All of your costs determine your pricing. Smart bakery pricing strategies include a profit, and it must pay a living wage to the people making it. You can’t survive in business and not understand the business of selling your product.
Before I started my business Real Cake, Inc. I immersed myself in books and online tutorials. My goal was to succeed where I had seen others fail. All the articles insisted I create a formal written business plan. But as hard as I tried, I couldn’t forecast which products people would want to buy from me or how many sales I could have in a day. I couldn’t do a ‘market survey’; nor did I know who in the world I could call to do this; and what it might cost. I didn’t know how to price my desserts, what my rent would be, utilities, insurance, equipment and everything I might need. As much as I wanted to, I didn’t know enough to write a business plan.
So much of what I read was confusing as hell! There was a lot of advice but no real life examples. I wanted examples! How do I do these different business tasks? I could find some information on restaurants, but I wasn’t opening a food business like a restaurant. I had to accept that my best and my only plan was to improvise! I reminded myself that I had almost 25 years of experience as a professional pastry chef, had owned two other businesses previously, and I could make any baked goods my market wanted. I had to trust in myself.
This is how I started
My first goal was to find a legal kitchen space I could rent. I priced out retail locations; the least expensive monthly rent I could find was around $2,500 (that doesn’t include any utilities) per month, and that wasn’t for a prime location. Industrial rental units were less expensive running from $1,500 to $2,000 per month. None of the rentals properties in my area were food-service ready, which would have been a great savings option. So I would need to invest an additional hundred thousand dollars (depending upon how much work needed to be accomplished) to build out a kitchen.
I also found an incubator kitchen in my area that rented for $25.00 per hour. Everything I needed in the kitchen was rented ala carte; so refrigeration, freezer and storage space were all necessary additional costs. When I looked at the math for what the rental kitchen would cost, it looks like this: $25.00 per 7 hour work day is $175 a day; five days a week was $875 per week, and a whopping $3,500 a month (plus all the rental extras). I couldn’t afford to work there; I knew there was NO WAY I’d have enough sales to cover that, yet alone make a profit for myself. I wasn’t going to spend more than I could make and start building up debt.
Eventually, I found a local coffee shop that would rent me their kitchen space and buy my pastry/products. The day I started I didn’t even have a written menu. I jumped in and started developing products just to see what would this market want to buy from me.
Smart Bakery Pricing Strategies
The coffee shop owner taught me their way to price products; it’s called Cost X3. Where you calculate the exact cost of the ingredients in a product, multiply that amount times three. That number tells you how much you should sell your product for, to cover your costs, and make a profit from the remain two-thirds. All the other miscellaneous business costs I had, and my profit, will be included in remaining 2/3 of the equation.
The coffee shop had employees making breakfast sandwiches, roasting and bagging coffee, and doing other tasks creating ‘products’ in addition to serving customers. They viewed labor as part of their overhead (like turning on the lights), and insisted labor shouldn’t be figured into my products cost either. We couldn’t agree on this. I was a manufacturer, not a service business; I didn’t have retail hours. If I wanted to grow my business, I’d need to run it by going out and creating sales, and have employees make my product, just like a factory. How could employee wages not be included in my direct costs?
Each night when I went home, I calculated the cost of every ingredient purchased; wrappers, plastic baggies, toothpicks, etc. I kept track of what my yield was for every recipe and timed how long it took me to make various products. I became obsessed with my costs! I cost out every ingredient down to the ounce, and then compared prices among all the stores. I began to read price tag details I didn’t know existed. Like; did you know most price tags on grocery store shelf’s include the per ounce price? Don’t laugh, although it seemed overly frugal, there were a lot of ways I saved money. I judged the taste differences between fresh fruit and frozen fruit in my products. If you want to make dollars, pennies do add up!
I had to buy smart and work smart. Pistachio paste purchased at Albert Uster is $3.25 per ounce, but if I make my own, it’s only $0.75 per ounce. Is it the same, no. I can’t process the paste as fine in my food processor, but mine tasted great and I could easily adjust my recipes to use it.
