A girlfriend of mine recently started a business making homemade truffles. These little chocolate treats are amazing – creamy, flavourful and very hard to stop at one. She decided to sell them at a local farmers market and we recently spent time discussing her pricing strategy.
She currently sells her truffles for $1 each. So I asked her, how much does the competition sell truffles for? She advised they sell for $2 to $2.50 each. So I probed further about how she set her price and she advised she worked from the cost of production up to arrive at a figure of $1.00.
When I suggested she could look at her pricing strategy differently, especially in light of her competitor analysis, she seemed surprised by the thought she could actually sell her truffles for up to $2 each, given that appeared to be the ‘market value’ for truffles. So next visit to the market she raised her prices and guess what…volume sold did not change, but her income doubled.
So what do homemade truffles have to do with demand and value chain growth in fresh produce? I see huge similarities between the two.
In fresh produce, growers often work from a cost of production up. Retailers, ingrained in discounted buying behaviour, thrive on this and work hard to further drive down prices by working with growers who often invest less in the quality of their crops in order to drive out costs. But driving down costs serves no one and instead creates a profitability squeeze that is unsustainable for growers’ long term.
It’s also not sustainable for consumers because ideally, we want good growers growing our food, investing in food safety, investing in technology to improve efficiency and investing in new varieties that keep shoppers engaged with fresh produce…and coming back for more.
So perhaps we are in need of a paradigm switch. What would strategies and pricing looked like if we worked from a value creation pricing model instead of a cost of production pricing model? It is a radical shift, but stay with me.
Let’s say we focussed on value creation pricing using a health model. What is the ‘perceived value’ of health or put another way, what is the cost of poor health? Think of all the medical interventions people pay for in a quest for health…and then think of the inexpensiveness of fresh produce. How much would an avocado be worth in a health model if it could be prescribed by a doctor for cholesterol reduction? When you think of the cost of cholesterol reduction drugs…an avocado at $5 a day would be cheap. Not only cheap…but delicious too.
Can you imagine a day when a doctor will prescribe an avocado a day for heart health? By viewing the avocado from the perspective of the ‘value’ it delivers, in the context of cholesterol reduction, $5 would be cheap…but given avocados regularly sell on the supermarket shelf for $1.99 to $2.50, the value growth gain is significant. Imagine the impact on grower returns…and on the perceived value of avocados.
I have a vision for the future where by the time I exit the industry, bringing value growth strategies to the demand chain will be the new conversational norm – and it will once and for all replace discounting and buying cheap.
I have strong empathy for food producers. I have tried to garden and grow small amounts of my own food unsuccessfully for years. At best, I manage to get the odd tomato and a few leaves of silverbeet for a salad. At worst, I make a lot of white fly, caterpillars and snails very happy.
Growers deserve a pricing and value chain growth model that rewards the fact they grow food – healthy and real food that feeds the world and nurtures our bodies. I look forward to the day when this transition happens.