Direct Marketing and Value Added Products
Direct Marketing and Value Added Processing Management Strategies
Direct marketing and value-added processing are two of the best business management strategies Maryland farmers can employ to improve their net profitability. Value-added products may open new markets, improve farm viability, enhance farm visibility, and extend the marketing season. Value-added agriculture also carries a unique set of risks that entrepreneurs should consider, including: their level of business expertise, processing skill sets, regulatory requirements, their available resources, and their understanding of direct marketing outlets. Here is an overview of the 4 Ps of what is called the marketing mix: the product, price, promotion, and place as they apply to direct marketing value-added products.
Any product can be considered value-added if it is originally grown by the farmer and increased in value by labor and creativity. Value-added is a customer-driven process in which the farmer retains more of the food dollar by processing, enhancing, packaging, and marketing the product him/herself. Value-added may also include production methods such as organic, grass-fed, hormone–free, and others.
It is vital to understand the benefits and characteristics of your product. For example, you’re not just selling salsa, you're selling a high quality, healthy and delicious condiment, produced and sold locally. Only when you can clearly identify the traits and benefits of your product can you match them to your target customer. The backbone of value-added marketing is high quality products.
The better you understand your target customer’s buying habits and food dollar expenditures, the more accurately you’ll be able to price your product. Your market research should help you determine the price ceiling for your product. This price is sometimes determined by the perceived value of the product by the customer.
The most basic element of pricing is to know your costs, including variable and fixed costs. Be sure to calculate all the costs included not only in production, but also in marketing and distribution. Your projected unit costs can be estimated by dividing your total production costs per batch of product by the number of units produced from that batch. Your cost-per-unit helps you establish your break-even point. There is no profit made or loss incurred at the break-even point.
Value-added products usually move in low volumes so using margins rather than mark-ups (production cost plus profit) is a more advantageous pricing format. A margin is the selling price less your profit. Using a margin pricing strategy, the selling price less the profit margin equals the costs.
Gross Profit Margin % = Selling Price-Costs/ Selling Price X 100
General guidelines suggest a gross profits margin in the 40% to 60% range. Any less than 40% indicates you probably won’t be able to support the product; over 60% will probably put you through the product’s price ceiling.
For example--the per unit production cost of your Jammin’ Jelly preserves is $1.25. You decide to use a 45% gross profit margin.
= per unit cost/ (1.00-margin)
= $1.25/ (1.00- .45)
= $1.25/ (.55)
If you had decided to use a simple 45% markup the calculated costs would be:
= per unit cost x (1 + percent mark up)
= ($1.25 x $1.45)
During the marketing research and development phase of your value-added product ask yourself:
- Who are my target customers and why should they buy my product?
- Who are my competitors and why are my target customers buying their product?
- How will I differentiate my product from my competitor’s?
Answers to these questions will help you determine how and where to promote your product. Truly understanding the benefits and characteristics of your product allows you to determine your unique selling proposition (UPS). Your UPS very clearly answers the question, “Why I should do business with you instead of your competition?"
Promotion is often a mix of activities including some form of advertising, signs, brochures, samples, and special events. Word of mouth promotion is still the cheapest and most effective form of advertising. Constantly test and track the effectiveness of your promotional activities to determine what works best for your particular type of product.
Value-added is all about niche markets. The keys to successful niche markets are to find markets that are:
- Significantly different from the mass market in the same class of items to allow for premium pricing.
- Still large enough to provide enough sales to be profitable.
- Is too small to attract mass production and distribution.
Direct Marketing via on-farm retail outlets, farmers’ markets, CSAs, e-commerce websites, specialty grocery stores, gift shops, mail order catalogs, and craft shows have proven to be successful outlets for direct marketing your locally grown and processed value-added products.
Does Value-Added Processing Fit Your Operation?
Value-added processing is a customer driven process that can offer farmers the potential to capture a larger share of the food dollar. The farmer’s share of the consumer’s food shopping dollar has decreased from 46 percent in 1913 to just under 20 percent in 2006, according to the USDA Economic Research Service. Why? Because consumers now buy more “ready-to-eat” or “ready-to-cook” food while farmers generally produce and market raw agricultural commodities.
