant) 7 10 14 17 20
Yield (lbs. per tunnel) 2,240 3,200 4,480 5,440 6,400
VARIABLE COSTS
Fertilizer $40 $50 $60 $70 $80
Pest Control $50 $50 $50 $50 $50
Black Plastic Mulch $20 $20 $20 $20 $20
IRRIGATION
Dripline $25 $25 $25 $25 $25
Drip Irrigation Operation $25 $25 $25 $25 $25
Plant Maintenance (Stakes, Twine) $30 $30 $30 $30 $30
Fuel $30 $30 $30 $30 $30
Transplant Materials $48 $48 $48 $48 $48
Packaging - Boxes (@$1.50) $105 $150 $210 $255 $300
Marketing (3% of ave. revenue) $50 $75 $100 $150 $200
LABOR
Transplanting $66 $66 $66 $66 $66
Trellis - Staking, Training $110 $110 $110 $110 $110
Weeding $25 $25 $25 $25 $25
Ventilation & Monitoring $220 $220 $220 $220 $220
Machinery Operation $35 $35 $35 $35 $35
Harvest $263 $315 $350 $438 $525
Grading/Packing $68 $81 $90 $113 $135
Seasonal Cleanup $55 $55 $55 $55 $55
Land Preparation* $55 $55 $55 $55 $55
Interest Expense $64 $71 $77 $88 $99
TOTAL VARIABLE COSTS $1,383 $1,536 $1,681 $1,907 $2,133
FIXED COSTS
Land (rent of .2 ac at $150 per acre) $30 $30 $30 $30 $30
Depreciation $700 $700 $700 $700 $700
TOTAL FIXED COSTS $730 $730 $730 $730 $730
TOTAL COSTS $2,113 $2,266 $2,411 $2,637 $2,863
BREAKEVEN PRICE
32# box $30.18 $22.66 $17.22 $15.51 $14.31
per pound $0.94 $0.71 $0.54 $0.48 $0.45
MN High Tunnel Season Extension 12/3/09 - 4
Karl Foord
© 2009 Regents of the University of Minnesota
- 5. HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS
Item Yield Cost Breakeven
YIELD (lbs. per plant) 7 10 14 17 20
YIELD (lbs. per tunnel) 2,240 3,200 4,480 5,440 6,400
TOTAL VARIABLE COSTS $1,383 $1,536 $1,681 $1,907 $2,133
TOTAL FIXED COSTS $730 $730 $730 $730 $730
TOTAL COSTS $2,113 $2,266 $2,411 $2,637 $2,863
BREAKEVEN PRICE
32# box $30.18 $22.66 $17.22 $15.51 $14.31
per pound $0.94 $0.71 $0.54 $0.48 $0.45
MN High Tunnel Season Extension 12/3/09 - 5
Karl Foord
© 2009 Regents of the University of Minnesota
- 6. Both costs & price affect margin - II
Revenue side
Gross Revenue = price x yield
Critical factors – People Skills
Managing the customer’s
perception of value
MN High Tunnel Season Extension 12/3/09 - 6
Karl Foord
© 2009 Regents of the University of Minnesota
- 7. Projected Gross Revenue
Price Yield Matrix
Yield Price per lb. ($)
lbs./plant lbs./tunnel $1.50 $2.00 $2.50 $3.00 $3.50 $4.00
7 2240 $3,360 $4,480 $5,600 $6,720 $7,840 $8,960
10 3200 $4,800 $6,400 $8,000 $9,600 $11,200 $12,800
14 4480 $6,720 $8,960 $11,200 $13,440 $15,680 $17,920
17 5440 $8,160 $10,880 $13,600 $16,320 $19,040 $21,760
20 6400 $9,600 $12,800 $16,000 $19,200 $22,400 $25,600
MN High Tunnel Season Extension 12/3/09 - 7
Karl Foord
© 2009 Regents of the University of Minnesota
- 8. PRICING
MN High Tunnel Season Extension 12/3/09 - 8
Karl Foord
© 2009 Regents of the University of Minnesota
- 9. General thoughts on pricing
Business vs. Customer
Perspective
Strategic pricing
MN High Tunnel Season Extension 12/3/09 - 9
Karl Foord
© 2009 Regents of the University of Minnesota
- 11. PRICING DECISION CHART
COMPANY VIEW
Our Asking
Price
Our Costs - Our Goals
Pricing
Goal No
($) Exchange
Profit WIN - WIN
Profitable Enterprise
Exchange MARGIN
Total Costs LOSE - WIN
Exchange
Fixed Costs
Overhead Salaries, Etc…
Variable Costs
Direct Costs Materials
MN High Tunnel Season Extension 12/3/09 - 11
Karl Foord
© 2009 Regents of the University of Minnesota
- 12. PRICING DECISION CHART
Customer CUSTOMER VIEW
Value Satisfy a Want
Determination
Perceived Value > Price
WIN - LOSE or
Line of Perceived Value
Price No Exchange
