Value-Added Pricing of Malted Grains for Craft Brewers

Product or quality differentiation of a food product from similar basic foods is frequently accomplished through adding a “special” ingredient. It might be the special sauce of a McDonald’s Big Mac or it might be just a... [ view full abstract ]

Product or quality differentiation of a food product from similar basic foods is frequently accomplished through adding a “special” ingredient. It might be the special sauce of a McDonald’s Big Mac or it might be just a basic seasoning or flavoring that adds kick or a unique flavor to a basic food product or condiment or beverage. For many consumer ready foods and beverages, however, it is this ingredient that establishes the value (or added-value) in the final product. Marketing ingredients are an element of the topic of food supply chain management. So what is this ingredient worth? What is the price that the provider or source receive for this ingredient? What should the buyer pay for this ingredient? These questions arise from two different perspectives, and most likely two different solutions.
Numerous pricing strategies and formulas are understood and utilized in the food supply chain; however, most are addressing the target pricing question from the buyer’s and manufacturer’s decision making in to reach its profit goal, a desired profit (or desired profit margin) for the final product upon selling to the consumer or end-user. Most food purveyors are adept at solving this economic problem when there is only one variable input for producing a final product; the issue becomes much more complicated when multiple variable inputs (ingredients, in this discussion) are involved.
Because the pricing rules for each ingredient and for the processed products all depend on each other (proportions, prices, sources, etc.), every time an ingredient is purchased, selling prices for the final product should be updated. With current computer technology, software and spreadsheets, the final price can be updated instantaneously; however, a rational marketer would not be changing retail prices constantly to reflect the input price changes. The knowledge would be there, nonetheless. The food or beverage manufacturer can use the pricing rules three-fold: as a buying decision between competing ingredients, and as a pricing decision to maintain desired profit margins, and as an operation decision to decide which products, if multiple products share some common ingredients, would be best to produce.
For discussion purposes, pricing of malted grains by a start-up micro-malting house to market to craft brewers is the topic. What is the value-added price for a malted grain that contributes flavor, and has unique characteristics or applications for a craft brewer?