Welcome to this week’s Premier Business Operations newsletter… 

Before I get too deeply into this week’s newsletter, several readers have asked about previous editions.  You can find these online at https://premierbusinessoperations.wordpress.com/ or alternatively by going to the Premier Business Operations website:  www.premier-business-operations.com.

During the past month we’ve been examining my friend Annie’s maple syrup enterprise, especially her product and operating costs.  If you recall, we needed to take a hard look at these costs in order to help us determine an appropriate pricing for her product.

To summarize what we’ve seen so far, her product costs for each 8 oz. bottle of maple syrup was $5.13 and in the last newsletter we itemized many of the operating expenses as well.  These included items such as: 

  • Site or entry fees for tables or stalls at:  farmers markets, craft fairs, flea markets or other festivals.  This was estimated at $1500 per year.
  • Cost of rent for a commercial kitchen.  This was estimated at $500 per year.
  • Maintenance, gas and insurance of her truck and travel costs from event to event.  This was estimated at $500 per year.
  • Taxes.  We determined that the combination of state and federal income taxes would be 31%.  This would be calculated from the net income.

In the last newsletter, we also researched some competitor prices for an 8 oz. bottle of maple syrup and found an average price of $11.12.  You may recall that when I first began to speak with Annie about her maple syrup business, she was selling her product at prices that varied from $5 to $7, “depending on her mood” (her words).  Since she will not be selling again until 2011, I told Annie that this would be a good opportunity to examine different pricing scenarios.  I really did this in an effort to demonstrate to her that she is probably “leaving money on the table” by charging so little.  For the purposes of these scenarios, we used the same number of bottle she sold this year, 400.  Let’s see how well she can do…

Sale price $ 5 $ 7 $ 9 $ 11
 
 Revenue for 400 bottles
   $ 2,000  $ 2,800  $ 3,600  $ 4,400
 Cost of product
   $ 2,052 $ 2,052 $ 2,052 $ 2,052
 Profit from sales
   $ (52)  $ 748  $ 1,548  $ 2,348
 Operating Expenses
 Entry fees $ 1,500 $ 1,500 $ 1,500 $ 1,500
 Kitchen rent $ 500 $ 500 $ 500 $ 500
 Transportation $ 500 $ 500 $ 500 $ 500
 Total $ 2,500 $ 2,500 $ 2,500 $ 2,500
 
 Net Income
   $(2,552)  $(1,752)  $ (952)  $ (152)

 

After I showed Annie the figures above, she was in disbelief.  She always thought that she was at the very worst breaking even!  So now what?  Annie is faced with several options:

  • Sell more maple syrup.  At each price level, there is a breakeven point that will cover her operating expenses.  It should be pointed out that there is NO breakeven point for the $5 sale, where she is losing money on every bottle.  At the $11 price, the breakeven point is 426 bottles, so she is close.  But if she is reluctant to raise her price beyond $9, then her breakeven point is 646 bottles.  Of course selling more maple syrup causes her to produce more she has in the past.
  • Raise her sale price.  This is a given.  It is impossible for Annie to ever profit from this venture unless she is willing to raise the sale price of her product.
  • Reduce her variable costs or her “cost of product”.  Since producing maple syrup is such a labor intensive job, the best options of reducing costs is by finding lower cost bottles (50 cents) or labels (25 cents).
  • Reduce some of her fixed operating costs.  Fixed costs are typically the most difficult to reduce for most businesses due to items beyond the control of the business, such as fuel prices.  In this case, Annie might consider: using a vehicle that gets better gas mileage; only selling at events with lower entry fees; identify a commercial kitchen option that may be less costly, such a church.

As usual, I left Annie with some things to think about…  I’m sure she hates me at this point since she has always told her husband that she is making money with this venture.  I think I’ll leave that one to Dr. Phil.  Hopefully between now and next spring, she’ll have figured out some options to turn her maple syrup business into a profitable one.  I’ll look in on her sometime early in the year to see how she’s doing. 

Key takeaway for readers…  whether you’re currently a business owner or aspire to be, it’s never too late to review the pricing strategy and costs of your business.  Being a small business owner, every dollar matters.  To find out more about Premier Business Operations can you better understand and reduce your costs, please visit our website at www.premier-business-operations.com or contact us at information@premier-business-operations.com

Have a great week…  and don’t forget to keep tabs of your dollars…

Advertisements