Value-added products are defined by USDA as having:
- A change in the physical state or form of the product (such as milling wheat into flour or making strawberries into jam).
- The production of a product in a manner that enhances its value (such as organically produced products).
- The physical segregation of an agricultural commodity or product in a manner that results in the enhancement of the value of that commodity or product (such as an identity preserved marketing system).
While there are opportunities with value-added processing, there are also increased risks. The risk varies with the size of the investment, the type(s) of product you choose to produce, and the market potential. Other risks to consider include the entrepreneur’s level of expertise, access to small scale processing equipment, technical support, regulatory requirements, and the entrepreneur’s business and financial management skills.
Some Questions to Consider
- Are you willing to invest the time and effort necessary to plan this business, research the profit potential of processing and marketing your product, and evaluate your personal and material resources to determine if this type of business is a good fit for your family and your current farming operation?
Starting a value-added processing business, like any start-up business, takes careful planning. You will need to devote time to market research, phone calls, letters, office visits, and a lot of decision-making before you turn out your first jar of jelly or can of organic vegetable soup. Months or even upwards to a year is not an unreasonable amount of time to expect to spend in preparation for opening your business.
- Who will purchase your product?
Anyone with a new product or service must know their target audience and, more importantly, why they would be willing to purchase the new product or service. What is your customer profile? What is their age, sex, income, buying habits, where do they live, how much do they spend on related items, where do they shop, even what do they read? This is market research.
- What is your product and how will you make it?
If you want to make a food product for retail sale, with very few exceptions, you will not be able to make it in your home. This means that you will either have to build your own facility and buy equipment, rent existing facilities and equipment, or contract with an existing food processor to co-pack your product for you.
Also, it’s one thing to make small batches of your product for family and friends, but larger production runs demand developing large batch recipes. Where can you get professional advice on adjusting recipes and improving the shelf-life of your product? What is the shelf-life of your product? Where can you purchase the ingredients, packaging containers, labels that make your product attractive and safe to the public? This is market research.
- Are you aware of the local, state, and federal regulations concerning food processing?
There may be local zoning ordinances or land use restriction that affect what kinds of businesses you can operate on your property. You will need to seek out training on basic food safety and sanitation procedures that ensure a safe food product. Your product will also need to comply with the Food Regulation Standards developed by the Food and Drug Administration (FDA).
Your product may require a nutritional analysis or benefit from a specialty product label.
- Can you make money with this enterprise?
A key characteristic of many small or on-farm specialty food processing activities is that they are “income patching,” where the processing activity is one of several sources of income rather than the processor’s sole source of support. How much time and financial resources can you commit to this new enterprise? How much will customers pay for your product? Consumers are generally willing to pay a slight premium for specialty or gourmet products, but these must be high quality products.
Knowing what your customers will pay is an important component in determining your break-even point. It will help you to determine how many units you’ll have to sell to breakeven. The second part of the profitability equation is your cost of production. You must calculate all your costs, both fixed and variable. How many units of your product must you sell to become profitable?
Remember, the goal is not to just breakeven, but to make a profit.
- Do you consider yourself to be an agri-entrepreneur?
Risk is an intrinsic part of any business venture and starting a new food processing business can be risky. The costs of the uncertainty that comes with a new venture can be staggering in terms of stress on family relations, self-image, and personal bank accounts.
This business will demand you sharpen your business management skills and write a business plan that includes a detailed marketing plan for your new enterprise. This is where you’ll write down the goals for your business and how you plan to reach them.
- Do you have the necessary capital investment required to fund this new business?
Successful businesses start small. With limited funds you may need to look at investing ingenuity first, labor second, and money third. Stephen Hall in From Kitchen to Market suggests, “Depending on your approach, you can expect to incur minimum start-up costs of approximately $35,000 to $100,000 or more for each year for the first three to five years.” (Hall p.xiv). Consider how you will develop your product and markets, work out production procedures, and learn the peculiarities of the industry before building permanent facilities, hiring labor, or quitting your day job.
Unfortunately, there is no simple blueprint to follow that applies to everyone for developing a value-added enterprise. The resources listed on this site can assist you in the process of identifying, selecting, managing, monitoring, and growing your value-added business.