The Magic Pricing Formula

One of the most common business-related questions I see regarding starting a new bakery is how to price your products and services. If you can legally charge for food in your area with your current setup (for example, some states restrict home bakeries), the answer is a simple formula:

Price = Ingredient Cost + Labor Cost + Allocated Overhead Cost + Profit

To price ingredients, you need to to know how much you are spending per unit on each ingredient and how many units of each ingredient are in your recipe.

Your labor cost is based on how many hours it will take to complete the order (including prep, baking, decorating, packaging, and cleanup) multiplied by your hourly wage. If you rent a commercial kitchen by the hour, I find it’s convenient to capture that cost under labor since it is directly related to the time spent on order processing.

Your total annual overhead expense is how much you are spending per year on stuff that’s not directly related to creating products but is still necessary to run your business, such as insurance, accounting, license fees, utilities, advertising, etc. To find the allocated overhead cost, just divide your annual overhead expense by the number of orders you fill per year.

The first three items added together represent your cost. The last component, profit, will typically be a markup in the 15-45% range. To determine how much to mark up your cost, you need to do some market research to see how much similar products are selling for in your area. If you find that your cost is already higher than market value before applying markup, you need to reduce your costs, find a new market, or both. Do not try to price your products below market value.

This magic formula can be applied to just about any product or service. Of course, the formula’s accuracy is only as good as your data, so be diligent and make sure to revisit your pricing structure every year or so to account for inflation.

If you enjoyed this article and want to help fund future content, you can send a contribution via PayPal. Thank you for your support!

About these ads

7 Comments

Filed under Marketing, Pricing

7 responses to “The Magic Pricing Formula

  1. VGCEA

    Jason! Such a great idea to start this blog. I’ve got my eye on this space and I know your content is going to be top-notch. I’m so glad I now have one link for the 9,000 pricing questions that pop up every day. Thumbs up!

  2. SOOO glad to see this!!

  3. Jeanne Winslow

    So glad you’re doing this blog. I will be a regular:)

  4. Pingback: Starting a New Business | The Bakery Business Perspective

  5. Pingback: More About Allocated Overhead | The Bakery Business Perspective

  6. Met you on cakecentral, trying to get my business going and I had soo many questions about pricing. Thanks for posting and when I have the extra money, definitely donating! (:

  7. Awesome information! Thank you Jason for replying to my question on Cake Central. You by far nailed it… :-)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s