Revised August 2016

Agdex 845-3

Pricing Processed Food Products

Setting a price for your products is one of the hardest These costs include (but are not limited to) the following:
parts of running a processed food business. The price has
to be low enough that your customers see value, but high • raw ingredients
enough that you earn a profit. • processing expenses or fees for co-packers
• packaging costs such as boxes, bags, labels
If you set the price lower than what consumers
are willing to pay, you could be leaving • shipping and/or transportation
valuable revenue on the table. If the • labour costs you pay people to make
price is too high, you may struggle to your food product, for example:
sell your product. Include all –– yourself or family members

This factsheet explores four issues to your costs when –– contract/seasonal employees
consider when pricing your processed –– machine operators
food products. setting your • marketing costs (advertising,

• How to calculate the cost and product price price lists)

profitability of your product • display costs (tables, tent,

booths, signage)
• Finding the market channel(s) that
best match your business goals Fixed costs (overhead)
• How knowing your competitors can help For fixed costs, include expenses that do not change from
you set a price month to month. The costs occur no matter how many
• How consumer demand affects the pricing units are made or grown.
of your product
These costs include (but are not limited to) the following:

• land and equipment expenses

How to calculate the cost and • kitchen, building or facility costs

profitability of your product • insurance (building or liability)

• utilities
The cost incurred to produce the product is just the
• management salaries
beginning. When determining your product’s price,
include all your costs. Most of your costs will fall into two Note: it does not matter which category you put a cost in
categories: variable (direct and indirect) and fixed. as long as you account for all your costs.

Variable costs Cost of Production = Variable Costs + Fixed Costs

(direct and indirect)
For variable costs, include those expenses that change
with the number of units made or grown. For some
of the costs, you will see a direct relationship to the Understanding your break-even point
number of units made or grown while for other costs, the A break-even point is a standard calculation in business
relationship may not be quite as clear. used to discover the point where costs are covered by a
certain price and volume. The break-even point is the goes towards covering Happy Cheese Company’s monthly
price at which there is neither a loss nor a profit from the fixed costs.
sale of your product.
The Happy Cheese Company has $1,200 per month in
For this break-even example, you will need to know the fixed costs for the cheese operation.
cost to produce one unit of product (variable costs), plus
what your monthly business costs are (fixed costs). Break-even = $1,200 / $1.25 = 960 packages
in units of cheese
Break-even point = fixed costs/month
unit contribution margin A higher wholesale price of $2.75 per 100 gram will mean
they can sell 640 fewer 100-gram packages (1,600 - 960)
Remember, this example is intended to show the process, per month and still break even, compared to selling at a
and your numbers will vary depending on the type of lower price of $2.25 per 100-gram package.
product you offer and your own costs.
You can use break-even analysis before you plan for a new
Break-even scenario food product or decide on a new price to be sure the new
product or price will generate enough income to cover the
Happy Cheese Company produces Camembert and sells costs of your business.
it to a broker. Their cost to make 100 grams of cheese
(variable costs) is $1.50 per 100 gram, not including the
How do I calculate my profit goals?
monthly business (fixed) costs.
Covering your costs is an important starting point.
The broker wants to buy the cheese at a price of $2.25 per Making sure you earn sufficient profit to ensure your
100 gram. business thrives is the next critical step.

How many 100-gram units will Happy Cheese Company You can set your profit goals as a percentage above the
need to sell to cover their monthly fixed costs and break cost of the product, or you can set a total profit figure for
even? the entire business. Make sure you are familiar with the
product price range in your industry, so your profit goal is
Happy Cheese Company will subtract the variable costs suitable for your food products. You will need to balance
per 100 gram from their selling price to see how much your need for a profit with a price that consumers see
the sale of each 100-gram “unit” will contribute towards value in.
covering their fixed costs.
This next example shows profit as a percentage above
Unit contribution = $2.25 - $1.50 = $0.75 cost, using products made by a jam producer. Typical
retail industry margins in Alberta for this type of product
Unit contribution margin = sale price - variable costs
are between 30 per cent and 40 per cent.
So, each 100-gram unit contributes $0.75 towards
Profit as percentage
covering the monthly fixed costs of Happy Cheese
Company’s business. Cheryl makes specialized jams, jellies and chutneys and
has done extremely well at farmers’ markets. She has been
Happy Cheese Company has $1,200 per month in fixed
approached by two different specialty retail stores: one
costs for the cheese operation.
wants to stock her apple chutney, and one is interested in
Break-even = $1,200 / $0.75 = 1,600 packages stocking her sage jelly. The first retailer wants a 30 per
in units of cheese cent margin and will price the chutney at $5.00 per 250-ml
jar of apple chutney; the second retailer will set the price
To break even (have no profit), but cover all their costs at $6.25 per 250-ml jar of sage jelly and wants a 40 per
(variable + fixed) by selling at $2.25 per 100 gram, the cent margin.
Happy Cheese Company must sell 1,600 of the 100-gram
packages of cheese each month. How can Cheryl figure out the best wholesale price she
will receive?
Break-even analysis can also help you analyze how a price
change affects your business. Using the same example, Since Cheryl knows the selling price and the margin,
Happy Cheese Company sells the cheese to a different she can calculate the price she will receive by using the
broker for $2.75 each. Here is what happens to the following formula:
number of packages of cheese they need to sell to cover
selling price / mark-up factor* = cost to producer
the same costs and break-even:
$5.00 / 1.429 = $3.50 OR $6.25 / 1.667 = $3.75
Unit contribution = $2.75 - $1.50 = $1.25 per 100 gram

