Making High Tunnels Pay

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

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
Karl Foord

Both costs & price affect margin - I
Cost side
 Tomato budget
 Breakeven analysis
 Critical factor– People Skills
 Labor – Managing other people

Karl Foord

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

Karl Foord

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

Karl Foord

Both costs & price affect margin - II
Revenue side
 Gross Revenue = price x yield
 Critical factors – People Skills
 Managing the customer’s
perception of value

Karl Foord

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

Karl Foord

PRICING

Karl Foord

General thoughts on pricing
 Business vs. Customer
Perspective
 Strategic pricing

Karl Foord

PERSPECTIVE

Business vs. customer

Karl Foord

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

Karl Foord

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

Karl Foord

Exchange
 Something of Value for an amount of
satisfaction
 Largely behavioral not mathematical
 Usually an emotional trigger
 Buy and justify
 Perceived value > price
Karl Foord

Variation among customers
 Buyers use products in different
ways
 Product attributes change
rankings
 Rankings impact value equation

 Value varies among buyers
Karl Foord

Value perception equation

 Value = quality + service +
relationship + price

Karl Foord

PERCEPTION FACTORS

Karl Foord

Quality - internal
 Quality
 Philosophical Match
 Ecological
 Organic / Natural
 Selection – Uniqueness
 Context – Urgency
 Health Benefits
Karl Foord

Service - external
 Convenience
 Confidence
 No frustrations
 No headaches
 Reputation
 Dependability
 Reference Prices
Karl Foord

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?

Karl Foord

Deepening the quality experience
 5 Sense your market
 Taste, touch, smell, sight,
sound
 Do you provide recipes?
 Sensory extrapolation
 Sell basil with pesto recipe

Karl Foord

Memorable
 Authentic experiences
 Memorable events - inherently
personal
 Goal: Be the first association in
their mind when it comes to your
products and services

Karl Foord

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
Karl Foord

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
Karl Foord

Reference prices
 Do your customers make price
comparisons?
 Within market
 Between markets
 Do your customers talk to you about
price differences?

Karl Foord

Impact of price reduction
 Any percent price reduction
will have a greater
percentage impact on
margin

Karl Foord

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

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

Karl Foord

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

Karl Foord

STRATEGIC PRICING

Karl Foord

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

Karl Foord

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
Karl Foord

Author
 Karl Foord Ph.D. MBA
 Regional Educator, Horticulture
 foord001@umn.edu
 (651) 558-1218

Karl Foord

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/

Karl Foord

Handouts
 Tomato Budget (2 sided assumptions on
back)
 Tomato Sensitivity Analysis (financial)
 High Tunnel Construction Budget
 Pricing Decision Chart

Karl Foord

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

Karl Foord

Making High Tunnels Pay

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