Erin and Al Rosas say that Rosas Farm’s customers will pay a higher price for good nutritional value. [Photo: Jeffrey Camp]

One of the most important decisions for small business owners is determining the right price for their product or service. Too high, and the product sits on the shelf. Too low, and the income from selling it won’t cover the cost of producing it.

Finding the right price for Rosas Farms’ grass-fed, organically raised beef is tough because “you can’t compare grass-fed beef to conventional beef,” says Al Rosas, who with his wife Erin started the Marion County business in 1990. He adds, “We will never be able to compete with conventional beef because we don’t do the same things they do to achieve a 99-cent burger.”

Rosas says he doesn’t allow the market to set the price. Instead, the farm prices its grass-fed beef, bison, pork and chicken as “absolutely cheap as we can afford to let it be and still sell.” While admitting their profit margin is very tight — “even five, 10 cents a pound is a world of difference when I’m doing 250,000 pounds of chicken or 500,000 pounds of beef” — Rosas believes people will buy his meat if they understand the differences between conventional beef and grass-fed beef.

“Our concern is finding that value,” Rosas says. “Is it in dollars and cents? Or is it actually in the value of the nutritional end of it? We have to educate the consumer so the group looking for it is going to pay for it.”

Rosas’ views are in tune with the principles espoused by Cathy Hagan, area director for the University of North Florida Small Business Development Center, who says businesses have to take into account fixed costs, but have to bring something extra to the table to survive.

“There’s some perceived value that your customers have that they’re willing to pay for,” Hagan says. “Often, small businesses, particularly when they’re getting started, worry about pricing too high because it might not be competitive. But they need to justify why they deserve a premium, whether it’s quality, price, service or relationships. There is that perceived value they can create.”

At Gary and Saundra Polletta’s Edgewood Bakery, the price of raw ingredients has jumped almost 25%. [Photo: Kelly LaDuke]

'People are More Cautious'

Gary W. Polletta has owned Edgewood Bakery in Jacksonville for 30 years. In the last year, the price of raw ingredients for his baked goods has jumped almost 25%. In February he raised prices for the first time in a year, but he knows he has to be careful: “You can only raise the price of a donut so much before people say it’s not worth it and quit buying them. Our customer counts are the same or better than last year, but our amount purchased per customer is down, which tells me people are more cautious about what they’re going to spend money on,” he says.

Polletta says he tries to educate his customers about the rising cost of his raw materials while maintaining his product quality and pricing his products fairly. “We can figure our costs exactly on an item,” he says. “But there’s not a set formula on what you can charge. Some items have a perceived value that’s more than the actual cost. Other items cost a little more to make but you can’t add three times the ingredients cost because it puts the price so high people just won’t buy it.”

Polletta says he’s making less money today than he made five years ago because he’s absorbing some of the increased costs. But long-term benefits — including maintaining his customer base — may make up for the short-term income loss, he says. If the cost of raw ingredients such as flour decreases in the coming months, Polletta’s income will bounce back, and “It would just be that much longer before we have another price increase,” he says.

TIPS Pricing Strategies Check out whether these approaches to pricing — some of which are financial and some psychological — might improve your business’s bottom line. » Cover your costs. Make sure the product or service makes more than it costs to produce. This is a no-brainer. » Trial and error. Try offering a product at different price points. » Market segmentation. Offer an item at different prices to different markets. » Double take. Try “keystoning,” which is doubling the cost of producing a product. » Pricing by profit margin. Add a predetermined profit margin to the cost of a product. » Competitive pricing. If you can still make a profit, pricing below the competition may pay off in volume. » Odd pricing. Use figures that end in 5, 7 and 9 because consumers will round down a price of $19.95 to $19 rather than up to $20. » Multiple pricing. Sell a number of units for one price, such as three for $9. » Discount pricing or price reductions. Advertising products or services at 20% off, 30% off, 40% off or more can drive customer traffic into the business.

Suzanne Specht, assistant director of the Florida Gulf Coast University Small Business Development Center, says business owners have to understand both fixed and variable costs, and they have to watch what their competitors are doing. “It’s not a science, it’s more like an art,” she says.

Consumers, Specht says, are sensitive to price, but added value — good customer service, a good brand or even something as simple as a cordial greeting — can make it more difficult for them to leave when prices increase. “They won’t switch for a nickel or two,” Specht says.

Once business owners have determined how much to charge, they still have to monitor the market and react to ever-changing conditions or they won’t survive, Polletta says. “Unless you’re living in a cave, everybody knows the cost of everything is going up. Everybody knows if you don’t raise your prices, you don’t stay in business.”