Crunching the Numbers in Baking
Whether you're a seasoned baker looking to turn your passion into profit or a new decorator eager to share your delectable creations with the world, determining the right price for your homemade treats can be a daunting task.
Taking the time to carefully consider pricing will help to ensure that you cover your costs, make a profit, and ultimately that you're able to stay in business and keep doing what you love!
Calculating Costs
The first step in figuring out what to charge is to price out the cost of the ingredients you use to make each item. This includes flour, sugar, eggs, butter, flavourings, decorations and packaging materials.
Don't forget to factor in overhead costs like utilities and advertising, as well as the time you spend baking, decorating and packaging the items. The CakeCost app is a great tool to help calculate accurate costs on your products.
(We're not affiliated with the CakeCost app and we don't receive any compensation for sending you there - we just think it's an awesome product!)
Determining Profit Margin
Next, do some market research to get a better understanding of how similar bakery items are priced in your area, and decide on a target profit margin. In most baked good markets, 5% is considered a low margin, 10% is considered average, and 20% is considered good. Remember that your margin should be added on top of your ingredient, overhead and labour costs.
Setting Your Prices
Once you have a clear understanding of your costs, profit margin goals and market demand, calculate your standard pricing for each type of product. You may want to factor in discounts for larger volumes of a single product type if you'll save in labour by doing it all at once (for example: creating a single batch of royal icing for 4 dozen cookies instead of 4 individual batches for 4 separate orders).
You'll also want to consider pricing for customized or specialty order items that require additional time and resources.
Test and Adjust
Make sure you're monitoring customer feedback and sales numbers each time you adjust your pricing. You might need to change up your strategy based on profitability, market demand and local competition.
Communicate Value
Make sure your customers understand the value of your products! Using high quality ingredients, unique flavours, superior artistry, and personalized services can all help increase the value of your products. Customers are willing to pay for quality items and great service, so make sure they understand that's what they're signing up for!
Why it Doesn't Pay to Sell Yourself Short
Sometimes it's tempting to sacrifice the long game for short term gain. Bakers see their local competitors offering cookies and cakes at cheaper prices and worry that if they don't match them, they won't get any customers. If you take just one thing from this post, please let it be this: DO NOT undercharge for your products.
If your profit margins are too low to cover your expenses, you're not going to be able to sustain your business long term. More importantly, you need to do more than just break even. You need to make a profit so that you have resources to invest back into your business for things like better equipment and your own skill development if you want to see your business thrive.
Undercutting prices in a market can also spark a price war in your local area, which is the last thing you want. In this race to the bottom, businesses take a reactionary approach to lowering their pricing that leads to a downward spiral for everyone involved.
Customer Expectations
Lowering your prices can make potential customers wonder if your products are lower quality. Most people who are shopping for custom, artisan cookies and cakes understand that they're going to pay for premium quality and that the end product is going to be significantly better than the pre-baked goods they can quickly grab at the grocery store.
If you've priced your products too low, it can be difficult to get them back up to where they need to be for a solid profit margin. A customer who's presented with a doubling in price for their daughter's birthday cake one year later is likely to have sticker shock. Prevent this experience by setting clear, fair pricing expectations from the beginning.
Creative Innovation
If you're overworked and underpaid, you're eventually going to burnout. And that's the absolute worst thing you can do for your creative brain. As an artisan bakery decorator, you need mental energy left to do what you do best - create!
Remember that success in this business takes time, patience and dedication, so don't be afraid to learn from your experiences and adapt along the way. Continue to invest in your own skills, play with new techniques and keep innovating.
Here's to sweet success in your bakery journey!