While farm operators reap retail prices when selling direct to customers, marketing costs can quickly reduce profit margins. As a grower, you should know the costs for all market channels you sell through and then strategically decide which channels are most advantageous for your farm and business goals.
Regardless of your product—meats, value-added goods, or fruits and vegetables—a marketing mix analysis is a useful tool to help you make sound business decisions. The information below defines marketing costs, explains how to analyze your marketing mix, and outlines decision criteria to optimize your marketing outlets.
Your marketing mix
Many direct farm operators juggle multiple market channels to sell the quantity of product necessary to make a go of an enterprise. For example, a produce grower may have a restaurant account, sell at two farmers markets, and manage a Community Supported Agriculture (CSA) subscription service. Altogether, these three market channels are a marketing mix.
Managing your market channels well and strategically choosing outlets that complement one another will affect not only your success to move product but also your success to profitably sell product.
Each market channel has pros and cons, such as pricing, time commitment, and packaging and quality expectations. You must weigh these considerations before choosing the outlets that best fit your skills, abilities and business goals.
Marketing costs
As a direct marketer, you control your own supply chain. In doing so, you also incur all costs related to product preparation and distribution. To analyze your return over these marketing costs, you should detail all expenses related to each market channel.
Although many operators have advertising and promotional costs in mind, marketing costs encompass all monetary expenses related to getting a product from farm to table.
Marketing cost categories:
- Post-harvest handling: Time spent washing, packing, and organizing product for market.
- Advertising and promotion: Flyers, brochures, website hosting and development.
- Travel time: Time spent transporting product from your farm to the outlet.
- Time selling or arranging sales: Time incurred selling product such as at a farmers market or spent arranging sales with buyers and dropping off product at stores.
- Mileage: Miles to and from an outlet from the farm. Check the IRS site for the mileage rate for a given year.
- Supplies: Bags, cartons, or packaging for the outlet.
- Signage: Price cards, labels or banners.
- Fees: Farmers market, event, or membership fees related to your outlet.
Data to conduct your own analysis
To determine last year’s performance by market channel, gather all the data you have about last year’s annual marketing costs and revenues.
Begin by collecting records for any cash marketing expenses, such as advertising, post-harvest packaging, supplies and market fees. These are expenses for which you should have a vendor receipt. Allocate these costs to each of your market channels. For example, say you spent $500 last year on post-harvest packaging, and your receipt shows you paid $400 for waxed boxes and $100 for pulp trays. You would allocate $400 to your CSA market channel and $100 to your farmers market channel since that’s how you used the packaging.
For non-cash expenses that often have no receipt or record, like travel time or mileage, you can estimate cost based on each delivery or day. For example, if you sell at a farmers market 20 miles away, you would multiply 40 miles (round-trip) by $0.655 per mile (2023 federal mileage rate) for each market day and assign your labor inputs a wage rate, ($15 per hour) for the 40 minutes of travel time.
Since the purpose is to identify total costs per outlet, you may need to allocate some costs to each outlet if costs are spread across all of them.
For example, the cost of website development and hosting is a marketing cost for the whole farm and is not restricted to one particular market channel. In this case, you should allocate the costs proportionately, but it does not need to be complicated.
In many cases, simply allocating the cost in proportion to sales by market channel makes sense (if a farmers market is 50 percent of your sales, half of your website costs should be allocated to the farmers market).
If a whole farm cost closely relates to only one outlet, adjust accordingly.
Marketing mix analysis
To understand market channel profitability and identify relative strengths across channels, you should calculate an apples-to-apples comparison for all sales outlets. This marketing mix analysis shows an overall comparison without including production costs by product or price variations.
A marketing mix analysis does not consider production costs. If your product price is consistent across sales outlets, a marketing mix analysis provides a good comparison. But if you receive $2.50 per pound of wholesale meat sales instead of your usual $5 per pound retail, you essentially have more production costs for each dollar of sale. In turn, the wholesale market channel may be unprofitable, even if a marketing mix analysis shows a positive return.
Marketing mix analysis example
| Items | Farmers market 1 | Farmers market 2 | Farm stand | Direct-to-grocery | Direct-to-school |
|---|---|---|---|---|---|
| Gross sales | $4,800 | $3,200 | $2,000 | $800 | $600 |
| Number of delveries/days | 8 | 12 | 60 | 10 | 5 |
| Sales per day | $600 | $267 | $33 | $80 | $120 |
| Total annual marketing cost | $1,160 | $1,852 | $420 | $445 | $225 |
| Daily costs per day/delivery | $110/day | $136/day | $5/day | $43/day | $43/day |
| Time selling/arranging sales @ $15/hr | $45 | $45 | $0 | $3 | $3 |
| Mileage @ $.665/mile | $40 | $53 | $0 | $20 | $20 |
| Travel time @$15/hour | $15 | $23 | $5 | $20 | $20 |
| Fees | $10 | $15 | $0 | $0 | $0 |
| Annual costs | |||||
| Advertising | $240 | $160 | $0 | $0 | $0 |
| Supplies | $40 | $60 | $120 | $15 | $10 |
| Net revenue (Gross sales minus total annual market cost) | $3,640 | $1,348 | $1,580 | $355 | $375 |
| Gross margin (Net revenue / Gross sales) | 76% | 42% | 79% | 44% | 63% |
In the above example, the gross margin summarizes the overall return on total marketing costs. Outlets with the highest gross margins retain the largest percentage of gross sales. One way to understand gross margin is to imagine the percent of a dollar retained. The farm represented in the example retains 76 cents of every dollar at farmers market 1 and 42 cents at farmers market 2.
