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.

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Making High Tunnels Pay

  1. 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. 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. 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. 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. 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 $0.45 MN High Tunnel Season Extension 12/3/09 - 5 Karl Foord © 2009 Regents of the University of Minnesota
  6. 6. Both costs & price affect margin - II Revenue side  Gross Revenue = price x yield  Critical factors – People Skills  Managing the customer’s perception of value MN High Tunnel Season Extension 12/3/09 - 6 Karl Foord © 2009 Regents of the University of Minnesota
  7. 7. Projected Gross Revenue Price Yield Matrix Yield Price per lb. ($) 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 $25,600 MN High Tunnel Season Extension 12/3/09 - 7 Karl Foord © 2009 Regents of the University of Minnesota
  8. 8. PRICING MN High Tunnel Season Extension 12/3/09 - 8 Karl Foord © 2009 Regents of the University of Minnesota
  9. 9. General thoughts on pricing  Business vs. Customer Perspective  Strategic pricing MN High Tunnel Season Extension 12/3/09 - 9 Karl Foord © 2009 Regents of the University of Minnesota
  10. 10. PERSPECTIVE Business vs. customer MN High Tunnel Season Extension 12/3/09 - 10 Karl Foord © 2009 Regents of the University of Minnesota
  11. 11. PRICING DECISION CHART COMPANY VIEW Our Asking Price Our Costs - Our Goals Pricing Goal No ($) 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. 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. 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. 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. 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. 16. PERCEPTION FACTORS MN High Tunnel Season Extension 12/3/09 - 16 Karl Foord © 2009 Regents of the University of Minnesota
  17. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 29. STRATEGIC PRICING MN High Tunnel Season Extension 12/3/09 - 29 Karl Foord © 2009 Regents of the University of Minnesota
  30. 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. 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. 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. 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. 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. 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

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