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Chapter 6 - Seed pricing and costing
The
importance of price
The
cost of seed
Pricing
policy
Pricing
strategies
Pricing
techniques
Distributors'
margins
Price lists, terms and conditions of sale price
lists
Price has different meanings for different groups of people:
· to the buyer price is a cost which is used as a measure of value; the buyer evaluates one variety or source of seed against the alternatives;
· to the seller price is revenue and therefore a key element in the marketing mix; setting the right price is an important tactical decision and is a key factor influencing revenue and profit;
· to a government price may mean popularity and votes and is therefore a sensitive political issue; governments may therefore seek to influence and control seed pricing.
The importance of price varies from one market to another and between different segments in the same market. For example, non hybrid seed, which the farmer can save, will be more price sensitive than hybrid seed. Price will be a more critical factor in marginal farming areas, where spending power is low, but less important where high yields can be obtained and farm produce can be sold profitably. Providing the benefits of the seed are understood, it is other factors, such as the availability of fertilizer and confidence in the produce market, rather than price that dominate the farmer's decision to purchase.
Price and demand
The manager responsible for pricing a product must know how much more will be sold if the vice is lowered and, conversely. how much less will be sold if the price is increased. There is obviously a limit to what the farmer will pay as well as a limit to demand however low the price is set (unless seed is used for human consumption). As prices increase the point is reached where substitutes to bought seed, such as farm saved seed, may be used or the farmer may choose to plant a different crop.
Price can be one of the most effective marketing tools available to a company. Pricing strategies for a product or product line should be established on the basis of reaching short and long-term marketing objectives such as selling a certain quantity, achieving a certain market share or making a given margin over costs. However, prices are often set without taking into account the true cost of production and the effect which that may have on the competitive position of a product or product range.
Cost is a major factor in any discussion about price. Thus the costs involved in putting a bag of seed on the farm must be recorded, analysed and known to management. These costs will include the cost of the processed and packaged seed and the marketing costs associated with selling and distribution. Costs may be grouped according to the activities involved notably:
1. Seed production, involving procurement, processing and storage, quality control and certification.
2. Seed marketing, taking into account marketing, market research, advertising and promotion, sales and distribution.
3. Administration and finance.
For a company planning a seed production programme the working capital needed to procure and process seed has to be assured. If it is not to be financed out of existing resources then short-term loans are required to ensure that there is sufficient working capital. Seed held in stock at the various stages of processing also has to be financed. This is a significant cost item and there may be serious financial consequences for a business that has high stock levels.
The manner in which costs are allocated and presented will depend on the accounting system used. A simple presentation of a Profit and Loss Account demonstrates how income and costs relate, as shown in Figure 6. Elements which make up a Profit and Loss Account are discussed below:
revenue
income from various sources such as sales, commissions
or royalties
sales
direct income from sales of seed commissions indirect
income from sales made on behalf of a third party
royalties
income earned from licensing varieties to a third party
cost of goods
direct costs of procuring seed for sale plus treatments
and packaging; may include processing costs depending on
accounting policy
gross margin
sales income less purchase costs (also expressed as a
percentage); serves as a useful indicator of the earning power of
the product or business
expenses
company overhead costs associated with different
activities such as production, sales and distribution, marketing,
and administration
trading profit gross
margin less expenses
plant breeding
breeding, variety maintenance and trial costs
gross profit
trading profit less plant breeding expenditure
net profit after finance and tax
gross profit less finance and tax charges
The Profit and Loss Account can be presented for the business as a whole or for individual products or groups of products which may represent 'Profit Centres' within the business. Costs which are common to the whole business, e.g. the central management or the fixed cost of owning and operating a breeding station and processing plant, can be allocated across products. Although some products will be more profitable than others, and will be able to bear a greater share of the overheads, it is important to cost each product as honestly as possible for management control and decision-making purposes.
Seed pricing involves setting prices when a new product is launched or a new distribution channel is used. Also, decisions may need to be taken to change the price in response to competition and to the general market situation.
In the public sector prices are often based on an economic pricing policy. Economic pricing considers the effect of seed price on the economy, taking into account the amount officials think farmers can afford to pay and the role of the seed industry in the development of agricultural production. Ideally, however, the public sector should follow a more commercial pricing policy which accounts for all costs and allows for an element of profit.
