Summertime is the perfect time to check your pricing. Pricing is not the most important part of product development. Unfortunately, it is one of the most asked questions on Facebook groups supporting food entrepreneurs, particularly, bakers. Most consumers think if they pay too much, they’re being taken advantage of and if they pay too little, the product is of poor quality.
The pricing checklist below offers food for thought. No pun intended. Before attempting to price your product, you must know what the cost is for producing every product on your menu. You will want to review the checklist that addresses How to Find the Cost of My Food Product.
Know the market: Pricing Checklist
If you don’t know your target audience, you don’t know what your customers will pay.
- Do you know how much competitors charge?
- Once you know what competitors are charging, you can then decide whether to match or beat them based on the quality and value associated with the product you produce.
- Simply matching a price is dangerous, you need to be sure all your costs, both direct and indirect are covered.
- What is the best pricing technique?
- Cost-plus pricing involves adding a mark-up percentage to costs; this will vary between products, businesses, and sectors.
- Value-based pricing is determined by how much value your customers attach to your product. Decide what your pricing strategy is before making a calculation.
- Food products often benefit most from value-based pricing.
Calculate your cost.
- Include all direct costs, including money spent developing the product.
- Calculate your variable costs (for materials, packaging and so on) the more you make or sell, the higher these will be.
- Calculate what percentage of your fixed costs (overheads such as rent, rates, and wages) the product needs to cover.
- Add all of these costs together and divide by volume (the number of products made from the formula/recipe) to produce a unit break-even figure.
Consider cost-plus pricing.
- You may add a margin or mark-up to your break-even point.
- This is usually expressed as a percentage of break-even.
- Industry norms, experience or market knowledge will help with mark-up.
- When the price looks too high, trim your costs.
- Be aware of the limitations of cost-plus pricing, because it works on the assumption you will sell all units. If you don’t, your profit is lower.
- Set a value-based price.
- A value-based price strategy means you must know your target market. Anyone can purchase an inexpensive cake from the Walmart bakery.
- Where would your cake rate?
- Are you a “Walmart” baker?
Can you compete with Walmart or a local bakery?
- What will set you apart from others in your local community?
Think about other factors.
- You might need to calculate different prices for different markets or sales you make online. Consider your payment terms and keep an eye on your cash flow.
- Stay on your toes, watch cost carefully.
- Prices can seldom be fixed for long.
Your costs, customers, and competitors can change at any time.
- Keep an eye on what’s going on with product cost and talk to your customers regularly to make sure your prices remain optimal.
You want to sell at the Tasty Tomato Farmers Markets’ Toasty Hot Pepper Festival.
The entry fee is $25 for the day. The distance between your home at the festival is 64 miles. Using the IRS mileage rate of $0.545 per mile, your cost for this trip would be $34.88 one way.
- While at the festival you will need to eat breakfast and lunch, this totals out to $35.
- You purchased some specially made decorations for the festival totaling $165. The total cost to attend this show is $259.88. These are fixed costs.
- You’ll be selling your hot pepper jelly at the festival for $8 per (16oz.) jar and your cost of goods sold *Cost of Goods Sold (COGS) is $4 per jar.
You must ask yourself:
“How many jars do I need to sell to break-even on the festival expenses?”
Let’s calculate it:
- $259.88 / ($8.00 – $4.00) = $259.88 / $4.00 = 64 jars
You will need to sell 64 jars of hot pepper jelly before you hit the break-even point. You will not make any profit until to pass the break-even point. Work the numbers before participating in a vendor event.
*(COGS) refers to the direct costs attributable to the production of the hot pepper jelly.
If you need help pricing your products, consider watching the 3 Part Series on developing a proper pricing mindset.