Diversifying Your Agricultural Sales Mix

  

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Small and Medium sized farms are BUSINESSES and must be run as a business.  With the plethora of fantastically fun farmers’ markets springing up like wildfire, there is a sense of false security that direct retail sales, by being a vendor at a farmers’ market, is the best and most valuable avenue for generating business profit from your farm. 

Smart farm businesses diversify their sales mix to add on other forms of profit generation to minimize the high risk of vending at farmers’ markets while still enjoying all the positive benefits that farm markets bring – direct consumer interaction, community involvement, business and branding exposure, and much, MUCH more!

Let’s start with some defining terms

A sales mix is the proportions of sales coming from different products or services. Changes in sales mix often affect profits because different products often have different profit margins, therefore a change in the sales mix can have an impact on profits even if total revenues are unchanged.

Selling less of a more profitable product but making up the sales with a less profitable product still leaves one with lower profits.

Understanding Your Product Mix RISKS

There are a wide range of financial and product risks that producers assume when marketing their products. An important step in understanding and managing those risks is to take time to identify potential risks that might be encountered. Marketing risks can occur in a number of areas, including products, transactions, operations, pricing, and public policy. Managing each of these areas of marketing risk can involve a range of strategies and tools depending on the market and regulatory environment you operate in.

Producers may tend to focus their efforts on managing risk on the production side at the expense of improving their management of consumer risks. Producers and other suppliers, in general, are increasingly being required by large volume customers to assume more consumer risks.

Although less tangible than other types of marketing risks, the possible decline of product relevance to consumers should be an ongoing concern for savvy farmers.  Staying in touch with the wants and needs of consumers can be a full-time job. With ever-changing purchasing patterns, eating habits, dietary fads, and shifting demographics, maintaining product relevance can be a challenge. It is essential to understand how relevant your products are to today’s consumers.  Understanding your Sales Mix, and understanding how to run the financial numbers will assist you in modifying your sales mix to match and marry consumer needs and demands.

Sale mix--Definition and Explanation of the Concept:

The term sale mix refers to the relative proportion in which a company's products are sold. The concept is to achieve the combination that will yield the greatest amount of profits. Most companies have many products, and often these products are not equally profitable. Hence, profits will depend to some extent on the company's sales mix. Profits will be greater if high margin rather than low margin items make up a relatively large proportion of total sales.

Changes in sales mix can cause interesting variation in profits. A shift in sales mix from high margin items to low margin items can cause profits to decrease even though total sales may increase. Conversely, a shift in sales mix from low margin items to high margin items can cause reverse effect-total profit may increase even though total sales decrease. It is one thing to achieve a particular sales volume; it is quite a different thing to sell most profitable mix of products.

Sales Mix and Break Even Analysis:

If a company sells multiple products, break even analysis is somewhat more complex than discussed in the topic break even point calculation. The reason is that the different products will have different selling prices, different costs, and different contribution margins. Consequently, the break even point will depend on the mix in which the various products are sold.

Example:1

$60,000 sales represent the break even point for the company as long as the sales mix does not changes. If the sales mix changes, then the break even point will also change. This is illustrated below.

Example:2

Although sales have remained unchanged at $100,000, the sales mix is exactly the reverse of what it was in example1, with the bulk of sales now coming from the less profitable product A. Notice that this change in the sales mix has caused both the overall contribution margin and total profits to drop sharply. The overall contribution margin ratio (CM ratio) has dropped from 45% to 30% and net operating income has dropped from $18,000 to $3,000. The company's break even point is no longer $60,000 in sales. Since the company is now realizing less contribution margin per dollar of sales, it takes more sales to cover the same amount of fixed costs. Thus the break even point has increased from $60,000 to $90,000 in sales per year.

Agricultural Operations WITHOUT Diversified Sales Mixes

Well . . . . ummmmmm . . . . . if you don’t have one, you’re taking a HUGE RISK.  At any given time in any given business sector, the international politics, local politics, weather, and consumer demand can vary wildly.  Diversifying the different ways a farming operation will generate profit, allows that farm to manage their potential risks better.  Farmers who rely solely on farmers’ markets for their primary income and revenue source are at a much greater disadvantage – and are much more prone to the sways and swails of all the outside factors that directly influence agriculture.

It is in every farmers best interest to examine their sales mix, know their break-even point on every item produced and sold, and understand the financials of their profit margins VERY CAREFULLY. 

Those who do, and those with a wider mix of sales and profit generating activities will be able to adapt to the market fluctuations more quickly and with less loss of revenue.

Diversifying your Agricultural Sales Mix Blog Series

• The False Security of Farm Markets
• Diversifying Your Agricultural Sales Mix
• Creating 4 Sales Channels for Solid Agricultural Sales 
• Direct Retail Sales
• Indirect Retail Sales
• Wholesale Sales
• Partner Profit Sales
• Selling Whole Products AND Value-Added Products for Maximum Profit
• Utilizing Both Direct Marketing And Indirect Marketing in Agriculture

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• Sustainable Business Services 
• Sustainable Marketing Solutions