Every business owner has to grapple with the all-important question of pricing. How do you decide the best price for your handmade products? How do you know what people are willing to spend, and will it be enough for your business to make money?
Today we’re going to cover the steps you can take as a home bakery business owner to price your baked goods so that they sell and you can grow your business.
There are a few different ways to start thinking about how to price your products. And before you make any commitments, it’s best to do some research and gather as much data as you can.
The important questions to answer when it comes to landing on a fair price for your products include:
- What does my competition charge?
- What are my fixed and variable costs?
- At what rate do I value my time?
Let’s dig deeper into each of these pricing-specific questions.
First, a look at your competition. The process of pricing your own products should not start and end with a competitive analysis, but it’s important to take other people’s pricing models into account.
Just as realtors take stock of the comparative products in an entire neighborhood before assigning a price to a home, you too price according to “comps”. Remember, however, that realtors keep their competitive analysis very local, sometimes only considering properties on the same block. Likewise, as a baker, it’s only really helpful to compare your business to nearby competitors.
You won’t be able to learn much about pricing from an artisanal Parisian bakery if you’re operating a bakery out of your kitchen in upstate New York. Not only are your customers completely different, but so are your costs.
On the other hand, what local competitors and similar businesses can tell you is what local customers are willing to spend. That doesn’t mean that you should copy another bakery’s pricing model to the T, of course.
Remember that you’re offering something differentiated, and your pricing should reflect that. Don’t underprice yourself to match the budget shop, but at the same time, stay within a range that reflects the income levels in your local economy.
Take Stock of Your Costs
After you’ve gathering relevant data about local pricing structures, it’s time to look internally at your business. Take a thorough look at your variable and fixed costs. This includes everything from the cost of each and every ingredient to rent to utilities and costs associated with appliance maintenance and staff, if applicable.
During this process, it can be quite helpful to price out each of the products your selling. The first step in calculating your margins is to know how much each cookie, cake, or pie costs from a raw ingredient standpoint. From here, you can calculate a price that would give you a fair margin. On average, food has a gross profit margin of about 70%, which is a good place to start.
Remember that you’re shooting for an average 70% profit margin, which means that some of your menu items may have a higher or lower margin, depending on demand and cost of ingredients. Here is a handy tool to calculate your profit margins.
The final component of your pricing calculation is time. How much do you value your time? If you can put a precise numerical value on your time, even better. Don’t forget to factor this into your overall costs, including how much time you dedicate to the business. Remember: you are the most valuable resource in your business!
Look for Opportunities to Reduce Costs
Baking is a business that can scale well. That means that starting out, the cost of ingredients on a small scale may hold you back from your ideal profit margins, without pricing yourself out of the market.
However, as you build your business and scale up, new opportunities will arise to cut back on your costs. From reducing your electricity bills to buying from cheaper vendors or purchasing in bulk, get creative and you might be surprised by how you can manipulate your profit margins without much trouble.
At the end of the day, pricing is a constant challenge to businesses of all kinds, and the food industry is no different. The good news is that you can always adjust your menu as necessary as you learn more about the market and your customers.