Eventually, I needed to find another kitchen to rent. The coffee shop owners began treating my business like they owned it. They would promise their customers products I couldn’t produce profitably or in a time frame that wasn’t possible for me to achieve. It didn’t work for me to produce a little bit of twenty different items a day. It could take me 8 hours to produce only $80.00 of products. This became the most inefficient production model ever; and I couldn’t raise my prices high enough to compensate me for my time.
Everything I made couldn’t be a custom, one of a kind product.
I was making expensive products at great price points, with-out profit. Many of the items I made sold for under $3.00 each. Making twenty different products per day wasn’t smart.
- Every day I had to go to multiple stores, shopping for so many different ingredients.
- I would constantly have small amounts of left-over product and ingredients.
- It required more storage space, for more ingredients. More freezer space to hold excess products.
- If I bought my ingredients in bulk, it was cheaper; but then I risked having ingredients going stale before I could use them.
I stopped renting at the coffee shop and focused on how I could use the incubator kitchen. I realized I needed to structure my business completely.
- I finally understood why a business plan would have helped me.
- I should have set-up limits.
- I couldn’t be everything to everybody.
I had to look at how to make money far more seriously. Although I didn’t formally write a business plan, I did mentally formulate a plan of I what needed to do, and how I was going to do it. I learned that pricing and deciding what my product line was; was up to me to determine. I had Chefs and people asking to buy specific products from me that I had to turn down. Products that didn’t create enough profit were not products worth producing. I had to put my need to remain open and pay myself before the desires of my customers.
Ingredient Cost x3 was too vague of a pricing plan, and it doesn’t factor in the different costs a hand-crafted product has compared to a mass manufactured product. It ignores the difference in costs and profits between a business located in an expensive mall compared to a home-based cottage business.
Pricing My Product & Creating A Menu
Not having a business location with my name over the door meant I was invisible. No one knew my business existed! I would have to get my menus into buyers hands, and they had to be GOOD to get their attention and lure them into buying from me. Over the years I was in business, I spent more time working on menus (costing product out and trying to create big sellers) than any other business aspects, other than producing my actual products. Creating great products at the right price, is the only way to make sales and create repeat business.
Writing my menu was somewhat easy, and it was fun dreaming up desserts. I always stayed with items that were popular and included a few new items. I wrote fun, creative descriptions for each product. Eventually, I came to the conclusion that I was creating menus for me, to show how clever I was. People were lazy reading menus and just wanted to know if I sold the item they were looking to buy. In time, I stripped out all the clever names and titled each product as simply as possible.
At first, when I priced my items, it looked disorganized. I was pricing each product individually. So I began thinking about rounding off my numbers and grouping pastries into bigger categories. For example; my wholesale price for a standard cupcake was $1.49 each. But because I had some cupcakes that cost more to make than the ‘standard size’ I broke my menu into regular and premium cupcakes. That wording worked well; it was a clear, simple solution and I applied it to almost everything I sold. Looking back now, I recall reading articles about creating different price points.
I understood value pricing in my everyday life, everything ‘cool’ I wanted was always so damn expensive. But I was scared to apply it to my business. Most of the people who inquired about my products seemed obsessed with price.
Back at the coffee shop, I remember the day the coffee shop owners told me “we need to raise our prices!” They had toured similar businesses in the area and realized everyone else was selling frozen mass-produced cupcakes for more than we were selling my fresh baked cupcakes. They raised the retail price of my cupcakes to $3.00 each, but I was still only getting $1.29 per vanilla cupcake.
“Price is, at the end of the day, determined by the market.” wrote The Management by Menu Website. “You have to make a conscience effort to price your product for your market. Your market is the people who live NEAR you, who can afford you, who want your product.” So you need to know your market/area. If your price is too high compared to similar businesses, a percentage of all your possible clients will always choose the less expensive option. When you are priced below your competitors, some customers will perceive your product as being inferior solely based on the price.
