What is a value-added product?
Per the U.S. Department of Agriculture, a value-added product is defined as:
- A change in the physical state or form of the product
- The production of a product in a manner that enhances its value
- The physical segregation of a commodity or product in a manner that results in the enhancement of the value of that product
Examples of value-added products may be through additional processing, such as shelling nuts, creating fruit jams and jellies, or through specific production methods like organic, naturally grown, and so on.
Benefits of value-added products
On average in the U.S., farmers only bring home about 10-12% of each dollar spent at the grocery store- imagine how business profitability would change if that number was 20%, 30% or 40% instead of 10%! The primary benefit of value-added products is that they provide an avenue for a producer to increase revenue over a standard product. This happens in a number of ways – it can maintain cash flow in seasons where sale of raw products is slow, it can increase the selling price per unit of the product, and it can generate new markets or avenues for sales for your operation.
Pitfalls of value-added products
When done correctly, value-added is an excellent way of improving profitability on a farm- but it is not without risk. Common concerns include food safety during processing, preservation, and storage as well as the expense of inputs required to add value (processing space, energy, time, labor, waste, equipment). Producers also need to consider whether they need additional capital, storage space, insurance, and distribution channels to extend their markets. Finally, value-added products often fall under different state and federal regulations in labeling, licensing, and recordkeeping that must be met.
Point of Sale
Sometimes, value-added customers can attract similar customers to your audience, but occasionally they will draw a whole new client to you! It’s important that you decide what avenues you are interested in pursuing to sell your products- whether it’s a farm stand, farmers market, independent grocery store, restaurant, or other avenue. Each point of sale will have characteristics that influence their purchasing decisions such as origin, environmental impact claims, quality, variety, and price point.
Pricing
In order to assess whether a value-added product is effective in improving your profitability, you have to do the legwork. Pricing your products can be complicated depending on what you produce, what your competition is, and the behavior of your buyers. At it’s core, your total revenue is equal to the price of goods multiplied by the quantity of goods sold. If you price your goods too low, you typically sell higher volume, which might be beneficial to reduce your cost of production. However, with lower price and higher quantities sold, you receive less revenue per unit. On the flip side, if you have a higher price, you sell fewer units and per-unit costs increase- but you potentially make more revenue per unit.
There are three common strategies for pricing goods. Cost-based pricing is where you calculate the cost of production and add a consistent margin to it for each product. Competitive pricing is where you price your product based on a competitor’s prices. Value-based pricing allows you to price a product with or slightly below its perceived value.
Regardless of how you choose to price your goods, be sure to account for all of your operating costs and provide yourself enough profit to sustain your operation. A final consideration to investigate is your target margin of profit. This number may vary, with low margin for high volume customers, high margin for small orders, and a margin you refuse to drop below. Be sure to calculate your breakeven volume at your desired price to ensure you will be able to recover your costs of production.