Making decisions
After completing a marketing mix analysis, you can wisely decide on a direction to take. To optimize your marketing mix, you should avoid outlets with a low gross margin and focus on those with a high one.
Complementary outlets
Ideally, outlets complement one another. For example, unsold vegetables at a farmers market may be sold at a farm stand you operate every day. These secondary markets help sell product in which you have invested production costs. Also, one market channel can market another. For example, your pork sales at a grocery or restaurant may not be very profitable, but that outlet may provide promotional exposure for your sales of whole and half hogs direct to customers.
Future prospects
You must also judge the future growth of a market channel before removing it from your marketing mix. Its numbers may not look good compared to last year, but if the outlet is relatively new, you may need to invest some time before sales justify marketing costs. This is especially true for a channel that reaches your target market. You may just need to give the market time to grow.
Lifestyle factors
Sometimes you may retain a market channel simply because you like it or it fits well into your life. A restaurant account in a community where your child attends piano lessons allows you to “double dip” on a trip you are already taking.
Also, the quality of the selling experience is important. You may make more sales at a big farmers market down the road or by expanding your CSA sales, but you also may simply enjoy the atmosphere of your current farmers market and the company of fellow vendors.
After weighing your return on marketing costs and other factors, you must decide which channels to optimize. At times this is difficult, especially if dropping one entails dropping customers who know you and love your product. If this is the case, consider creative ways you may still be able to serve your loyal customers while also dropping an unprofitable outlet. In the end, these types of strategic decisions will offer the necessary profitability to continue operating in the future.
Pricing and marketing costs
Due to variables in marketing costs across channels, a producer can vary prices and still remain profitable. For example, since the marketing costs can be significantly lower in the wholesale market channel than at a farmers market, a grower can receive a lower price and maintain the same profit.
Through careful examination of your own marketing costs and revenues by market channel you will have the information needed to make wise decisions about how to best sell your products.
In 2016, University of Minnesota Extension collected detailed marketing costs from 10 commercial vegetable operators. In addition to data collected for creating whole farm balance sheets, income statements, and enterprise analyses for assorted vegetables, we also collected costs and sales by market channel. Most study participants sold produce through an average of three outlets, with CSA and farmers markets comprising 36 percent and 29 percent of total sales, respectively.
A common concern for produce operators is the cost of selling in direct marketing channels. The direct costs of transporting produce and selling at a farmers market or delivering CSA boxes decrease profit margins, even though operators capture retail prices. In contrast, although wholesale market channels offer a lower price, growers may spend less to sell the product. After considering all direct and labor costs, we found wholesale marketing costs were relatively low when compared to direct marketing channels.
Operators had the lowest marketing costs per dollar of sales for farm stands, followed by wholesale and CSA. Overall, farmers markets had the lowest return on marketing costs.
To examine how marketing costs varied across outlets, Extension organized costs by labor, mileage and direct expenses. Labor included total hours spent selling (such as at a farmers market), preparing product, and transporting produce. The time spent by all farms was valued at $10 per hour. Mileage cost was calculated as the total miles driven for each outlet at the 2015 federal mileage rate. Direct expenses included advertising, post-harvest packing materials (such as waxed boxes), and a portion of utilities (such as phone calls) directly used to sell product through a particular marketing channel.
Looking at the results of this marketing cost analysis, the labor cost for selling at farmers markets explains its low return, especially since labor costs are the largest component across all channels. The absence of mileage costs associated with self-serve farm stands helps explain how this particular outlet had the highest return on marketing costs. The low mileage associated with wholesale is also notable. In our sample, some food hubs picked up product on-farm, and this kept marketing costs low. Direct expenses were the smallest component and not significant, with the exception of direct-to-institution sales.
Chase, C. (2010), Evaluating Marketing Outlets using Whole-Farm Records. Retrieved from https://www.extension.iastate.edu/agdm/wholefarm/html/c5-32.html
Jablonski, B. et al (2017), Market Channel Assessment Benchmarks (Colorado). Retrieved from http://foodsystems.colostate.edu/research/market-channel-assessments/state-benchmarks/
Reviewed in 2023