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5.8: Pricing Strategies

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  • The cooperative principle of “service at cost” was widely used as an idea of how cooperatives should operate. While it sounds reasonable, its application as a management strategy has problems if taken literally. Some members interpret it to mean that cooperatives should operate as non-profits, with zero or close to zero patronage refunds each year. Others see it as a requirement to follow an average cost or uniform pricing strategy and set the price the same for all of their members, regardless of size or volume.

    When cooperatives are first formed, often times the members are considered homogeneous in that the farms are of similar size or scale and with a similar social purpose. Neither of these practices, however, will lead to a cooperative achieving an economic purpose and surviving. In the first case, there will never be any income to reinvest in the cooperative’s assets. In the second case, there is a better and more equitable pricing strategy, which is equal margin pricing, which recognizes that there are differences in providing a product or service and as long as the cooperative charges the same margin per member, volume discounts or premiums are justifiable.