Wednesday, February 6, 2019

Pricing Models in Precision Agriculture (IoT-based Services)

Revenue models for precision agriculture (use of internet of things sensors, apps and services) might not be directly applicable in the connectivity business, but will have to be understood if service providers decide to explore roles in distribution (sales channels) of such services.

Retailers who offer precision agriculture programs often charge by the acre, per instance, percentage of yield or per unit sold.

That roughly corresponds to connectivity business pricing models based on flat rate, pay per use, revenue sharing or usage volume.


Pricing Model
Advantages
Disadvantages
Bundled Per Acre
Flat per acre rate with all “precision services” offered by the retailer included in the plan.  
  • Ease of billing
  • Farmer knows cost up front
  • Separates customers into two separate groups (participating in precision program or not).
  • Allows for easier analysis of yield trends within each of the two groups.
  • Allows group data analysis to be presented to entire group in the program to improve production within the group.
  • Likely to create a closer relationship for all inputs with the grower (less shopping around).
  • Easier to build in a call center/service center fee.
  • Large upfront commitment for producer
  • Potential to be an expense that is cut during low profit margin years
  • Each additional service outside of package requires surcharge
  • Difficult to “dabble” with just a few acres.
  • Farmer usually must commit to all or none.
  • Machinery limitations of grower may not allow full implementation of program
  • Accurate data analysis requires trustworthiness of grower and operators to properly adjust/calibrate equipment
Per pass or service
Each pass across the field or individual service has a price associated with it.  
  • Able to charge a higher total price vs. bundled model due to less “sticker shock”
  • Allows producers to pick and choose their individual needs
  • Allows company to analyze margins of each individual service
  • Ease of entry/exit from use of specific services
  • Grower and retailer work together to develop best plan for each operation
  • Bookkeeping becomes more challenging as each service needs to be tracked separately.
  • Harder to prove benefits of the service as there is no “Large group” of producers doing same practices.
  • Requires higher effort from salesforce as each individual product or service must be “sold”
  • Easy for grower to say “not this year” on certain services
% of yield bump/gain
(example: a ten bushel/acre yield bump was added to a grower’s average and they share four of those bushels with their service provider)  
  • Places accountability with the service provider to deliver results.  “The saying put your money where your mouth is” applies here. Grower is more likely to commit as it is obvious that they only pay if they receive a yield gain
  • Potential for higher adaptation by grower and producers
  • Keeps service provider in closer contact with grower throughout the year as their paycheck depends on the grower’s success!
  • This is a unique approach, sure to make conversation as farmers talk to farmers, making for self-advertisement.
  • Delayed collections as retailer must wait for harvest to be completed
  • Determining baseline yield establishments
  • Weather variability
  • Measurement of yield (yield monitor, grain cart, certified scale tickets?), Is a yield monitor calibrated by the grower accurate enough?
  • Determining a market price for the grain
  • Risk of negligible or no yield bump equates to no payment to service provider
  • May “discourage” growers to shoot for higher yields
  • No consideration for reduced inputs.
  • Model may not be sustainable long term
Per unit of product sold
Service is bundled with each unit of fertilizer, chemical, seed, etc.  
  • Ease of bookkeeping
  • Services buried within the price of a retailer’s commodities
  • Spreads the overhead cost of precision ag professionals and technologies over all customers
  • Encourages growers to cut back on inputs
  • Easier for competition to undercut a retailer’s price if grower doesn’t see value of buried service charges
source: PrecisionAg

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