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.

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This is an experimental blog to explore the feasibility of launching a web site about the business aspects of running a bakery. While I work on adding new content, feel free to ask questions about business, law, design, or technology, and I will do my best to answer them here.

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