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*
Sample margins converted to mark-up factor are listed in Here are some common marketing channels for a
the table below. For this example, find the margin percentage processed food product.
(30% or 40%) in the first column, then look across to the
second column to the mark-up factor of 1.429 or 1.667.
Direct Marketing
Mark-up Factor Table • farmers’ markets • trade shows or trade fairs
Margin % Factor • farmgate sales • mail order/online sales
30.0 1.429 Advantages Disadvantages
31.0 1.450 • additional time required to
• direct contact with
32.0 1.471 sell products
customers
33.0 1.493 • some of the channels are
• lower marketing costs
seasonal
34.0 1.515 • potential to earn more
• extra costs if transporting
35.0 1.539 profit on products you sell
products to customers
40.0 1.667 • a market to test new
• customer base is smaller
products
45.0 1.818 than other market channels
• networking with
50.0 2.000 similar sellers and/or
60.0 2.500 finding collaboration
opportunities
This calculation has helped Cheryl determine that she
will earn more profit by going with the second store, even
though their profit margin is higher than the first store. Indirect Marketing
The only thing left for Cheryl to decide is whether she can
cover her costs and make a profit at the wholesale price of • brokers • restaurants
$3.75 per 250-ml jar of sage jelly. • retailers (small shops or • institutional food service
larger grocery stores) buyers (schools, hospitals)
Advantages Disadvantages

Findingthemarketchannel(s)that • larger customer base

• good distribution system
• adds an extra cost to your
product due to fees or
best match your business goals has been established commissions paid
• some take responsibility for • selling product at wholesale
There are many possible market channels for your food marketing your product prices
product, each with its advantages and disadvantages.
• opportunity for higher sales • lose contact with the
Examine which type of market channel is the best fit for volume customer if you sell only
you, your product and your business. through indirect channels
• may be difficult to source
Each channel will have different requirements, such as indirect sellers interested in
storage for your product, fees to place your product or distributing your product
discounts for brokers. These costs will affect the price
you set.
For more detailed information on opportunities and
Price can also vary by channel due to market demand. challenges for the direct marketing channel, see the
For example, the price of a specialty jar of dilled carrots Agriculture and Forestry publication Farm Direct
offered at a farmers’ market will be different than the Marketing for Rural Producers, Agdex 845-6.
price for a similar jar at a large grocery retailer.

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Howknowingyourcompetitors Welcome customer input

can help you set a price Have a process that makes it easy for customers to
communicate with you about your product. If you are
Cost-based pricing is just one way to determine your price conducting market research, be sure to include your
and works best in a market with limited competition. In current customers in the process because they have
a market with more competition, it is best to look at what experience with your product.
your competitors are charging.

Knowing your competitors’ prices can help you price

your product. When competition is low for your product
Howconsumerdemandaffects
category, you can choose to price at the top of the price
range. If competition is high, you can choose to price
the pricing of your product
at the low end of the price range. If your product has a In Alberta over the last decade, consumer demand has
unique quality or selling feature not being marketed by increased for foods that take a short time to prepare,
your competitors, you could demand a higher price. including ready-to-eat foods, snacks and mini-meals,
one-dish meals and custom quick meals or meal kits.
Here are six ways to learn about your competition’s This trend has resulted in many new opportunities for
pricing strategies: food processors.
Prepare a competitor list Market-focused pricing takes into consideration
consumer trends, purchasing patterns and demand for
Select who your key competitors are and review how
food products similar to yours.
their prices compare to yours. Focus on those with a
similar product and similar-sized business to keep price Once you have determined that there is a market for your
comparisons relevant to your business. product, you will want to find out if consumers think
your product offers good value for their money. To learn
Analyze your main competitors
what consumers think, you will need comprehensive
Ask customers and suppliers about your competition. information about your customers, the size and nature of
If possible, visit a competitor’s business to learn how your customer base and their feelings about price.
products are priced and distributed. See how your
Ask the following questions:
competitor’s product strengths, weaknesses and price
compare to yours. • How many customers do I have and where do they live?
Watch new competitors as they enter your market • What is the age, income and education of my
customers?
Regularly check with customers, suppliers and your • Where do my customers spend their money?
competition to gather information about new businesses
• Do my customers believe price indicates the quality of
in your field. A growth in competition could require an
a product?
adjustment in your pricing.
• Why might a customer favour my competitor’s
Use your networks to stay informed product?
• What type of service does my customer value?
Stores that carry your products (or do not yet) are a great
resource as they can tell you about other companies they Getting accurate consumer information can be time-
purchase from and why. You might ask if the competition consuming and costly, but it is an important factor for
offers discounts to retailers or price cuts to consumers. setting price. Companies often hire market research
firms to determine answers to these questions. A
Attend trade shows
market research professional will design the research
Industry trade shows are a great way to find new questionnaire and provide unbiased analysis of the results.
customers and learn about how your competition prices
Market research information is also available through
and promotes its products.
public libraries, on the Internet or through publicly-
funded business development centres such as the Business
Development Bank of Canada. This type of information
tends to be general, but it is less expensive to access than
creating new research.

