Pricing Baked Goods: How to Do It the Right Way

Pricing Baked Goods: How to Do It the Right Way

I will show you the art of confidently pricing baked goods so that you can make a profit with every sale. This works for home bakeries, online bakery sales, farmers market, or for your retail bakery shop.

Are you guessing at prices because you just don’t have the time to stop and figure out exactly how much each recipe costs you to make? 

Stop guessing at pricing baked goods and start knowing exactly how much profit you are making.

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    Top three reasons you need to accurately price baked goods

    Pricing baked goods correctly is the key to successful baking business. Here are my three top reasons why you should know the actual cost of your recipes.

    Reason 1: guessing or pricing like your competition isn’t accurate 

    There are several ways that people decide on a selling price. Here are a few examples of scenarios I have been in as a business owner.

    Pricing based on your competition– Let’s say you are a gourmet cupcake store in a town with another gourmet cupcake store. The other cupcake shop sells their cupcakes for $3.00 ea. You know that your customers will pay that price because they already are at the other store. You price your cupcakes at the same price as your competition.

    Pricing based on demand– You are the only cupcake store in town. People love your cupcakes and stand in line to buy them. You price your cupcakes at the highest price that people will continue to pay.

    In very simple terms, you should be trying to make the right quantity of product that your customers will buy, then charge as much as you can to get rid of it. If you can’t get rid of that quantity, start discounting it and adjust your quantity the next time you bake.

    In the end it really comes down to finding a balance between how much you make and how much you charge.

    Reason 2: Knowing the cost will help you calculate your profit margin

    Once you have calculated the cost of your recipes, you will be able to calculate the profit margin.

    Your profit margin is how much money is left after all the expenses have been covered. It is always expressed as a percentage.

    Looking at the profit margins of your products as percentages makes things easy to compare.

    Knowing your profit margin helps you:

    • Know which items are the most profitable
    • Decide which items you should promote.
    • Make decisions about your less profitable items.  
    • Help you to create more profitable menu items.
    • Adjust your prices to maintain ideal margins. 

    Reason 3: Forming good financial habits will help you be more successful

    If you are just getting started, it may be hard to imagine that someday your business will grow into something much larger. You may have a bookkeeper, accountant or investors. One day you might even want to sell your business!

    Understanding terms like profit margin, cost of goods sold, and gross profit are going to be important. Start now and learn as much as you can about the business side of baking so that you can build the foundation for success!

    How to Price your Baked Goods

    How much does your recipe cost to make?

    Figuring out how much your ingredients cost you is something you’ll want to put effort into. I recommend keeping a list or a spreadsheet of up to date ingredients and the prices you are paying for them. Here is what you need to know to calculate the cost of your recipe:

    1. Ingredient cost (what you pay for 1 lb of flour, 1 egg, 1 tsp vanilla, etc)
    2. Cost to produce the entire recipe (cost for a batch of decorated sugar cookies)
    3. Recipe yield ( how many cookies in the batch)
    4. Cost per serving ( recipe cost divided my the yield)

    My cost per batch is $3.00. The recipe yields 18 sugar cookie cut-outs. $3.00/18=.16 cents to make each cookie.

    How long did it take to make the recipe

    One of the first things you should do is decide how much your time is worth. If you were going to work for someone else doing this work, what would you expect to get paid? Remember, the better you are, the more you can charge for your time. You can always increase your hourly rate, but to start with, just pick a realistic hourly rate.

    1. Mix the dough (15 min)
    2. Roll, cut and bake (30 min)
    3. Decorate (60 min)
    4. Package (15 min)

    My direct labor is 2 hours per batch. I have valued my time at $15/hour. so my direct labor is $30 per batch. If I divide that by 18 cookies, my direct labor is $1.60 per cookie.

    Adding in Overhead Costs

    There are two types of costs involved: fixed costs and variable costs.

