If you think Organic Produce is priced higher because of costs

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Suppose I told you that a box of 80 conventionally grown D’anjou Pears are priced at $33 at Seattle. What do you think will be the price of box of 80 same variety of pears but grown certified organic?

Higher? It is a good guess. Safe to say, in Seattle, it will be higher than conventionally grown variety.

How much higher?  $4-$8 more? Good guess. It costs $6.90 more for a total price of $39.50

Why are organics priced more? One argument is, the yield is low when you cannot use fertilizers and it costs lot more. While true, it is not relevant.

But let us let the reasoning stand for now.

Let us go all the way from Seattle to New York and buy a box of 80 conventionally grown D’anjou pears. What will be the price in New York?

I will not ask you to guess for this. The price is $35, $2 more than Seattle.

Why are comparable pears priced higher in New York? One could argue that it costs lot more to ship to New York and the rents are higher in New York. Again, true but not relevant.

Again, let us let this reasoning stand for now.

What do you think is the price of same 80 count of organic pear in New York?

If the two cost reasonings are true, it should be $6.90 more than price of conventionally grown?

Wrong.

In New York, the organics are priced at $58.10, a whopping $23.10 more than conventionally grown.

Do organics really incur additional costs when sold in New York?

Organics are priced higher because there exist segments that are willing to pay higher price for the value difference (be it real or perceived value, rational or emotional).

Costs are not the reason for the higher price, but the higher price that organics can fetch are the reason someone is willing to incur the costs to produce them.

The big price jump in New York is because customers there value the organics lot more and are willing to pay much higher price. Not due to costs. If you think East coast costs for organics are inexplicably higher, in nearby Boston, a market similar to New York, the organics are priced at $42.50, $10.50 more than conventionally grown.

In pricing, Customers – their needs, interests, aspirations- come first. Cost is a factor for deciding whether or not you can profitably serve the needs of the customer, not for setting price.

Data Source: http://newfarm.rodaleinstitute.org/opx/product.php?prid=19

3 thoughts on “If you think Organic Produce is priced higher because of costs

  1. Great example on how pricing is not a simple cost + formula.

    However, I think clarification needs to be provided for when you say costs are not a factor in pricing. Any optimization model set to optimize for profit requires cost inputs. Costs are not determining the final price, but certainly they are factor (input) into the equation.

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