making high tunnels pay

MN High Tunnel Season Extension 12/3/09 -Karl Foord

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Economics in High Tunnel Production Making High Tunnels Pay

Minnesota Statewide High TunnelSeason Extension Conference December 3, 2009Alexandria, MinnesotaKarl 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


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Both costs & price affect margin - ICost side

Tomato budget Breakeven analysis

Critical factor– People Skills Labor – Managing other people


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Yield (lbs. per plant) 7 10 14 17 20Yield (lbs. per tunnel) 2,240 3,200 4,480 5,440 6,400VARIABLE 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 $25Drip 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 $66Trellis - Staking, Training $110 $110 $110 $110 $110Weeding $25 $25 $25 $25 $25Ventilation & Monitoring $220 $220 $220 $220 $220Machinery Operation $35 $35 $35 $35 $35Harvest $263 $315 $350 $438 $525Grading/Packing $68 $81 $90 $113 $135Seasonal Cleanup $55 $55 $55 $55 $55Land Preparation* $55 $55 $55 $55 $55

Interest Expense $64 $71 $77 $88 $99TOTAL 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 $700TOTAL FIXED COSTS $730 $730 $730 $730 $730

TOTAL COSTS $2,113 $2,266 $2,411 $2,637 $2,863BREAKEVEN 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

$/Tunnel (20' x 96' - 5 rows - 320 plts/tunnel)

TUNNEL CROP BUDGET - TOMATOES



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ItemYIELD (lbs. per plant) 7 10 14 17 20YIELD (lbs. per tunnel) 2,240 3,200 4,480 5,440 6,400TOTAL VARIABLE COSTS $1,383 $1,536 $1,681 $1,907 $2,133TOTAL FIXED COSTS $730 $730 $730 $730 $730TOTAL COSTS $2,113 $2,266 $2,411 $2,637 $2,863BREAKEVEN PRICE

32# box $30.18 $22.66 $17.22 $15.51 $14.31per pound $0.94 $0.71 $0.54 $0.48 $0.45

HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSISYield Cost Breakeven


Both costs & price affect margin - IIRevenue side

Gross Revenue = price x yield Critical factors – People Skills Managing the customer’s

perception of value


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lbs./plant lbs./tunnel $1.50 $2.00 $2.50 $3.00 $3.50 $4.007 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

Price per lb. ($)Yield

Price Yield Matrix

Projected Gross Revenue


PRICING


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General thoughts on pricing Business vs. Customer

Perspective Strategic pricing


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PERSPECTIVE

Business vs. customer


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MARGIN

PRICING DECISION CHART

Varia

ble

Cos

ts

Direct Costs Materials

Profitable Enterprise WIN - WIN Exchange

Total Costs LOSE - WIN Exchange

Fixe

d C

osts

Overhead Salaries, Etc…

COMPANY VIEW Our Asking

Price

Pricing Goal ($)

Profit

Our Costs - Our Goals

No Exchange



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Satisfy a WantPerceived Value > Price

Convenience

Philosophical Match - EcologicalHealth Benefits

Quality - Reputation - Dependability

Selection - Uniqueness

Confidence: no frustrations, headaches

Reference PricesContext - Urgency


WIN - WIN Exchange

Price Window

FunctionalityLow Perceived Value

Focus of Marketing Efforts

Emotional Benefit

Perception Factors

Customer Value

Determination

CUSTOMER VIEW

WIN - LOSE or No Exchange Line of Perceived Value



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Exchange Something of Value for an amount of

satisfaction Largely behavioral not mathematical Usually an emotional trigger Buy and justify

Perceived value > price



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Variation among customers Buyers use products in different

ways Product attributes change

rankings Rankings impact value equation Value varies among buyers



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Value perception equation

Value = quality + service + relationship + price


PERCEPTION FACTORS


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Quality - internalQuality Philosophical Match Ecological Organic / Natural

Selection – Uniqueness Context – Urgency Health Benefits


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Service - external Convenience Confidence No frustrations No headaches

Reputation Dependability

Reference PricesMN High Tunnel Season Extension 12/3/09 -

Karl Foord18



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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?



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Deepening the quality experience

5 Sense your market Taste, touch, smell, sight,

sound Do you provide recipes? Sensory extrapolation Sell basil with pesto recipe



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Memorable Authentic experiences Memorable events - inherently

personal Goal: Be the first association in

their mind when it comes to your products and services


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 -

Karl Foord22



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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



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Reference prices Do your customers make price

comparisons? Within market Between markets

Do your customers talk to you about price differences?


Impact of price reductionAny percent price reduction

will have a greater percentage impact on margin


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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

Impact of Price Reduction on Margin and Sales



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Scenario Lbs. Breakeven Sales Price Margin Net Profit

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 price change 100 $0.70 $2.50 $1.80 $180.00

Scenario II - Price Change 150 $0.70 $1.50 $0.80 $180.00

Impact of Price Reduction on Net Profit



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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


STRATEGIC PRICING


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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



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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



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Author Karl Foord Ph.D. MBA Regional Educator, Horticulture [email protected] (651) 558-1218


mailto:[email protected]�


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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/


http://www.ledgewoodfarm.com/�

http://www.farmtek.com/farm/supplies/home�

http://plasticulture.cas.psu.edu/�

http://www.plasticulture.org/�

http://www.plasticulture.org/�

http://www.intrinsiccoach.com/english/home/�

http://www.intrinsiccoach.com/english/home/�


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Handouts Tomato Budget (2 sided assumptions on

back) Tomato Sensitivity Analysis (financial) High Tunnel Construction Budget Pricing Decision Chart



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Satisfy a WantPerceived Value > Price

Convenience

Philosophical Match - EcologicalHealth Benefits

Quality - Reputation - Dependability

Selection - Uniqueness

Confidence: no frustrations, headaches

Reference PricesContext - Urgency

Pricing Goal ($)

Profit

WIN - LOSE Exchange

WIN - WIN Exchange

Our Asking Price

No Exchange

Perception Factors

Focus of Marketing Efforts


Our Costs - Our Goals

Profitable Enterprise

Customer Value

Determination

CUSTOMER VIEW

Line of Perceived Value

Total Costs

COMPANY VIEW

Overhead Salaries, Etc…

Direct Costs Materials

Varia

ble

Cos

ts

High Tunnel Conference - December 2, 2009, Karl Foord

Low Perceived Value

Fixe

d C

osts

LOSE - WIN Exchange

Emotional Benefit

Functionality
