Many people go into business with little to no pricing knowledge. There are several skills you need when running a company and product pricing is an essential one. The right price attracts consumers, may give you an edge over your competitors, increases sales and increases you profits.
Whether your goods are made in a manufacturing plant or with your hands, you need to learn how to price your products. This post is aimed at bakers but the tips can be applied to other kinds of businesses. At the end of this post is a spreadsheet for you to fill in and determine the best price for your baked goods.
Learn how to bake yourself a profit pie by using the following tips:
1. Do your research
There are a million and one other bakers. Sniff out the competition, what products do you have in common and how much do they charge for their goods? The prices you set at least have to cover the cost of your goods, but since you want to bake yourself a profit pie, you’ll have to charge higher than the cost. If you charge too high, you’ll drive your consumers into your competitors’ hands i.e. law of demand – consumers tend to demand more of a good if the prices are lower and vice versa.
2. Determine the cost of your baked goods
The cake ingredients aren’t appearing out of thin air, they’re store bought goods and that is a cost to your business. Determine the cost of your ingredients and include them in the price of your baked goods.
- Ingredient costs i.e. flour, sugar, baking soda, icing, chocolate, etc.
- Total batch cost i.e. how much does it cost to make a batch of cupcakes/cookies?
- Recipe yields i.e. how many cupcakes in 1 batch?
- Cost per serving = Total batch cost/recipe yield i.e. cost of 1 cupcake
For example: If it costs N100 to make a batch of cupcakes and there are 10 cupcakes in a batch, then each cupcake costs N100/10 = N10.
3. Determine the labour costs
Your don’t only cost money, they also cost your time. You need to include the cost of your time into the price of the product. Determine how long it took to make the recipe and then pick a suitable hourly rate.
- Mixing the dough (30 mins)
- Rolling, baking (30 mins)
- Decorating (30 mins)
- Packaging (30 mins)
In this example, it takes you 2 hours to make a batch. Let’s say you choose an hourly rate of N300/hr. Direct labour costs for 1 batch = N600 and labour cost per cupcake = N600/10 =N60.
4. Determine your overhead costs
Overhead costs = Fixed costs + Variable costs
- Fixed costs – these are the costs of running your (home) bakery that don’t change when output (i.e. number of baked goods) changes. Examples include: cost of running your website, printing costs, etc.
Let’s say monthly website costs and printing costs are N30 and N40 respectively and you sell 300 baked goods every month. Unit fixed costs = N70/300 = N0.23
- Variable costs – these are the costs of running your (home) bakery that do change when output (i.e. number of baked goods) changes. Examples include: cupcake liners, cost of cake/cookie packaging boxes, etc.
Let’s say you bought cupcake liners and packaging costing N500 in total. Unit variable cost = N500/300 = N1.67
5. Determine the cost of goods sold
Cost of goods sold = Ingredient costs per serving + direct labour cost per serving + fixed costs + variable costs
Using the figures in this blog post, your cost of goods sold = N10 + N60 + N0.23 + N1.67 = N71.9 (approx. N72).
Pricing your cupcakes at the N72 (each) will enable you to breakeven. Since you want to bake yourself a profit pie, you have charge a bit more over the total cost. To determine your profit margin with the selling price you’ve set, use the formula below.
Gross profit margin = 100*(sales price – Cost of goods sold)/sales price
If you charge N80 per cupcake, your profit margin = 100 * (80 – 72)/80 = 10%
6. Review your prices
You may have to change the prices of your baked goods to accommodate changes in costs, a sale, changes in your competitor’s prices, etc. Make sure to go back to your pricing calculator regularly to determine the most suitable prices for your products.
Access your product pricing templates here:
- By Shecluded: https://docs.google.com/spreadsheets/d/1p3SgSq8IAAdWLfDeE5vo51yN7JNQy7YSpX-_sEnb6sQ/edit?usp=sharing
- By PhilosophyofYum blog (must subscribe before you can access it): https://philosophyofyum.com/cake-pricing-for-home-bakers/
For a useful video to help you with your product pricing, https://youtu.be/0mpGyGHkkLU