Deciding where to sell is about more than just the numbers.

If your farm sells in multiple markets, as mine has in the past, you’ll inevitably have to answer the question at some point of which channel to sell your best products in, and at some point you might also need to decide whether or not to add or drop a market? My current farm used to sell CSA shares and also do restaurant deliveries. We made the decision about five years ago to stop delivering to restaurants, but not before considering multiple angles, and even calculating that our restaurant sales were actually contributing more, as a percentage of sales, to our bottom line. If the restaurant sales were contributing more, why did we choose to drop that channel?

The channel contribution is what is leftover when you subtract the channel specific costs from the contribution margins of all of the crops you sell through that channel. Illustration by the author.

Whether or not to drop a market can be a much more complicated question than just whether or not that market is contributing to the farm’s bottom line. Knowing whether a marketing channel is contributing to the bottom line definitely helped us with that decision, and it’s always a good thing to have a handle on.

Financial Factors

Understanding how well a market is contributing to the farm’s bottom line is a matter of some basic math. In my article on “Tools to help you put the right price on your products,” from the February issue of GFM, I explained the concept of Contribution Margin, which is the difference between the price of a product and the variable costs of producing the product. That contribution margin is the money available to cover fixed costs, like marketing and administration of the farm, and if there’s anything left over after the fixed costs are covered that’s profit.

To understand what a specific marketing channel is contributing to the farm, you take the total revenues from that marketing channel, subtract the variable costs of all of the products sold through that channel, and any costs that are specific to the marketing channel. This is basically the total contribution margin for the products sold through the channel, minus costs that are specific to the channel, meaning if you eliminated the channel those costs would go away. 

For a farmers market those are things like your stall fees, driving to and from the market, the labor to set up, run and take down the market, and even things like bags and display racks. Costs for items like display racks and tables which are used for multiple years should be depreciated, the easiest way to estimate this is by dividing the initial cost by the number of years they’ll be used (if you plan on selling them after you’re finished with them you can subtract that recovery amount from the initial cost before dividing by the number of years). Also, if you already have the tables and display racks and you’re considering dropping the channel, the cost of those would be zero to continue with the channel so you don’t need to account for them in that case, but if you thought you could sell them by eliminating the channel you would account for that.

For something like CSA shares the marketing costs are a little different, but you can still calculate them. They might include the cost of packing shares, or setting up a market style pick-up, and also the costs of administering the CSA shares and any CSA member communication. Likewise, the marketing costs for restaurant sales include the time spent taking orders, packing, delivering, and invoicing.

If you run these numbers for any particular channel and you end up with a negative return from that channel, you’re in trouble; the channel isn’t even paying for its own costs. When we ran the numbers for our farm both of our channels were positive so that was good. Usually, one channel is more efficient at generating the returns than another, meaning the ratio of the total contribution margin of all of the produce sold in that channel to the marketing costs from that channel is higher. Being more efficient in this case doesn’t necessarily mean that it’s a better channel for you.

For us, restaurant sales were more efficient, and CSA was less efficient at generating returns. However, restaurant sales were a very small marketing channel for us, and CSA was most of our income, so the total contribution from the restaurant channel was much smaller than that from the CSA channel. If we had only looked at the numbers, they were indicating that we would probably do better if we increased restaurant sales and decreased CSA sales, or even eliminated CSA sales in favor of selling entirely to restaurants. 

Other Factors

For us, there were a number of reasons that we looked at the numbers and actually ended up deciding to drop restaurant sales and concentrate on our CSA. While the CSA wasn’t as efficient as the restaurants in generating returns, it was proven at a higher volume, and with a more diverse mix of vegetables. The diversity of vegetables was important to us, as it is part of our self-insurance policy against individual crop failures for any given year, and it makes good crop rotations easier. Having the numbers to show that we could still be profitable even switching to just running a CSA helped make the decision a little easier to drop restaurant sales.

Another reason we chose to drop restaurants was that it was more volatile than CSA, which is very steady over the course of the season once CSA members have committed to the season. Some weeks restaurant sales were good for us, but occasionally there would be lulls that were hard to predict. While the restaurant channel proved it was paying for the distractions of having to take orders and make deliveries during the season, it still felt like a distraction, and we preferred the pace of CSA administration, with most of the sign-ups happening before our field season really go going.

Ultimately, I’ve been very happy with the decision we made, largely because it was choosing the channel we preferred to work with. I’m so glad we made the decision with the numbers in mind though, and at the very least were able to show that the CSA would be able to support us, even if we dropped the restaurant sales.

Josh Volk farms in Portland, Oregon, and does consulting and education under the name Slow Hand Farm. He is the author of the book Build Your Own Farm Tools and Compact Farms: 15 Proven Plans for Market Farms on 5 Acres or Less, both available from Growing for Market. He can be found at slowhandfarm.com.