Are you looking to get into alpacas but are still waiting for the “right time.” Well the best time to buy is at the end of the calendar year! Why? Thanks to the economic stimulus plan, the Section 179 tax incentive has been extended until 12/31/10! Which means you can purchase your alpacas now and write them off in full the first year!
Where do they come up with those prices for alpacas and alpaca products? To be perfectly honest, I have NO clue. No one appears to be following the rules of business and the alpaca industry has been inflated for quite some time because of it. Thankfully with the recent economy troubles things are correcting themselves and alpaca sales are starting to fall in with the rest of the livestock industry. Let’s look into why we are pricing the way we do.
Making the Money
To make a long story short you’re thinking about getting into the alpaca business to make $$$. You have dreams of telling your current boss to shove it, kick off your loafers and slap on a pair of muck boots. This means you need to price your goods and services in such a manner that you can be profitable. You need to be able to cover not only to costs of farm operation but to also cover your living expenses and put some in your pocket, PROFIT!
You might think that the cost of an item is what determines its ability to sell. WRONG! Ultimately you are the reason an item sells not the sticker you put on it. But what price should you put on that sticker?
Under pricing – Bad idea all around. Not only are you pricing items such that you no longer can be profitable but your clientele also changes. You might be thinking but we’re in a recession, people are pocket pinching and I should lower my prices so I’m the lowest of them and its ok that I lose $ because I’ll have a higher volume in sales. *Buzzer* Your customer base which you’ve marketed to before now sees you as potentially going out of business, unreliable, and possibly selling an inferior product than your competitors.
Over Pricing – Well fine, if you can’t be the cheapest let’s be the most expensive. High cost = Quality right? Nope. Your customers are bargain shoppers but if you’re priced so ridiculously over the same thing your competitor is selling they’ll just think you’re a pocket picker. When you end up looking at expenses you need to cover you might think your prices have to be very high just to cover overhead but don’t forget that that price might be too high for what someone is willing to actually pay or what they perceive as “fair.”
The Price is Right
There are many factors that go into setting your price. There is a lot of homework that goes into understanding why an item is priced the way it is. It is probably best to even look at your local college or university to see if they have courses to help you along the way. The key is to never forget why you are in business. You are there to fill the need/want/desire your customer has and the more you know about your customer the more profit you will be able to make.
Know Your Customer. Know your Competition
It is important to know who your customers are and what they value. You can obtain this information through simple statistical research like the census bureau, through surveys direct to your customer base, becoming your customer, and checking out your competition. There is a reason why marketing budgets are so high for companies, no marketing = no sales. Once you figure out who you’re selling to, you can price to fit them. For example; If you’re marketing to young new parents who, just bought a home, have 2 kids and a dog they probably are not willing to spend $30 on a pair of socks. But, if you’re marketing to middle aged men who are into hunting they are happy to shell out $20-30 for a pair of socks that will keep their feet warm so they can stay in that tree stand longer.
Costs
There’s no way around it, you won’t be able to make a profit unless you bring in enough money to cover your costs. In the case of us alpaca ranchers your costs are happily itemized out on your Schedule F form. Your Schedule F is your Overhead cost and can include both fixed and variable costs. Believe it or not every ounce of your Schedule F goes into determining why you’re pricing a pair of alpaca socks the way you are.
What we are ultimately looking for is your MarkUp %. Let’s say a pair of alpaca socks costs you X to make/buy, what is the MU% to sell it at Y so you can make a profit?
MU% Factors
So how do you come to find your MU%?
Expenses – think of everything! Schedule F, living expenses, your salary, outstanding loans, cost of product, etc
Sales Goals – Yup you must set a sales goal. How much do you want to sell this year? If you are just starting out your sales goal will probably be lower than your expenses. But you must set a goal for yourself never the less. Year 1 my goal was $5K Year 2 my goal was $20K for example.
Product Cost – Items that wouldn’t normally go into your Schedule F like wholesale purchases.
Profit – How much profit do you plan on making this year? I’ll be flat out honest with you, I’m year 3 into my alpaca business and my projected profit this year is -$35,000. Yup, I plan on being $35,000 in the hole. It’s not pretty but at least I understand where I am and what I need to do to eventually make a profit. Starting a farm from scratch is very expensive. If you’re looking for a more economical way to get started in alpacas see our post on Agsting.
Reduction% – there is always loss in any business and be sure to keep good records so you understand your losses. They could be anything from the death of an alpaca, several socks in a shipment with a slipped stitch, or moldy hay. If you do not know this % yet it is best to use 5% of our sales goal until you have records to support a different number. Calculating reduction 5% of 100,000 = 5,000
My year 2 MU%
90.5%=($35,000 + $1,000 + $18,000 + -$35,000) / ($20,000 + $1,000)
These are my real numbers for 2010. My goal was not to attempt to cover any of my living expenses and I realized that I am starting out and yes I’m still paying off farm startup costs so minus $35,000 was a realistic “Profit” goal. I was very aggressive in my sales goal and have been working hard at doing $20,000 in sales this year.
Price Tag
So I have my rounded MU% of 90 now what? This is the % you will mark up your products. If it costs you $10 for a pair of socks then you will want to mark it up by 90%. $10 x 90% = $19 Tada! You have just priced your socks!