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This following list of trade magazines and online
resources may also be of interest to those in food
processing:

• Food Processing http://www.foodprocessing.com/

• Bakers Journal http://www.bakersjournal.com/
• Canadian Grocer http://www.canadiangrocer.com/
• Foodservice and Hospitality
http://www.foodserviceandhospitality.com/
• Gourmet Retailer http://www.gourmetretailer.com/
• Specialty Food http://www.specialtyfood.com/
• Prepared Foods http://www.preparedfoods.com/
• Food and Beverage Packaging
http://www.foodandbeveragepackaging.com/

Bringing it all together: the Pricing Processed

Food Products Worksheet
Making informed pricing decisions for your processed
food products is an essential step in developing your
business. Monitoring your cost of production, your
competition and what your customers want – and being
flexible enough to incorporate price changes over time –
are key to a successful product and a profitable business.

Below is a working example for a business and product

that brings together all the topics in this factsheet. Use
this process as a way of setting your own price, using
numbers specific to the type of product you offer and
your profitability goals.

This factsheet presents an overview to the subject of

pricing of processed food products. For a more detailed
analysis on different aspects of pricing, see the factsheets
on The Essentials of Pricing, Agdex 845-1, or Methods to
Price Your Product, Agdex 845-2.

Prepared by
Alberta Agriculture and Forestry

More information, contact:

Alberta Ag-Info Centre
Call toll free: 310-FARM (3276)
The development of this factsheet was supported in part by
Website: agriculture.alberta.ca
Growing Forward 2, a federal-provincial-territorial initiative.
R08/16

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 Pricing Processed Food Products Worksheet – Know Your Costs and Market Assessment

Example: Nature’s Own Spreads – Sage jelly

Product Cost example Competitor Pricing example

Total variable costs per unit $2.80 per 250 ml jar Main Competitor A Many Jams Company
Total fixed costs per month $1,200
Current selling price $4.75 per 250 ml jar
Strengths broad product list
Break-even Price example use indirect marketing, strong
specialty market image
Unit contribution margin = $4.75 – $2.80
selling price – unit variable cost = $1.95 per 250 ml jar
Weaknesses higher prices, smaller volume
Break-even = fixedcosts/month $1,200
point unit contribution $1.95
margin Price Range $6.00 to $7.00 per unit (retail)
= 616 of 250 ml jars

Profit Goals example Main Competitor B Every Day Jams

Develop a profit goal To generate $1,000 profit
for the business monthly from the business Strengths strong speciality market image

Target Profit: Weaknesses low volumes, narrow product

N = # of units required to range
make a profit
Price Range $4.50 to $6.80 per unit (retail)
N = fixed costs + target profit N = $1,200 + $1,000
unit contribution margin $1.95 Demand Level example
= 1,129 of 250 ml jars
Demographics of upscale urban consumers who
Marketing Channels example
customer base shop at local shops
Direct Marketing Options: 30 - 50 plus with secondary
• Farmers’ markets education
• Farm gate sales
• Mail-order/on line Wants, needs and feelings of associates price with quality
customer base
nice packaging since viewed
Indirect Marketing Options: I plan to sell to a specialty retail as specialty item
store for $4.75 per 250 ml jar
• Broker convenient small size for
• Retailer smaller families or couple
• Restaurant
• Institutional buyer
Secondary data-search findings consumers looking for new
breakfast solutions
Target Price Range $4.75 per 250 ml jar
customers want variety in their
food and meals
consumers looking for new
flavor and texture

Note: your costs may be considerably different than those in

the example.

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 Cost of Production – Processed food (Fillable Worksheet)

Variable Expenses example

Ingredients – for food product

Processing expenses
(commercial kitchen rent,
co-packer etc.)
Labour
(including paying yourself )
Packaging costs
(jars, labels, boxes etc.)
Transportation (shipping, travel
to Farmers Markets etc.)
Marketing costs
(advertising, samples etc.)
Farmers Markets booth fees etc.
Other

Fixed Expenses example

Insurance (liability, vehicle)

Utility costs
(heat, electricity telephone)
Equipment
Office supplies
Operating interest
Professional fees (accounting)
Management salaries
Other

Cost of Production = Variable costs + Fixed costs