Pricing products in portfolios

Pricing products challenges businesses from many perspectives. The question nearly always is, “How much should I mark-up this product?” rather than “How much is this product worth to my customers?” We don’t focus on the product benefits as much as we focus on the cost that went into creating that product. Perhaps we can view pricing from a portfolio perspective instead of a one-shot perspective.

A portfolio means you have a group of similar items. Many growers and retailers tend to group and set product prices by container size. While this is a good start, there can be a more strategic way to price plants if they are categorized by container size.

Take a category of plants, like 12-inch hanging baskets. Tom Dudek and I reported the price range for this product in a relatively narrow geography of Western Michigan to be several dollars wide. The price floor is the lowest price charged for the item. Below this price floor, the product is no longer profitable. The price ceiling would represent the highest price any consumer in the market would be willing to pay for one item in this category.

So, where does the strategy come in? Well, rather than having a single price for every 12-inch hanging basket, consider segregating them into two or three groups. Product Group 1 would sell best closer to the price floor. Product Group 3 would sell closer to the price ceiling. Product Group 2 would sell best in between those two groups. So, rather than selling everything at one price point, there are now three price points for all of the 12-inch baskets. Group 1 could be labeled as “Good,” Group 2 might be called “Better,” and Group 3 could be classified as “Best.” Another way to label these groups are “Standard,” “Deluxe,” and “Premium.”

One important thing to remember is that item cost is not the determining factor of price — willingness to pay is. If some customers are willing to pay more for a particular type of 12-inch hanging basket, it doesn’t necessarily mean that it cost more to produce. One factor that may help to put a basket in this category is inventory. If you don’t have very many plants of that type, charge a premium price. If the plant cultivar is new, why not charge a premium price?

Let’s look at what portfolio pricing can do for profits. This is a very simple example. The costs and units are small and rounded, to keep the math simpler. If a grower or retailer could sell 175 12-inch baskets, she might decide to use portfolio pricing to generate $809.15 in profit. The plants (both direct+indirect cost or fixed+overhead cost) cost either $4, $6 or $8, depending on some of the plant material in them. Rather than use a straight mark-up on cost, this smart grower knows the price floor is around $10, so the plants are priced at $9.99. She earns a profit of $5.99 on each plant in Group 1 ($9.99 retail price minus $4.00 cost per plant). When she sells 100 of them, the total profit is $599, or 48 percent of her total profit. So, she is not making even half of the profit on selling 62.5 percent of the plants (100 plants sold/of 160 total plants sold). Selling Group 2 plants at $14.99, she makes a total of $499.50 or 40 percent of her profit on 31 percent of her total plants sold. Selling Group 3 plants at $19.99, she only needs to sell 10 to earn $139.90 or make 12 percent of her profit on those 10 plants (6 percent of all sales).

Having a portfolio diversifies the risk among three price points and gives consumers choices. All three don’t contribute equally to profit but play a key role in earning overall profit for this product category.

Bridget Behe is a professor in the department of horticulture at Michigan State University. Have a Question? You can contact Bridget Behe at behe@msu.edu.