Making High Tunnels Pay
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Making High Tunnels Pay

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Presented by University of Minnesota Extension Educator at the 2009 Minnesota Statewide High Tunnel Conference in Alexandria, MN on Dec. 2-3, 2009.

Presented by University of Minnesota Extension Educator at the 2009 Minnesota Statewide High Tunnel Conference in Alexandria, MN on Dec. 2-3, 2009.

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Making High Tunnels Pay Making High Tunnels Pay Presentation Transcript

  • 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
  • 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
  • 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
  • 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
  • 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 $0.45 MN High Tunnel Season Extension 12/3/09 - 5 Karl Foord © 2009 Regents of the University of Minnesota
  • Both costs & price affect margin - II Revenue side  Gross Revenue = price x yield  Critical factors – People Skills  Managing the customer’s perception of value MN High Tunnel Season Extension 12/3/09 - 6 Karl Foord © 2009 Regents of the University of Minnesota
  • Projected Gross Revenue Price Yield Matrix Yield Price per lb. ($) 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 $25,600 MN High Tunnel Season Extension 12/3/09 - 7 Karl Foord © 2009 Regents of the University of Minnesota
  • PRICING MN High Tunnel Season Extension 12/3/09 - 8 Karl Foord © 2009 Regents of the University of Minnesota
  • General thoughts on pricing  Business vs. Customer Perspective  Strategic pricing MN High Tunnel Season Extension 12/3/09 - 9 Karl Foord © 2009 Regents of the University of Minnesota
  • PERSPECTIVE Business vs. customer MN High Tunnel Season Extension 12/3/09 - 10 Karl Foord © 2009 Regents of the University of Minnesota
  • PRICING DECISION CHART COMPANY VIEW Our Asking Price Our Costs - Our Goals Pricing Goal No ($) 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
  • 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
  • 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
  • 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
  • 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
  • PERCEPTION FACTORS MN High Tunnel Season Extension 12/3/09 - 16 Karl Foord © 2009 Regents of the University of Minnesota
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • STRATEGIC PRICING MN High Tunnel Season Extension 12/3/09 - 29 Karl Foord © 2009 Regents of the University of Minnesota
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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