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Pricing strategies for sustainable profitability in food and agri businesses
In today's challenging economic climate, food and agri businesses face mounting pressure from rising wages and operating costs, making effective pricing strategies critical to long-term profitability. Many companies struggle with knowing when and how to adjust their prices, ultimately resulting in shrinking profit margins. Here, Andrew Brolly, Fractional CFO in ifac’s food and agribusiness consulting team outlines how your business can establish and maintain effective pricing strategies:
1. Know your true costs and margins
Ensuring your prices sufficiently cover all associated costs and generate the desired profit margin is fundamental. Businesses commonly overlook indirect expenses such as electricity, insurance, rent, and other overheads. Miscalculating costs can significantly impact profitability.
Consider John, a business owner who priced his leading agri machinery product at €999 plus VAT, expecting a 21% margin (€210). After reviewing his costing process, he realised that crucial expenses like electricity and insurance had been omitted. He had originally calculated the cost of the product at €789 per unit, however the actual cost was €821, reducing his margin below 18%. To achieve his desired margin, John needed to adjust his selling price to approximately €1,039 per unit. This increase is not overly significant when looking at one product, however the cumulative effect for John would have been very significant if he had not calculated his margin properly and adjusted his pricing.
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2. Evaluate competitor pricing and identify efficiency gains
Competitive pricing significantly influences customer decisions, especially in price-sensitive markets. Understanding competitor pricing doesn't just inform your price points, it also encourages internal efficiency improvements.
Continuing John’s example, he discovered that his product priced at €999 was actually costing €32 more to produce than anticipated. Concerned about increasing prices and potentially losing customers, John explored efficiencies. By sourcing alternative materials, he reduced unit costs by €20.50. Additionally, investing in automation cut production time by 25%, saving an additional €10.50 per unit in labour costs. These changes brought his cost down to €790, enabling him to maintain a competitive selling price of €999 and retain his targeted 21% margin.
3. Leverage your Unique Selling Points (USPs)
Differentiating your product can justify higher pricing and attract more customers. Identify and communicate clearly what sets your product apart from competitors - whether it’s superior quality, outstanding customer experience, production efficiency, or enhanced taste or nutritional value.
John’s deeper market analysis revealed a significant advantage, his product processed 20% faster than competing offerings. Highlighting this USP in his marketing could significantly influence customer decisions, allowing John to justify potential price increases and potentially boost sales volumes.
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4. Continual review for optimal results
Pricing isn’t a one-time exercise—it requires ongoing attention and adjustment. Regularly reviewing and accurately assigning all business costs to each product or service ensures pricing remains profitable. Clearly understanding your market positioning, competitor pricing strategies, and product differentiation will position your business to adapt proactively to market changes, ultimately safeguarding margins and enhancing profitability.
By implementing these strategic steps - accurate cost management, competitor analysis, efficiency improvements, and leveraging unique selling points - food and agri businesses can establish a robust pricing strategy that sustainably boosts their bottom line.
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