Correct me if I’m wrong, but when you were deciding your pricing, you did the following:
- Looked at what popular bakeries are charging and based your prices on that. However, you decided that since you're not a famous bakery, you will charge a little less than them.
- You saw what home bakers around you are charging and priced your desserts slightly under that.
- You calculated your ingredient costs, multiplied by 3, then added a random amount as “profit” and that’s your selling price.
If you did any of these or anything similar, this blog post is for you.
When I first started out I did all of the above and let me tell you why it did not make any sense for me, nor does it make sense for you. If you are a small business owner, a startup and a self taught baker and you do not buy your ingredients in bulk, your cost price will be higher than the average popular bakeries. Why? Because they buy chocolate not by the kilo, but by the hundreds of kilos. Bakeries like theobroma and Le15 use hundreds and sometimes thousands of kilos of flour, sugar, oil and chocolate per day so it's possible for them to charge the way they are charging. For businesses like ours, we do not operate this way, so to use them as a benchmark is not only incorrect but it’s also detrimental to our overall P&L. If you buy flour at Rs 30/kg, they buy it at Rs 15 or even less. Companies like this have relationships with vendors who give even better rates that the market knows about, so their overall costs are very low. However, this doesn't mean they don't have other costs such as rent, salaries etc which also need to be factored in.
Secondly, do not follow the popular method of costing x 3= selling price. Your selling price is determined by many more factors like number of staff, electricity, the amount of profit you want, packaging costs etc. It's impossible in today's day and age to do cost x 3 and sustain a business nor earn a living wage.
Incorporating your electricity, and staff costs can be tricky, but don’t let that consume you and confuse you. Look at it holistically instead of trying to incorporate these costs into each order. So lets say you have Rs 20k for staff, 10k for electricity and another 10k for other miscellaneous overheads (keeping in mind you are baking from home, alternatively, you can also add your rent and other expenses to this method). So, your monthly fixed expenses are 30k and food costs should ideally be 20-30% of your selling price. You know you need to cover your food costs (known as COGS), your fixed expenses and you then add profit.
So if your cake is Rs 1000, Rs 300 is your food cost. You are left with 700. Out of this 700 you need to back calculate earning your fixed expenses. If you need to make 30k a month to cover your expenses, and 1 cake is 700 (removing food cost), you need to sell 43 cakes to make 30k. Now you obviously need to make a profit, and for that you need to sell 85 cakes.
85 cakes at Rs 1000 = 85,000
85k - 30% food cost = 59,500
59,500 - 30k fixed costs = 29,500
You are left with 29,500 as profit to use for anything else. Either keep it for yourself, invest in high quality packaging, marketing, savings, photoshoots, influencer collaborations etc.
So unless you're selling at least 30 cakes all by yourself, you do not need to have hired help or any expenses, as you can see, to keep this profitable, you must keep your expenses low. In this calculation I have not included packaging costs which should ideally be factored into your COGS.Now, if you're not overwhelmed, let's discuss pricing!
Pricing is entirely dependent on how much you believe in the quality of your products. Many popular bakeries across India use genuinely poor quality ingredients and you can tell by the taste, however, that doesn't stop them from pricing it high. You can be a low income area and still be priced a little above the industry standard, and STILL make sales. Its all about the quality of your products and the marketing. But hey, if you want to be competitive, thats totally fine too, just make sure you're making profit and not underselling yourself.
Lastly, fear has no place in pricing. If running a charity was the goal, there are numerous charitable organizations that could use your help. Don’t become one yourself. If you are scared to charge a certain amount, sit with that thought and ask yourself why. If you’re in this for passion and don’t need the additional income, that's understandable, but many people do. This is why your pricing should always factor in all costs and then add some extra for your profit, otherwise you’ll be doing yourself a disservice.
Like the above example, if my food costs were 300, I would charge 1500-1600 for a cake, given my high quality packaging, marketing expenses, rent and other expenses, personally. But I do not know many people who would charge 1600 for a ½ kg cake, which is why this is an entirely personal decision.
Key points to note: Pricing and costing will vary depending on seasonal changes, location and accessibility of ingredients. For example raspberries are more expensive in south india, or vegan butter costs more than dairy butter etc. Hope this was helpful, DM me if you have any questions or want to chat about pricing <3
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