Figure 6 Profit and loss account example
Some objectives in government seed pricing could be:
· to induce farmers to use certified seed of improved varieties in order to increase national production;
· to provide adequate incentives to seed producers to supply seed in sufficient quantity to meet demand;
· to encourage the development of private distribution channels;
· to implement government agro-economic policies.
The objectives of public-sector seed agencies are usually similar to those of government since the main purpose is to maximize seed use while achieving a marginal profit to finance the organization. Institutional inefficiencies often mean that profits are not realized and the government is, in effect, financing a hidden subsidy to make up for the losses which cannot be covered by cost increases or operational improvements.
Where subsidies can be justified they should be part of a declared policy of assistance provided to farmers for specific crop development programmes. Subsidies should not be used to compensate for the inefficiency of seed supply organizations and should not discriminate against the private sector by only being available for seed supplied through the public sector. In some countries, the effect of subsidies is to create a great deal of uncertainty and this is a disincentive to private seed supply development.
Government pricing policy should not undermine private enterprise in a mixed economy since the private sector will need to establish a price structure which will reflect the true cost of seed and meet its business objectives. Subsidies may form part of transitional arrangements where the private sector is being encouraged to enter the market. This was the case when the seed market was liberalized in Turkey. The government arranged for subsidies to be paid to private companies with a phasing out over a five-year period.
State-run organizations may continue to supply the high volume and low margin non-hybrid seeds, such as cereals, or seeds of public varieties while the private sector develops more profitable high margin and imported seeds. Some objectives in private sector seed pricing are likely to be:
· props maximization which will be the long-term target although there may be many other shorter term considerations which will influence pricing policy, such as increasing market share and gaining acceptance of new products;
· price competition, may be achieved by setting a price that gives a competitive edge in the market place but may not be lower than that of a rival because other factors, such as service, will be contributing to a company's competitive advantage;
· a yield 01? investment which must be at least as good as other uses for investors' funds.
Once a company's seed pricing objectives have been established, different pricing strategies must be considered. These include:
Low price strategy
Low price strategies are used where consumers respond very positively to small downward changes in price, but a company may not always gain from setting low prices as more efficient competitors may respond with similar price cuts. If the product is not particularly price sensitive then the net effect of a price reduction can simply mean a reduction in revenue. A company may be tempted to reduce its price where similar or substitute products are also sold or when there is an oversupply. However, seeds can become devalued by selling them cheaply especially where there are real benefits associated with the product. Imported vegetable seeds are often chosen by farmers in preference to locally produced varieties in the belief that they are better because they are more expensive. It is therefore critically important to understand the likely response of the farmer when adopting a low price strategy.
Market price strategy
Where a few large companies dominate supply, products tend to be similar (known in the seed industry as "me-too" varieties) and the role of price tends to be neutral, i.e. a market price is established.
High price strategy
This strategy can be used as a long- or short-term policy. In the case of the long-term policy the company will have identified a market segment for a high quality, value-added product such as graded and treated seed for precision drilling. A high price will reflect the exclusive image or added value of the product. A short-term, high-price policy takes advantage of a new product introduced onto the market, as may be the case with a new high-yielding variety where supply is limited.
The important influences on pricing are cost, demand, prices of the product's main competitors and short-term sales targets.
Cost-plus pricing
This method involves calculating the unit cost of a product and adding the appropriate profit margin to give a base price which might then be altered in relation to prevailing market conditions. While this seems a simple approach the fact that such pricing is production oriented and may therefore not reflect what is happening in the market place, makes it risky. A rigid application of cost-plus pricing may lead to price increases when demand is lower and reductions when demand is strong. This is the opposite of what should normally be done.
Contribution pricing
This is a form of cost-plus pricing which involves separating the different products that make up the product portfolio and allocating to them the direct costs associated with their production. The price is determined at a level which will generate revenues in excess of these costs, thereby contributing towards meeting business overheads. Individual products can be analysed in terms of their ability to cover their direct costs and contribute to overheads.
Competitive pricing
Where there is market competition, costs cannot always be the determining factor in pricing. Here the nature and extent of competition will have a major influence on the price. If a product is faced with direct competition from similar products the price will be restrained. In contrast, when a product is faced by indirect competition from products in different sectors of the market there will be more scope to vary the price. This provides the possibility of using different strategies.
