When you first launch your baking business or go from being a hobby baker to a business baker, it can be hard to work out your prices. I remember when I took redundancy and started my iced biscuit business all of a sudden it became really important that I got my prices spot on, that I covered all the costs because I needed to make sure that my business was profitable in order to earn a living.
If I hadn’t taken these important steps, I’m not sure my business would have survived the first couple of years. It would have been easy to keep my prices low to keep the orders books full. But ultimately I wouldn’t have made any proper money. It’s not a nice feeling when you get to the end of the year and do your tax return and find you’ve been working hard all year for pennies.
If you’re not a baker but have a creative business where you make handmade products, then the principles below will count for you too.
It is possible to charge fair prices and run a profitable business by following some key principles:
1. Define your business model.
The first step to working out your pricing takes you right back to the basics of your business. What sort of baking business do you want to have?
As you’ll see in the slide below, you can sell 3 cakes per week for £100 per cake and turnover £300 or you can sell 30 cakes per week for £10 per cake and turnover £300 per week.
Would you like a premium baking business, where you make fewer hand made cakes, but at a higher value? You will need fewer customers, but they will be making a more considered purchase so you will really need to show the value of what you offer.
Would you like a volume based baking business where you need more customers buying at a lower price. This is likely to be a more impulse based buying decision, based on cost more than anything. So an easier purchase.
There’s no right or wrong answer here, it’s just a persona decision. Both businesses make the same amount of money, but are very different in the way they offer their goods and services and different in the way they price their products.
2. Get comfortable with charging your worth
Common things I hear food entrepreneurs say:
-I don’t include a salary for myself as that would make my products too expensive.
-I could never charge that much, no one will buy my products.
-I feel uncomfortable charging those prices. I personally would never pay that much!
-I know that’s what I should be charging but I usually charge less to make sure I get the sale.
It’s not unusual as an entrepreneur to feel uncomfortable with the idea of charging what your worth. But to move forward in your baking business, you have to, at a basic level accept that your products are worth a fair price.
It’s tempting to keep your prices low, which keeps the orders coming in and makes you feel like you’re growing and making money. But ultimately, this is not profitable and not sustainable.
If your baking business is to grow and flourish, you have to get comfortable with charging a fair price, where all the costs have been factored in. It is possible to charge a fair price and grow your sales, as long as your customers understand the VALUE of buying from you. To do this, you need to continually communicate & deliver VALUE to your customers.
3. Use the Pricing Formula: Overheads + Hourly Rate + Raw Materials + Value = Profitable Price
To give a fair price for your products, you need to include a cost to cover your time (HOURLY RATE).
You also need to cover any costs like website, electricity, telephone, premises costs, insurance etc etc. Some of these would be apportioned for the amount of time you actually use them for the business (OVERHEADS).
Then the costs related to actually making your products (RAW MATERIALS).
Lastly, you need include an additional amount (normally called a mark up, but here we’ll call it VALUE). This does a few things, firstly it gives you a buffer in case of price rises, or if there are any costs you haven’t include elsewhere. If you have a ‘hand made’ business then this mark up will be important and will allow you to offer the ‘add ons’, personalisation, high level of customer service, giving your customers an exclusive buying experience. I find that it helps to list everything out and then allocate costs to each of the headers and upload them into a spreadsheet.
4. Do a reality check
Once you’ve got the costings drafted in your spreadsheet, its time to do a REALITY CHECK
How do the prices look? How do they compare with the industry average, or prices in your local area, or against your competitors prices?
Do they seem too low? Have you properly costed in your time? If you had to produce 10 of your products in certain timeframe, how long would it take? Would it feel like a fair reward for your time and effort once you’d covered all your costs?
Do they seem too high? How and why does the price differ from the industry average, from competitors prices? Can you justify this? How will you clearly communicate this to your customers?
Have you allowed enough of a buffer in case of price rises for example?
What about corporation tax, VAT (if applicable), and postage – how will you incorporate these costs? Make any adjustments needed in your spreadsheet.
5. Time to ditch the hobby baker mindset.
It’s really important that you adopt the right mindset. Because you’re running a business. Yes, to be able to do something you love & put your gifts out into the world. But if you’re serious about running a profitable business, then you need to make the shift and adopt a business mindset.
And get clear and comfortable with the financials, with costings, and the idea of working to make a PROFIT.
Sometimes this may mean that you need to make tough decisions about what’s working and what’s not. What you keep and what you discard. What makes money and what does not.
This is not always easy because we are human, emotionally tied to our work, to our craft, to our skill and our products.
But remember, by ditching the stuff that doesn’t stack up financially, this leaves you free to concentrate on creating products that are profitable.
So be brave, be flexible and most importantly – take action.
So I hope that has helped you think through how you will go about pricing your products. I get asked this question so often by bakers and cake makers that I put together a short online Pricing training course to take you through all of these sections in depth.
The course materials also include a downloadable workbook so you can keep all your notes and calculations in one place and a downloadable spreadsheet already set up with all the formulas etc, so you just need input your costs.
I really wish I’d had access to a course like this when I started my baking business. It would have helped me to get really clearly, saved a lot of confusion and ultimately helped me to become profitable a lot quicker.
If you’re serious about launching a profitable baking business then head over to buy the Art of Pricing for a Profitable Baking Business course now.
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Kitchen Table Entrepreneur. Helping Food & Drink Start ups succeed.