The same goes for pricing your livestock. You’ll want to take the cost of your dam and divide it by how many cria you plan to get out of her, 10 I think is a fair number, add that with your stud fee and what it costs for 1 year of care and mark that up with your MU% to see what your cria should sell for to make a profit. This is a bit of a cheating method because technically your Dam/Stud/Care is already in your Schedule F but this helps break it out and getting more profit is never a bad thing.
Alpaca Dam = $12,000 / 10 = $1,200
Stud Fee = $3,000
1yr Care = $100
————————
total = $4,300
MU%= 90%
————————
Cria Sale Price = $8,170
Of course you are not obligated to stay at that MU% and in the end it is your customers, competition and ability to sell that will determine your price. You might find that you can price higher than your MU% on some items but have to be lower with others. Be sure not to go to the extremems, too high and too low will cost you ultimately.
When starting your alpaca business you need to determine what form of business ownership you should choose. There are 3 major types of ownership; Sole Proprietorship, Partnership, and Corporation. I will describe each of these forms to help you better understand which one to choose for your alpaca business.
Sole Proprietorship
As the name implies a sole proprietorship is a one man operation. 72% of all businesses in the US fall under this category and the account for $18 out of every 100 made. I know you’re thinking what? 72% and they only account for $18/100? Yes, sole proprietorship is the driving force of America but it’s all small business, people like you, me, your plumber, doctor, hair dresser, and taxi driver.
So why is a sole proprietorship so popular? Let’s check out some of the advantages and disadvantages of this form of business.
Advantages:
• Simple to start – just walk down to your county office and say hey there county clerk I want to start a business. They give you a form, ask for about $30 and poof, you’re a registered business. Finish it up with a visit to your local bank, open up a business account. Apply for an EIN for tax purposes and you’re rockin’ and rollin’.
• Simple to start means it’s LOW cost. The cost of your DBA (Doing Business As) is the only out of pocket expense you have to become a sole proprietor.
• Because the business will either succeed or fail based on you and your efforts there is a very strong profit incentive.
• The business owner has the freedom to manage how they see fit. You now are “the man” only you can put you down.
• Confidentiality – you only report to you, so anything you do is your business
• Tax Savings – can you say deductions?!
• For as easy as it is to start the business it is just as easy to terminate it. Decide that you no longer want to be in business, close the bank account, tell the county clerk to take you off the books and send an form to the IRS stating this is the last year you’re sending in your taxes. Poof, business has gone bye bye.
Disadvantages:
• Unlimited Liability – you are your business
o Your responsibility to pay into the business
o Your responsibility to pay the debt of the business
o Your responsibility for any claims against your business
o If your business is sued so are you and all of your personal assets
• Limited Size – small businesses stay small
• Limited access to capital – “What’s in your wallet?”
• Succession – Most businesses die when the founder dies
• Limited management talent, skills and time
• Lack of opportunities for good employees
Partnership:
A partnership is 2 or more people in business for profit. Typically most partnerships are less than 4 people. Partnerships account for 8% of all the businesses and account for $5 out of every 100. Partnerships require obtaining a business certificate and come in 6 different types.
Partnership Types
• General Partner – They assume liability along with you
• Limited Partner – They are limited only by their losses (what they put into the business)
• Silent Partner – Has no management voice
• Secret Partner – Private
• Dormant Partner – Both a secret and silent investor
• Nominal In Name only
All partnerships need an article of Partnership. Long story short, it’s a document which spells out how the partnership is split (50/50 or 60/40), duties, responsibilities, what the business is worth, insurance etc.
Advantages:
• Still easy to start
• More people equal more capital and credit opportunities
• Improved decision making – 2 heads can be better than one
• More tax advantages
Disadvantages
• Liability to all the partners
• Disagreement – you now have to pass things by your partner
• Continuity – Death: Uh oh, your partner died. Now what?
• Frozen Investment
Corporations:
Corporations are an association of people coming together for a common goal. Corporations are treated like a “human” and have the same constitutional rights as you and me. Corporations have a common stock (1share =ownership=1 vote) Corporations are required to produce annual reports, have meetings, minutes and can either be public or private in nature. They account for only 20% of all businesses but bring in $77 out of every 100!
There are several different corporation types but for the alpaca business owner only the LLC is worth discussing for our small business adventures.
LLC or Limited Liability Corporation is the choice of many farms both alpaca and other and here’s why.
Advantages
• Sole Ownership – You still can be a one man show.
• Limited Liability! – Folks can only sue what the farm owns! If your house is on the same land as your farm this is a big deal. Your LLC could own your livestock, barns, pastures etc but has no claim to your personal assets like your bank account or house.
Disadvantages
• To set this up you need lawyers which cost $$$
• Yearly fees to continue your LLC
• Must separate your finances from your business
• Separate Taxes
• More time consuming to kill
Well there you have it. I know the question will arise so what did I do? I personally chose sole proprietorship to start with. I liked the ease and cost to get started and to terminate it should I find 3-5 years down the road this adventure is not for me. The thought of someone coming onto my farm, hurting themselves and suing me for everything does scare the crap out of me though. To curb those fears I hold a rather large and irrational amount of liability insurance. But, I now don’t sound like a wicked old witch to kids who want to pet the pony or hug an alpaca. Should my alpaca business grow and become profitable I am considering becoming and LLC to further protect myself.
Be sure to visit our Overview Page for more information about starting your alpaca business.
