by Geoff Seelen, CFSA Market Access Coordinator | Monday, Aug. 15, 2022 —
What is the guarantee that an idea for a business will work out in your favor? The answer is rarely straightforward, but there are steps you can take to mitigate the risks of entering a new market. For instance, conducting sales forecasting for each product you wish to sell is advisable. This isn’t as hard as it sounds; you could save yourself some severe financial losses by building your business around what the market demands.
Here’s what you need to know.
Define the Target Customer
Who is your target customer? The more time you spend interacting with individuals who wish to buy your products, the more likely you will be able to determine who these customers are. By defining your target customer, you will be able to infer the extent of their purchasing power.
Let’s use the example of farmers markets to define a target customer.
- A 1998 Tennessee study determined that the median farmer’s market consumer was female, 45 years of age, had above-average income, and received some college education.
- A 2002 North Carolina study indicated that the vast majority (88%) of farmer’s market consumers are interested in fresh produce, and a substantial majority (64%) are interested in local products.
While the social and economic factors will differ from region to region, studies like these are still informative and, for our purposes, sufficient to demonstrate where one might begin their research. It is also instructive to observe that the data you seek may be limited in scope or not exist. Therefore, we must look elsewhere (i.e., other states or regions) to model our projections.
Estimate the Number of Target Customers
“By defining your target customer, you will be able to infer the extent of their purchasing power.”
The North Carolina Department of Commerce gives each county a three-tiered ranking based on economic distress, Tier 3 being the most distressed and Tier 1 being the least. Additionally, counties with larger urban centers tend to be more prosperous; there is a direct correlation between population density in a county and its Tier designation. So, if you are selling at a farmers market in a busy city like Charlotte, North Carolina, or Charleston, South Carolina, you can infer that the number of target customers will be higher. Because we know the median farmers market customer, we can make some inferences from demographic population data from a particular area.
To dig deeper, you can contact the farmers market manager to find out more about the number of visitors for each season. This is a potential red flag if they are not collecting that information. Likewise, if you are working with a firm within the wholesale market, you should inquire about their capacity to purchase the types of products you wish to sell.
Determine the Penetration Rate
The penetration rate refers to how often people will buy the product you are selling. The penetration rate is a constant you will use to calculate the market volume (how many units can you sell in a given period, e.g., pounds of honey/month, etc.).
For example, if you sell ground beef, ask yourself how often your target consumer will purchase 1 pound weekly. If you estimate 1 pound every two weeks, then the PR constant would be 0.5 (1 pound/2 weeks = ½ pound/week)
Calculate Market Volume
Formula: (Market Volume = Number of Target Customers × Penetration Rate)
Estimating your market volume will help you understand the overall value of what you can produce and its limitations. Essentially, you can’t simply know what to produce; you also need to know HOW MUCH you can produce before you run out of consumers.
If you have 50 target customers and a penetration rate of 0.5, using the formula above, your market volume for one week comes out to 25.
Calculate Market Value
Formula: (Market Value = Market Volume × Average Value)
Now that you have estimated the volume (units you can sell per week, month, year, etc.), you can multiply that by the average value (price) per unit to get the total market value for a given period.
A market volume of 25 units/week multiplied by the average value of that product will yield the market value for that period. 25 pounds of beef/week x $8.00 = $200/week market value. To get the annual market value, multiply the dollar amount by the number of weeks you attend the market each year.
“Keeping detailed records of seasonal changes in variable costs will help you catalog how your pricing changes over time.”
NOTE: this doesn’t mean you will sell this much; it only means that this is how much you could sell in a particular market, to a certain number of people, at a given frequency, and over a given period. Also, “average” refers to the fact that the price you charge will fluctuate. Keeping detailed records of seasonal changes in variable costs will help you catalog how your pricing changes over time. Add up your monthly prices for a sales forecast and divide by twelve.
Average Value: On Break-Even Points and Pricing
In the conventional and organic wholesale commodity market, prices are set at the regional and national level. At the local level, there are no formal pricing schemes to reference. Because of this, you set the price, not the market. Initially, you may need to “guess” to establish prices. The more sales you make, the more you will see the impact on your bottom line. However, there are methods you can use to avoid a guessing game. That’s where enterprise budgets come in.
Enterprise budgets can be complicated, but they don’t have to be. If you do not have costs specific to your operation, you can use CFSA’s Organic Enterprise Budgets or budgets developed by NC State University or Clemson University.
Once you estimate how much it costs to produce a product, you can decide how much to charge. You’ll need to factor in other variables such as what similar products are selling for, what people are willing to pay, and how much profit you need to cover your cost-of-living expenses.
Apply Conclusions to Operational Considerations
What should can you do with this information? Consider the implications of making informed estimates on how much of a particular product you can sell in a diversified vegetable farm context.
If you can accurately estimate the number of each product you’d like to grow and bring to market in pounds, you can determine how much of each product to plant.
This will allow you to maintain better cash flow, eliminate waste, use your labor more efficiently, and many other things.
Want more?
- Want help with business growth? Learn more and apply for technical assistance from CFSA today!
- Check out CFSA’s Enterprise Budgets.
- Read more articles for farmers written by CFSA’s Farm Services Team.