A Rationale for Market Channel Analysis
Modern farming is an intensive year-round profession, and for many growers, production costs – especially labor – rise to the top as the main budgetary concern. When we focus only on the challenges of farming profitably, we risk overlooking the ultimate “cost” of farming: selling highly perishable products in volatile and unpredictable markets.
Because the access costs of each market channel differ, the risks and rewards of those channels can vary. Measuring and managing the labor, equipment, and supplies needed to sell produce through different channels empowers growers to choose the best marketing plan for their operation. This plan could include decisions about crop selection for different markets, decisions about the scale of certain farm enterprises, or broader decisions about the farm business and the types of relationships needed for farm viability.
Download the Know Your Cost to Sell Market Channel Budget Analysis WorkbookBelow are two scenarios that illustrate the basic costs of two different market channels: Wholesale and Farmers’ Market.
Farmers Market Scenario:
- You bring 60 4-oz. bags of arugula to a summer market, selling them @ $3.50/bag
- You sell 50 bags, collecting $175.00
- Your total sales for the day amount to $750.00
- You also pay an employee $12.50/hr to work the market (2 hours for travel, 4 hours to run the stall) and you pay the $25.00 market fee for the day, equaling an investment of $100.00
- Marketing costs for arugula: $175/$750 = Arugula Sales/Total Sales = 23%
- 23% x $100 = $23
- Not including the cost of operating your vehicle, you need to invest $23 + $35.00 (10 bags unsold)= $58 to make $175 ($58/$175 = .33). Marketing costs are 33% of your arugula revenue for the day.
Wholesale Market Scenario:
- You get an order from a buyer for 60 4-oz. bags of arugula; they will purchase the product for $2.50/bag, and you collect $150.00
- You pay an employee $12.50/hr to make the delivery (1.25 hours round-trip*)
- Not including the cost of operating your vehicle, you will need to spend $15.00 (1.5 hrs at $12.50/hr for the delivery driver) to make $150.00. Marketing costs are 10% of arugula revenue for the day.
- This percentage will change as you consider additional sales and additional stops.
- *add 30 mins per additional stop; assuming you have similar sales lined up with other buyers, each additional sale costs $7.50 (½ hr at $12.50/hr for the delivery driver.)
These simplified examples show some of the key differences between direct-to-consumer market sales and wholesale relationships:
- Guaranteed sales versus speculative sales
- Reduced waste (Especially labor and supplies spent on unsold product)
- Impact of volume on revenue and marketing costs
How To Use This Workbook
Following the definitions below, categorize your expenses for a particular market on an annual basis. Using the spreadsheets provided, you can separate the costs of your different market channels. You may have to add additional rows for expenses not already itemized.
While knowing the marketing costs for any one delivery or market day can illustrate the impact of those sales moments, an annual budget for a marketing channel helps growers see the broader comparison, revealing the resources required for each market, including management and marketing labor. You can always divide the total budget for any market channel to analyze quarterly, monthly, or weekly costs.
The following categories appear in the Know Your Cost To Sell Market Channel Budget Analysis Workbook:
Post-harvest handling labor: If the market channel requires specific post-harvest labor, that added cost needs to be included in the market channel analysis. Time studies – timed records of a specific labor activity – can be used to estimate the labor cost of these activities. CSA packing is one example – the time it takes to fill those boxes will not change much from week to week, and the farm can estimate the total added labor for this part of the market channel based on the number of weeks the CSA runs.
Advertising and promotion: Traditional media buys and coupons are not how most farmers are spending advertising dollars. But social media does not post itself, and many growers spend considerable time on content creation. Like the other ways that you work at your business, this labor should be part of your costing process.
Travel time: Time spent transporting product from your farm to the outlet. Whether you pay an employee or do this work yourself, this is labor cost of selling.
Time spent selling or arranging sales: Time spent selling products, such as at a farmers market, or spent arranging sales with buyers and dropping off products at stores. It may work best to allocate these expenses to other line items, such as wages for a delivery driver and salesperson.
Mileage: Miles to and from the farm to a sales outlet. Check the IRS site for the mileage rate for a given year.
Refrigerated Transportation: Both the refrigeration unit and the vehicle require regular maintenance. Cost per unit can be calculated by dividing the annual mileage by the total maintenance and wear & tear. Machinery Costs Spreadsheet.
Supplies: From packaging to marketing displays, each channel will require specific supplies. Some supplies may be used across multiple market channels, and many supplies may be used for many years (farmer’s market tables) or used up in a single season (waxed boxes). Amortizing or depreciating durable supplies can help you divide those costs over several years.
Labeling: Wholesale labeling may include custom-printed labels, traceability labels, and UPC stickers. For other market channels, the farm may invest in a label printer or custom labels. For CSA and direct sales, growers might use labels to advertise or distinguish the farm’s products.
Fees: There is often a direct cost to accessing a market, such as market vendor fees, GAP, or Organic certification. Most of these costs are paid annually.
Management Time: Employees may need training to perform specific sales-related tasks. Packing, delivery, and market staffing are among the tasks that will require management. Communicating with buyers, bookkeeping and record-keeping, and transportation logistics are other tasks that farm owners handle for their markets. By recording this time and putting a value on it, the farm owner can see the full time commitment required by a market channel.
Conclusion
Annual market channel budgets provide farmers with a method to account for the costs of selling fresh produce. With this insight, growers can develop realistic marketing approaches. Instead of looking at gross sales alone, growers consider farm profitability when analyzing a market channel.
These budgets also assist farmers in making future farm business decisions and managing financial risks. By itemizing and organizing selling costs, market channel budgets guide growers toward informed decisions about future growth and improved management.
Download the Know Your Cost to Sell Market Channel Budget Analysis Workbook
This resource was supported through the United States Department of Agriculture (USDA) Transition to Organic Partnership Program (TOPP). TOPP is a program of the USDA Organic Transition Initiative and is administered by the USDA Agricultural Marketing Service (AMS) National Organic Program (NOP).