Window WIN - WIN
Focus of Marketing Efforts
Exchange
Perception Factors
Convenience
Philosophical Match - Ecological
Emotional Health Benefits
Benefit Quality - Reputation - Dependability
Selection - Uniqueness
Confidence: no frustrations, headaches
Reference Prices
Context - Urgency
Functionality
Low Perceived Value
MN High Tunnel Season Extension 12/3/09 - 12
Karl Foord
© 2009 Regents of the University of Minnesota
- 13. Exchange
Something of Value for an amount of
satisfaction
Largely behavioral not mathematical
Usually an emotional trigger
Buy and justify
Perceived value > price
MN High Tunnel Season Extension 12/3/09 - 13
Karl Foord
© 2009 Regents of the University of Minnesota
- 14. Variation among customers
Buyers use products in different
ways
Product attributes change
rankings
Rankings impact value equation
Value varies among buyers
MN High Tunnel Season Extension 12/3/09 - 14
Karl Foord
© 2009 Regents of the University of Minnesota
- 15. Value perception equation
Value = quality + service +
relationship + price
MN High Tunnel Season Extension 12/3/09 - 15
Karl Foord
© 2009 Regents of the University of Minnesota
- 16. PERCEPTION FACTORS
MN High Tunnel Season Extension 12/3/09 - 16
Karl Foord
© 2009 Regents of the University of Minnesota
- 17. Quality - internal
Quality
Philosophical Match
Ecological
Organic / Natural
Selection – Uniqueness
Context – Urgency
Health Benefits
MN High Tunnel Season Extension 12/3/09 - 17
Karl Foord
© 2009 Regents of the University of Minnesota
- 18. Service - external
Convenience
Confidence
No frustrations
No headaches
Reputation
Dependability
Reference Prices
MN High Tunnel Season Extension 12/3/09 - 18
Karl Foord
© 2009 Regents of the University of Minnesota
- 19. Quality
How do your customer’s experience
quality?
How do you improve your customer’s
experience of quality?
How will you make this experience
memorable?
MN High Tunnel Season Extension 12/3/09 - 19
Karl Foord
© 2009 Regents of the University of Minnesota
- 20. Deepening the quality experience
5 Sense your market
Taste, touch, smell, sight,
sound
Do you provide recipes?
Sensory extrapolation
Sell basil with pesto recipe
MN High Tunnel Season Extension 12/3/09 - 20
Karl Foord
© 2009 Regents of the University of Minnesota
- 21. Memorable
Authentic experiences
Memorable events - inherently
personal
Goal: Be the first association in
their mind when it comes to your
products and services
MN High Tunnel Season Extension 12/3/09 - 21
Karl Foord
© 2009 Regents of the University of Minnesota
- 22. Proactively manage customer
perception
Attending to customer perceptions
increases perceived value
Increasing perceived value minimizes the
price component of the value equation
Keeping perceived value high permits
high (fair) prices
High (fair) prices permit good margins &
successful businesses
MN High Tunnel Season Extension 12/3/09 - 22
Karl Foord
© 2009 Regents of the University of Minnesota
- 23. Price
One important factor in our plan is that we
are not afraid to ask a profitable price for
all of our produce.
Our customers need to be aware that it
costs more to produce early crops and we
must remember that highest quality is the
only crop you should market.
Ed Person, Ledgewood Farms
MN High Tunnel Season Extension 12/3/09 - 23
Karl Foord
© 2009 Regents of the University of Minnesota
- 24. Reference prices
Do your customers make price
comparisons?
Within market
Between markets
Do your customers talk to you about
price differences?
