Pricing
Quick Recap: Prasenjit and I are students at Cornell Tech doing research on building a platform to connect farmers with institutional buyers like hospitals or schools. We want to compare local vs. non-local food on price and food miles. Our goal is to show that by buying directly from local farmers buyers can save on both. I used to be a farmer in Upstate New York.
So far our adventure has included Qualitative Interviews, exploring the Ag Census, and finding data on the Origin of Every Product. We’re building an algorithm that matches farmers and buyers.
Now, the biggest uncertainty for our platform is setting prices.
Other marketplaces that serve small farmers let the farmers set their own prices. This is certainly the easier choice to make. Farmers who set their own prices feel like they’re in control and are being fairly compensated. All of this is important.
We’re setting the prices because we want to create consistency across local farms and give all of the farmers on the platform access to buyers. When I was farming, I definitely priced myself out of potential customers’ budgets. I would send them my price list and then never hear back from them. It was hard to price my products appropriately.
One of the difficult things about working with many small vendors is there are more people to negotiate with. This is eliminated if the platform sets the prices. Neither side has to negotiate.
By fostering more consistent demand from buyers and having many farmers to ensure consistent supply, we’re making it easier for farmers to take competitive prices.
The factors we’re considering for setting prices are USDA market terminal prices, costs of production and quantity.
We were hoping to beat conventional product prices with something like this:
Market Terminal Price + Empire State Of Food Markup <= Market Terminal Price + conventional distributor markup
One of our dining hall manager partners saves 8% annually by buying 60% local food. We thought that could translate into saving X% on individual local products.
However, it’s not that simple. Our dining hall manager doesn’t necessarily beat conventional products on price alone, he saves money in other ways. He gets lower prices from local farmers because locked-in prices for the whole year ahead of time and bought in large quantities.
I’m pretty sure there are other ways he has probably changed his operations as well. Like offering fewer choices at meals to reduce food waste (saving money) and using whole animals so that he is not buying lard or beef stock separately and instead makes them in-house (saving more money). Changing the operations inside a kitchen is a different problem than matching buyers to farmers. How do we show that?
Now the question is how do we set prices as a function of quantity? If we are not always beating the conventional price, how often do we need to beat the conventional price?
Testing pricing is hard because the real test is do these prices work over time and at a large scale. A one-off transaction does not adequately prove that your price makes sense in the market.
Here are the factors we need to keep in mind.
- It’s a two sided market — the prices need to work for both farmers and buyers. We think a lot about other two sided markets set prices — like Uber or Lyft.
- It is difficult to get access to B2B pricing because farmers and buyers want to be able to negotiate and don’t make those prices public. Making comparisons is difficult.
For right now, we’re just trying to make the matching algorithm work for one product (kale) and we’re matching based on quantity and holding price consistent across farms. I think we will just be pegging the price to existing local wholesale prices and tracking them against the USDA Market Terminal prices as a sort-of ground truth.
Ultimately, we will always be starting with an educated guess and adjusting our prices from there. Our pricing heuristic is correct if the percentage of food ordered through the platform from each buyer is increasing. We want our buyers saving money and our farmers’ revenues and profit margins increasing.
