Episode 4: How to Start Farming Without Ruining Your Life
Setting Prices: Don’t Be A Greedy Bastard
Sooner or later, you’ll come across farmers bragging about never discounting their prices. Getting full retail price for product is a point of pride for a lot of these folks, and a close analysis of what they’re doing reveals why pride is typically regarded as a vice.
Carve this in stone somewhere on your farm:
Price is a tool for achieving net margin, and nothing else.
We’ll define a few simple terms just to make sure we’re on the same page. Feel free to skip the next paragraph if you’re familiar with basic business accounting.
- Revenue is the total amount of money you take in from selling your stuff.
- Cost of Goods Sold (COGS) refers to the cost of all materials and labor directly used to create a particular product. For broiler chickens, for example, our COGS includes the cost of chicks, feed, packaging, labeling, and the labor to move broiler pens and process the birds.
- Gross Profit is the difference between revenue and COGS.
Lots of new entrepreneurs are relentlessly focused on top line (revenue) and direct costs (cost of goods sold) under the assumption that if you maximize the former and minimize the latter, everything will work out. Some folks take this too far and become obsessed with getting retail price — the highest possible price — all the time.
That obsession makes them forget the overhead associated with retail sales.
- Overhead: expenses shared across more than one product, or not related to any particular product. This would include production items (e.g. the cost of broiler pens, processing equipment/supplies) and non-production items (fuel, utilities, freezers, marketing, advertising, sales, accounting, waste/breakage, and any labor associated with any of these.)
When you subtract overhead from gross profit, you get the magic number: Net Profit. This is what’s left after you’ve paid everyone that isn’t you.
Retail sales spike your non-production overhead, which will eat your bottom line for lunch. Hustling to make all those high price sales will also limit your volume. We’ll talk about that next.
If you want to farm for a LIVING — that is to say you want to be a professional farmer who isn’t working a gig or two on the side to pay the bills (or pay for your money pit of a farm) — then you are going to need to sell a lot of stuff. Assuming a healthy net margin of 20%, you’ll need sales of $250,000 annually to bank $50K/year.
Imagine for simplicity that we’re going into the broiler business. Assuming we sold nothing but whole chickens* at our full retail price of $4/lb, we’d have to sell 14,705 chickens to make that number.
To get full price on 14,705 chickens is possible. But it will cost you a ton of money. Why?
Because they’ll almost all be direct, small-volume transactions. You’re selling a bird or two at a time at farmers markets or out of your farm store. Or maybe a half-dozen here or there to the few boutique shops or restaurants willing to pay full price. Each and every one of these sales costs you money.
You’ll have to staff a ton of farmers markets, which are an incredibly expensive way to make sales: you have to load up, drive there, set up, stand there for 3–5 hours, break down, drive home, and put all your stuff away. Or you’ll have to pay someone else to do it. Six hours minimum overhead per market at a $12/hr not-quite-living-wage means you’re paying $72 per market just to show up. Assuming (very optimistically) that you sell 20 chickens per market, you have to make 735 market appearances every year. Notwithstanding the fact that this is physically impossible, it would cost you $53,000 in labor alone, to say nothing of fuel, packaging, schwag, and the other needling expenses that’ll add up on you. All of these costs are overhead.
So markets are out. One of the cheapest ways to make money is to sell goods right out of your house or farm. It’s nearly free to do that on a small scale, but at the scale we’re talking about you’ll have to sling 40 chickens from your house every day, seven days week. That means nearly 300 people visiting your farm to buy every week. You won’t be able to handle that on your own AND run your farm, so you’ll be hiring someone(s) to make sales, manage inventory, and handle the phones. And since at this volume you need to appeal to the masses — and since the average person isn’t going to be comfortable just rolling up to your garage — you’ll actually have to create a decent farm store, replete with display freezers, POS, insurance, and probably some way for people to order online. And you’ll have to market and advertise relentlessly. All of these expenses are overhead.
It’s also important to mention that retail sales move more slowly. That’s a double-whammy: each day a chicken sits in the freezer, its share of the electricity bill goes up while its quality goes down and it keeps you from putting another bird in the freezer. The overhead cost for that bird increases every day (eating up your net profit) while limiting the volume you can produce (putting a ceiling on your revenue).
The bottom line is this: insisting on the highest possible price will spike your overhead and limit your volume, running your take-home pay into a ditch and leaving you burned out without a dollar to show for it. The world needs farmers, not martyrs.
In our next installment, we’ll talk about why you shouldn’t go to the other extreme — doing wholesale-only and becoming the cheapest player on the field.
- Diversification — selling more than one product — becomes very important to lowering overhead in the long term because it means you’ll need fewer customers. If I’m only selling chickens, I may need close to 1,000 customers to make my $250K. But if I’m selling beef, pork, eggs, and produce along with my chickens, I might only need 300 customers. Add in a handful of wholesale customers, I might cut that number in half (a restaurant that buys 12 chickens a week is worth 24 retail customers). It’s a lot cheaper to sell $250K worth of goods to 150 individuals and 6 restaurants than to 1,000 individuals.
Chris Newman is a permaculture farmer in Earlysville, Virginia. For $1/month, you can support his writings and other beyond-the-farm sustainability endeavors on Patreon. The next episode in this series — topic TBD — will be released within the next week. Or see Episode 3 here. Visit the farm and view the occasional on-farm livestream at @sylvanaquafarms on Instagram.