For me to raise my wholesale prices I needed to find out what my competitors pricing was. This was not an easy task, at all. To get wholesale pricing from big manufacturing companies, you need to be pre-qualified by them as a potential buyer. You need to give them your business ID, sales tax exempt number, plus fill out banking information and usually apply for credit terms with them. Then their sales rep comes out to your business and will quote you prices. (I dislike this business method! It offers a lot of secrecy never having to openly disclose your prices to your customers.) Sometimes as a buying customer you don’t even know a companies full product line, because they won’t give buyers catalogs. Many large food distributors don’t have written price sheets they hand out to clients. Seriously!
No, they give different prices to different customers based on the volume of business you do with them. (I wanted to mention this practice in case any of you aren’t aware of this.) Some of these companies make you sign a contract with them, guaranteeing you’ll buy up to 90% of all your food from them, plus you give them the right to audit your company if they suspect you aren’t living up to buying that percentage from them.
Luckily I knew people in the restaurant business who shared the big companies pricing with me. I made up a chart in Excel and started learning as much as I could about my competitions pricing. (Their prices are about what it cost me- just for the raw materials.)
After I had learned what it cost me to make a cake, I was kind of surprised that anyone could make them as cheaply as these companies. Immediately I knew this would eliminate any dreams I had of selling dessert cakes. I couldn’t sell a carrot cake for $27.67 as they do; it cost me $17.20 just for my raw ingredients with-out labor and overhead!
I needed to figure out what products restaurants wanted but weren’t able to buy from these big companies. I could make fresh products that had never been frozen. I could use fresh fruits, and I could make custom products a prominent manufacturer couldn’t begin to do. I could compete with them on my terms!
But I still had to find out what the micro bakeries ‘like me’ were selling wholesale and for how much? It took me a while to figure out how to penetrate their unpublished wholesale price lists. Eventually, I was desperate enough to pose as a business looking to buy from them. It was kind of awkward at first, I didn’t like lying or pretending to be something I wasn’t. But, this was how business works, and I could be a tough business women. I set up fake email accounts and asked bakeries for their wholesale prices. I called retail bakeries to learn their pricing on wedding cakes and pastries too. It worked like a charm!
Once I knew what price everyone else was selling cakes and pastries at, I could see I was pricing too low. “You have to make a conscience effort to price your product for your market. Your market is the people who live NEAR you, who can afford you, who want your product.” wrote The Management by Menu Website.
A percentage of all your possible clients will always choose the least expensive option. When you are priced below your competitors, your product will often be thought as being inferior; based on the value/price you gave it. Regardless if that is true or not. I think some customers will always complain about pricing, even if the item was free. But that is their deal. I can’t waste my time and my life trying to please everyone. I raised my wholesale pricing to the coffee shop, and in my brochures for retail cakes.
There wasn’t a simple way, or a correct way to price my products, what I had hoped for didn’t exist. There isn’t a short-cut, there isn’t a formula you can run to determine your prices. If you adhere strictly to a formula like ‘cost x3’ you may be failing to consider ‘the value’ of your product. Just as there are bargain shoppers, there will always be a segment of buyers that equate a price tag to the value of a product.
Pricing under your market makes people suspicious of your quality. Are you a lesser quality or a higher quality than similar businesses? Customers don’t always conscientiously think about it, but they do instantly relate higher prices to higher quality. Pricing is where most cottage food-industry bakers go wrong. If your producing superior goods your prices should be reflect the value of your product.
Hand-crafted products can never be made less expensively than machine made products. Small businesses can’t buy their raw ingredients in the same volume, and at the same price point as big companies. The labor and overhead is what makes an artisan product expensive. Every day a new food business hangs out their “open for business” sign and competes in the wrong market. They try to make products at the price point the market pays for mass produced products. Consumers think $3.00 per cupcake is a lot of money because they fail to understand the cost of the cupcake isn’t based on the ingredient costs alone.