Short-term pricing techniques
Pricing can be a useful tool for pursuing short-term marketing and sales targets. When a new variety is launched higher prices can be set, providing the opportunity of earning higher returns from those farmers willing to pay the higher prices before seed becomes more widely available. Lower prices may be linked to promotional activities such as boosting sales of established varieties, creating interest in new ones, reducing high stocks and encouraging farmers to buy early.
There are no fixed rules to apply, but the basis for setting a margin will depend on what is expected of the distributor and the acceptable final price to the consumer. Clearly, if the distributor is going to be actively involved in selling the seed and is expected to take a stock risk then the margin must afford adequate compensation.
Seed margins have to be attractive enough to provide the dealer with an incentive to stock and sell. Where there is competition, seed marketing companies compete by offering more attractive trading terms. This encourages dealers to stock their products and give them prominence. If farmers go to buy seed, and are undecided about the variety, the dealer will recommend seed from the most profitable supply source.
If a seed company wishes to enter an exclusive arrangement with a dealer, such that seed of other companies will not be sold through the same outlet, then it is usual to provide a higher margin. The dealer will also have to be assured that the company is able to offer an adequate range of competitive products.
Price lists, terms and conditions of sale price lists
Whatever the mechanism used for setting prices these prices need publishing and publicizing. Prices must be published in time for the selling season and in time for farmers to make their buying decisions. Frequently, situations arise in the public sector where all the parties involved in the price setting process fail to agree or the administration of the system is too slow. As a consequence, the sales campaign is delayed or there is uncertainty in the market causing seed to remain unsold.
It is common to provide an internal price list for the seed company's sales staff giving details of margins, commissions and discounts and indicating the latitude they have when selling to the distributors. Retail prices may be published as part of a catalogue or as a separate printed list. The advantage of a separate list is that it can be altered in response to market conditions more frequently than a printed catalogue. The distributors' price list should give details of:
· product group and variety name; package sizes and details plus package prices and the per kilogram price for comparison; prices for different seed preparations and treatments; the minimum unit of sale; discounts available; payment details;
Figure 7
Some components of terms and conditions of sale
1. Complaints procedure: the circumstances under which a complaint about seed quality will be considered.
2. Seed standards: regulations governing the supply of seed.
3. Latent defect: since seeds are supplied free of disease the company disclaims responsibility for subsequent infection when the seed is grown.
4. Definition of terms used to describe the variety response and performance: words such as resistance, immunity, tolerance and susceptibility are defined.
5. Plant variety protection: adjustment of prices to account for any royalty payments that are liable to be paid.
6. Published prices and quotations and subsequent alterations: explanation of what is included in the price and the right to alter quotations.
7. Force Majeure: covers factors outside the reasonable control of the supplier; standard exclusion clause covering the failure of a crop or delivery under such circumstances, such as a natural disaster, government action or civil commotion.
8. Damage delay or loss in transit: time limit and procedure modification
9. Transport charges and insurance: the supplier determines the delivery system. If he covers 'normal' delivery then any excess, e.g. express delivery, may be charged to the customer.
10. Payment: statement of standard payment terms and discounts.
11. Currency changes affecting the cost of seed this covers goods of foreign origin where there may he currency changes or the imposition of import taxes
12. Bankruptcy affecting the buyer and seller: legal position pertaining to bankruptcy of either party
13. Arbitration rules or legal jurisdiction under which disputes will he settled
14. Acceptance of terms: the placing of an order infers acceptance of these terms.
15. Seed supplied for crop production not seed production: disclaimer for performance of a subsequent crop grown from retained seed.
16. Property rights and payment: definition of the transfer of properly at the point at which payment is made in full.
- date and period for which the prices apply;
- minimum order time from supplier;
- transport costs and arrangements if applicable;
- insurance costs in transit if applicable;
- appropriate contact names, addresses and numbers.
Terms and conditions of sale
These may be printed in catalogues, on price lists or on order and dispatch forms. They set out formally the basis on which the business will be conducted between the seller and the buyer. They also provide a reference point should there be any subsequent dispute. It should be understood that basic consumer protection rights cannot be avoided by simply writing disclaimers into the terms and conditions. Some components of the terms and conditions of sale are shown in Figure 7.
