Every time a grower goes out of business, his or her peers discuss why it happened. Did a contract fall through? Did the economy in their area crater? Did their quality suffer?
After analyzing the pricing survey Greenhouse Grower sent out earlier this year, I think I’m safe in saying that the most likely culprit for growers shutting their doors is that they don’t charge what they need to charge for their plants.
I realize that is a bold statement, and that most of you know of other circumstances that led directly to a friend losing his or her business.
But I’m guessing that the finishing blow to the business would not have ended things if they had been pricing plants correctly in the years leading up to that final calamity. Let me show you what I mean.
No One Agrees On What A Grower’s “Costs” Include
Most growers calculate prices by using a markup formula (57% do so). A markup formula is deceptively simple: cost multiplied by a number (which typically ranges from 1.6 to 3 for the greenhouse growing industry). But the way growers arrive at those two basic elements varies wildly. First, let’s look at costs.
Based on what growers told us, few agree on what counts as a cost. Among those who spelled out the elements involved in their costs, here were the most likely to be included:
3. Tied: Growing Media; Pots; Overhead
Here were some costs cited by several, but that were less common:
2. Time on bench
3. Square footage per plant
And here are costs that weren’t mentioned at all, unless growers lump them into overhead costs:
• Marketing materials (other than tags)
• Plant Growth Regulators (PGRs)
• Pest control
Now, water can be considered an overhead cost, since it’s a utility like electricity. But all of the others are direct costs involved in growing and selling the plant.
Then there’s freight. When we analyzed how retailers calculate plant prices, we found that many of them didn’t treat freight as a cost. They would calculate markup without the cost of freight, then add freight and round everything up to a retail price point, such as $4.99.
Growers are a little better. Of those who mentioned freight, the majority included it in their costs before calculating markup. However, many didn’t mention it at all.
As you can see, we do not have an industry standard for what “cost” includes.
Now let’s turn our attention to the second half of the markup formula, the multiplier.
Again, there’s no industry standard. In retail, there’s more agreement on what the markup should be. The number doesn’t range too widely — from 2x to 2.8x, typically.
But for growers, you’ll find someone who thinks adding 30% to costs (or marking it up by 1.3) is workable. One outlier on the other end of the spectrum multiplies costs by 5.
That Means A Lot Of Costs Aren’t Covered
According to what we learned, a typical grower will take the cost of the plug, growing media, the pot, a percentage of labor and overhead, and multiply it by an average of 2.4 times (the average markup for growers).
Let’s say a single 4-inch annual in that formula comes to $2. That gives the grower $1.17 to play with. But since only some of the costs were used in the formula, he or she now needs to deduct shrink (including any charge backs from pay by scans), PGRs, fertilizer, pest controls , marketing materials, and freight.
Profit disappears quickly in that scenario.
Plus, we don’t know if the costs that are included actually involve the full amount. Take labor. Is the labor cost used only those workers assigned to that crop? Or does it include management and the owner’s compensation? Does it include insurance and benefits? Worker’s compensation?
It’s Not Smart To Follow The Competition
According to the pricing survey, almost a fifth of growers (18%) base their prices on how their competitors are pricing plants. Most want to be in the same ball park. Others try to be a little above (to position themselves as a quality grower) or a percentage below their competitors.
But after looking at how little consensus there is in the industry, this kind of pricing is highly risky.
Think about it. Basing your prices on your competitors’ gives them control over your operation’s health. What if they price plants in a way that ultimately loses money? What if the competitor you aim to keep your prices below is the guy who multiplies the cost of his liner — and no other costs like growing media, tags, labor — by 3? (That’s a real-world example, by the way.)
You will be following your competitor off a cliff into bankruptcy.
Another problem is there are too many unknowns. The competitors may have gotten a deal from their suppliers, or their cost structures are different from yours. And it doesn’t take quality into account. If a crop has a higher quality — it has better, more costly genetics or the plant itself is larger (even if the pot size is the same) — then why price it the same as others?
We found that certain types of growers were more likely to turn to competitive pricing: for example, those growers who do not have a retail division.
It’s Time For The Industry To Get Pricing Right
Greenhouse Grower would like to find a solution to the pricing issue in the industry. We’re seeking ideas and volunteers, and I hope you will join us.
First, we want to find a way to test best practices for different types of businesses, from brokers to growing operations to grower retailers to pure retailers.
We’re not talking about illegal practices like collusion. We’re looking at methods of pricing, from how to evaluate the market value of plants, to which costs need to be covered adequately.
We will also need volunteer businesses who are willing to participate. All of this will be supervised by vetted experts. We turned to a panel of experts for our survey, and will do likewise for any projects we develop. These experts will be available to our volunteer cohorts.
Smart pricing methods are fundamental to our industry’s future. I hope you’ll join us in finding a way forward that makes sense and keeps us financially solvent.
If you’d like to participate, just let us know at [email protected].