Harbour Honey: raise price, shrink jar, or go online?
Harbour Honey sells 500 g jars at a Saturday market for $14. Monthly sales are 900 jars. Honey costs $4.20 a jar, jars and labels $1.10, market stall fee $600 a month, and travel $240 a month. The owner packs and sells alone.
The market organiser will raise the stall fee to $900 next month. A nearby stall sells 500 g honey for $12. Harbour Honey's customers say the quality is better, but a survey shows 30% would switch if the price rose above $16.
Three choices: A. Raise the price to $16 and keep the 500 g jar. Expected sales fall 15%. B. Keep $14 but use a 400 g jar. Honey cost falls to $3.36 and packaging to $0.95; sales stay at 900 jars, but some customers may notice. C. Sell online as well. A website and packing area cost $3,200; online orders would be 200 jars a month at $18, with delivery $5.50 per order and payment fees 2.5%. Online honey and packaging costs are the same as the 500 g jar. The owner has 6 spare hours a week.
1. Calculate Harbour Honey's current monthly profit and contribution per jar at the current $14 price and the current stall fee.
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Revenue = 900 × $14 = $12,600. Variable cost per jar = $4.20 + $1.10 = $5.30. Total variable cost = 900 × $5.30 = $4,770. Contribution = $12,600 − $4,770 = $7,830, or $8.70 per jar. Fixed costs = stall $600 + travel $240 = $840. Profit = $7,830 − $840 = $6,990.
At the new stall fee of $900, fixed costs become $1,140 and profit at the same price/volume would fall to $7,830 − $1,140 = $6,690. That $300 fee increase is the pressure the owner must respond to.
2. Evaluate Option A and Option B. Calculate profit for each under the new stall fee. Which is financially better, and what non-financial risk should the owner weigh?
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Option A: Sales = 900 × 0.85 = 765 jars. Revenue = 765 × $16 = $12,240. Variable cost = 765 × $5.30 = $4,054.50. Contribution = $12,240 − $4,054.50 = $8,185.50. Fixed cost = $1,140. Profit = $8,185.50 − $1,140 = $7,045.50.
Option B: Sales = 900 jars at $14 = $12,600. Variable cost per jar = $3.36 + $0.95 = $4.31. Total variable = 900 × $4.31 = $3,879. Contribution = $12,600 − $3,879 = $8,721. Fixed cost = $1,140. Profit = $8,721 − $1,140 = $7,581.
Option B is about $535.50 better per month than Option A, and about $891 better than doing nothing at the new stall fee ($7,581 − $6,690). However, B reduces the jar from 500 g to 400 g - a 20% cut - while holding the price at $14. Customers may compare unit price and feel misled; the nearby $12 competitor makes value comparisons likely. A is more transparent but relies on the 15% sales fall being accurate; the survey suggests 30% would switch above $16, so $16 is close to a psychological threshold.
3. Evaluate Option C. Recommend a combination of options for the next 12 months, with one control to manage the main risk.
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Option C online: Revenue = 200 × $18 = $3,600. Honey and packaging = 200 × $5.30 = $1,060. Delivery = 200 × $5.50 = $1,100 (assuming one jar per order; if customers order multiple jars, delivery cost per jar is lower). Payment fees = 2.5% × $3,600 = $90. Contribution = $3,600 − $1,060 − $1,100 − $90 = $1,350 a month. Website/packing cost $3,200, so simple payback = $3,200 ÷ $1,350 = 2.4 months, before owner time. That is attractive, but 200 orders a month is roughly 50 a week; with packing, labelling, trips to the courier and customer emails, 6 spare hours may be tight.
Recommendation: adopt B (400 g at $14) for the market, and trial C online for three months. Do not adopt A. Combined monthly profit before website depreciation is about $7,581 + $1,350 = $8,931, compared with $6,690 doing nothing at the higher stall fee. If online orders average fewer than 120 a month, contribution falls to $810 and payback stretches to about four months; the trial should be stopped or the delivery charge raised.
Control: keep a simple weekly online contribution report - revenue minus honey, packaging, delivery and fees - and set a stop/go threshold of 120 orders a month. Also monitor complaints about jar size; if they rise, return to 500 g and use A instead.