    Fixed costs-This is the cost associated with running your business that doesn’t change each month, like rent for kitchen space, farmers’ market fees, website maintenance, etc. To cover the cost of my overhead, I divide my monthly costs by the number of units I produce each month.

    I am a home baker selling cookies and muffins at the farmers market. My overhead costs are: website 8.00/month, farmers’ market fees $35/month, printing costs $10.00/month. My overhead is $53.00/month. I sell 400 items per month. My fixed cost is $53/400, or .13 per unit.

    Variable costs– This is the cost that increases when your production increases: cupcake liners, parchment paper, etc. Remember to include the shipping cost for ordering supplies and the tax you paid on those supplies. Each cookie gets a cellophane bag, a ribbon, and a tag.

    Each recipe includes everything consumable associated with that product. In my cookie recipe, I include 18 cellophane bags, 1 1/2 rolls of ribbon, and 18 printed tags. My packaging costs per cookie are .04 ea.

    Put it all together to calculate the cost of goods sold{COGS}

    ingredient cost per serving + direct labor per serving + fixed costs + variable costs.

    My ingredient cost is .16/cookie; the direct labor is 1.60/cookie; it’s fixed costs are .13/cookie; my variable costs are .04 per cookie. The total cost is 1.93 each. This is also called the Cost of Goods Sold (COGS). My sales price, at a minimum, should cover my COGS.

    Here is where you can play with the sales price a little bit. How much is the customer willing to pay for that cookie?

    Your competition sells decorated sugar cookies for $3. 00 ea. You know the customer is willing to pay that price. You can increase your price to what the market will allow.

    Suppose you sell your cookies for $3.00 ea. If you subtract $1.93 from $3.00 you have $1.07. $1.07 divided by $3.00 = .35, or 35 percent. This is your gross profit margin on the cookie when it is sold for $3.00.

    Gross profit margin = 100*(sales price – COGS)/sales

    Online resources to help calculate the cost of a recipe 

    Here is a list of three resources available that can assist you in the basics of recipe costing. 

    Simple spreadsheets

    You can easily set up a spreadsheet on Google Sheets or Excel to do some basic math as you plug in your key information (item, cost, unit, amount used, serving size). If you like spreadsheets this may be a good option for you, but if you want quick and simple, try some of my other recommendations.

    Cookkeepbooks.com

    The CookKeepBook recipe cost calculator came about because friends asked us about a free tool that would calculate the cost of their recipes (for food or drink, or really anything that would have a recipe). Also we ourselves wanted to know how much our recipes are costing us. Since there were only a few excel spreadsheets (which were very limited) or paid for tools, we decided to create a basic recipe cost calculation tool free of charge” 

    Bake Diary.com

    Bake Diary is an online web application created to help cake decorators and home bakers easily manage the important day to day tasks associated with running a successful home or small baking business. It helps you keep track of all your orders, issue invoices, manage tasks and calendar appointments as well as schedule payments for your orders. Bake Diary has a monthly plan starting at around $7/month. 

    Toast Food Cost Calculator

    First, we have you enter the type of concept you run and in what state. Then, it shares the five most popular items (and their price breakdown) on similar restaurant menus into your state. Then, it allows you to dive into these menu items to calculate each item’s food cost, plus cost per pound and/or cost per cup for each ingredient. It also gives you the ability to create your own custom menu items and determine the ideal price for them, so play around with it and start brainstorming on how you can improve your food cost percentage.

    Now that you know how simple it is, get started pricing baked goods accurately.

    Now you should have a good understanding of why you shouldn’t guess at your prices. I hope you find the resource list that I’ve given you helpful Let me know in the comments which method you used and what you discovered about your pricing. Did you find your big money maker product? Which items are you going to re-price? 

    If you enjoyed this article, check out these: Three Sure-Fire Ways to Increase Your Bakery Sales, and How To Take Special Orders In Your Bakery, and How I Created my Dream Job.