MN High Tunnel Season Extension 12/3/09 - 24
Karl Foord
© 2009 Regents of the University of Minnesota
- 25. Impact of price reduction
Any percent price reduction
will have a greater
percentage impact on
margin
MN High Tunnel Season Extension 12/3/09 - 25
Karl Foord
© 2009 Regents of the University of Minnesota
- 26. Impact of Price Reduction on Margin and Sales
BREAKEVEN PRICE $0.94 $0.71 $0.54 $0.48 $0.45
Sales Price $2.50 $2.50 $2.50 $2.50 $2.50
Margin $1.56 $1.79 $1.96 $2.02 $2.05
Price Reduction $1.00 $1.00 $1.00 $1.00 $1.00
New Price $1.50 $1.50 $1.50 $1.50 $1.50
New Margin $0.56 $0.79 $0.96 $1.02 $1.05
Price Reduction % 40% 40% 40% 40% 40%
Margin Reduction % 64% 56% 51% 50% 49%
Sales factor to
achieve same profit 2.8 2.3 2.0 2.0 1.9
26
MN High Tunnel Season Extension 12/3/09 -
Karl Foord
© 2009 Regents of the University of Minnesota
- 27. Impact of Price Reduction on Net Profit
Sales
Scenario Lbs. Breakeven Margin Net Profit
Price
Sales Goal 150 $0.70 $2.50 $1.80 $270.00
Revised Sales
Goal
337.5 $0.70 $1.50 $0.80 $270.00
Scenario I - no
100 $0.70 $2.50 $1.80 $180.00
price change
Scenario II -
150 $0.70 $1.50 $0.80 $180.00
Price Change
MN High Tunnel Season Extension 12/3/09 - 27
Karl Foord
© 2009 Regents of the University of Minnesota
- 28. Capture Value
Avoid premature price reductions
Match quantities to customer lifestyles
Everyone looses if you sell unit that are too
large and they throw it away
Many people’s lifestyles don’t require the
large quantities of the past
Market perceived value not price
MN High Tunnel Season Extension 12/3/09 - 28
Karl Foord
© 2009 Regents of the University of Minnesota
- 29. STRATEGIC PRICING
MN High Tunnel Season Extension 12/3/09 - 29
Karl Foord
© 2009 Regents of the University of Minnesota
- 30. Managing Price Strategically
Strategic pricing is about more then
setting prices
An understanding of what creates
value for customer
How and when that value can be
transformed into earnings
MN High Tunnel Season Extension 12/3/09 - 30
Karl Foord
© 2009 Regents of the University of Minnesota
- 31. Managing the Pricing Process
Targeting markets that can be served
profitably
Communicating information that
justifies price levels
Managing pricing processes and
systems to keep prices aligned with
the value received
MN High Tunnel Season Extension 12/3/09 - 31
Karl Foord
© 2009 Regents of the University of Minnesota
- 32. Author
Karl Foord Ph.D. MBA
Regional Educator, Horticulture
foord001@umn.edu
(651) 558-1218
MN High Tunnel Season Extension 12/3/09 - 32
Karl Foord
© 2009 Regents of the University of Minnesota
- 33. References
http://www.ledgewoodfarm.com/
http://www.farmtek.com/farm/supplies/home
http://plasticulture.cas.psu.edu
http://www.plasticulture.org
http://www.intrinsiccoach.com/english/ho
me/
MN High Tunnel Season Extension 12/3/09 - 33
Karl Foord
© 2009 Regents of the University of Minnesota
- 34. Handouts
Tomato Budget (2 sided assumptions on
back)
Tomato Sensitivity Analysis (financial)
High Tunnel Construction Budget
Pricing Decision Chart
MN High Tunnel Season Extension 12/3/09 - 34
Karl Foord
© 2009 Regents of the University of Minnesota
- 35. PRICING DECISION CHART
COMPANY VIEW Customer CUSTOMER VIEW
Our Asking
Value Satisfy a Want
Price
Our Costs - Our Goals Determination
Pricing Perceived Value > Price
Goal No WIN - LOSE
($) Line of Perceived Value
Exchange Exchange
Profit
Profitable Enterprise WIN - WIN Exchange
Focus of Marketing Efforts
Total Costs LOSE - WIN Perception Factors
Exchange
Fixed Costs
Convenience
Philosophical Match - Ecological
Overhead Salaries, Etc…
Emotional Health Benefits
Benefit Quality - Reputation - Dependability
Selection - Uniqueness
Variable Costs
Confidence: no frustrations, headaches
Direct Costs Materials Reference Prices
Context - Urgency
Functionality
Low Perceived Value
High Tunnel Conference - December 2, 2009, Karl Foord
MN High Tunnel Season Extension 12/3/09 - 35
Karl Foord
© 2009 Regents of the University of Minnesota