How to price the cake? Guide for Home Bakers

Raina Bhatia

May 21, 2021

 

 

If you are struggling to price your cakes and cupcakes, you are not alone. The most asked question in the baking community is about how much should I charge for my cakes?

 

For home bakers, this question only gets harder to answer. How do you know if you are not overcharging or undercharging? How do you know if you are doing this right? There may be no straightforward answer to this, but there are ways to optimize your charge.

 

It is necessary to value your time and effort along with all the hours of work you put in while pricing your cakes. Undercharging because it feels ‘wrong’ is NOT the right way to go forward with pricing your goods.

 

How much does it cost to make your Baked items?

 

The most crucial step in pricing your cakes is to know how much it costs you to make them. There are many factors that you will need to take into consideration.

 

Basic Formula to Price a Cake or Cup Cake

 

Price= Cost of labour (estimated hours of work X your hourly rate) + Cost of ingredients + Overhead costs

 

This formula works best for smaller cakes and cupcakes rather than wedding cakes. Prices for wedding cakes are formulated based on the number of servings.

 

1.Labour

 

You need to add the number of hours you spend working on the cake. If someone asks for intricate designs, flowers, etc. charge accordingly.

 

2.Hourly Rate

 

Your hourly rate depends on your skills and experience. It is better to start with a lower rate and then increase it as your skills develop. The more you learn, the more you will grow and improve.

 

3.Cost of Ingredients

 

This includes flour, sugar, eggs, and all other components you must need. These costs are known as direct costs. You need to track these, so you know how much it is going to cost you.

 

4.Difficulty and Expertise Required

 

It is tough to value your skill and time. This depends on whether you are a beginner or a professional in the industry. The price of a simple vanilla cake will be lower than the cost of a 3-tiered cake with custom frosting and extra decoration.

 

5.Overhead Costs

 

Overhead costs influence your prices. They also reduce the profit you make from sales. Generally, you should include insurance, rent, equipment payments, interest on loans and utilities. You can reduce these expenses by relocating to a cheaper area and Purchasing ingredients in bulk at discounts. As a home baker if you are running a bakery from home you should include electricity cost.

 

Overhead costs affect your break-even point. The point at which both your income and expenses are equal is known as the break-even point. It means that you are neither facing a loss nor earning any profits. 

 

Overhead costs are of two types – variable costs and fixed costs. When you review the costs to run your home-bakery, it is important to identify your variable costs and fixed costs. Be sure to analyze your variable and fixed costs to maintain a more profitable home bakery business.

 

Variable Costs

 

Variable costs are costs that fluctuate based on how well your Home bakery business is functioning/selling its cakes or other bakery items. They are dependent on production output or sales.

 

The variable cost is a constant amount per unit/item produced. As the production and output increase, so does your variable cost. Similarly, if the output decreases, your variable cost also goes down.

 

1.Example of a Variable Cost

 

In terms of baking, the more cakes you sell, the more ingredients will have to be purchased. Hence increasing your variable cost. 

But, imagine that you have hit a dry spell and you are selling any cakes at all. There would be no need to buy unnecessary ingredients and thus decreasing your expenses.

 

2.How to Calculate Your Variable Cost for Cakes or Bakery Items

 

Variable cost is the quantity of output multiplied by the variable cost per item:

 

Total Variable Cost = Total quantity of cakes or cupcakes made X Variable cost per unit of output

 

Fixed Costs

 

Fixed costs are costs that do not change on a monthly or a fluctuating basis. They do not change with an increase or decrease in the number of goods and services produced or sold. These costs are set over a specific period and do not change in the short term.

 

If you have higher fixed costs, you will need to sell more products to reap profits and survive.

 

1.Example of Fixed Costs

 

These include costs such as rent, utility bills, salaries, yearly insurance premiums and depreciation. Your fixed costs are either avoidable or unavoidable. You can get rid of an avoidable fixed cost by discontinuing a product. Unfortunately, unavoidable costs like your business property taxes can only be eliminated by going out of business.

 

2.How to Calculate your Fixed Cost

 

Fixed Cost = (Cost of total production – variable costs) X Number of units produced

 

Startup Costs

 

In the early stages of your home-bakery, you would be having some startup costs. The initial one-time expenses are needed to start your home-bakery. These may include bakery items, ovens, delivery expenses and personnel, etc. A few more examples can be permits, licenses, hiring brand managers, logo designers and even a fixed delivery service if you are not planning on delivering goods yourself. Hiring a delivery service seems like a more workable option. 

 

You will need to calculate the amount of startup costs you want to pay off with each sale you make. For example, if you borrowed an amount of 20,000 to start your business and want to pay that back over two years, you add 10,000 per year in startup costs to your expenses during the first two years of business.

 

Once you are sure of how many years you will take to pay it off, you can add these costs to your overhead costs.

 

Find Your Profit Margins

 

After calculating your cost of the cake, you can add on an extra amount to reap a small profit with each sale. The amount you decide should be reasonable and realistic for the customer.

 

Profit margins vary depending on the work. Generally, a margin of 5% is considered low and a margin of 10% is average. Taking a margin of 20% is usually thought to be a good choice. It's important to find a profit margin that has the perfect balance for both you and the client.

 

You may find your costs priced way too high. At this point, you may need to consider either adding more items to what you are offering or reducing the cost somewhere at the beginning of the process.

 

You could create combos with items priced a bit too high or you could provide a cheaper item free of cost along with each sale of the concerned item. Another way to even out your prices is to use cheaper ingredients. By doing so, you could reduce the cost and restore balance in your profit margins. Also, it is possible to reduce your costs by spending less on miscellaneous and advertisement.

 

Ultimately, all you must do is cut down on costs and expenses and increase sales to improve your margins.

 

The formula for Profit Margin

 

You can find your profit margin using three easy steps:

 

  1. Find your net income (Revenue – Expenses)

 

  1. Divide your net income by revenue.

 

  1. Multiply the total by 100 to receive your profit margin percentage.

 

Profit margin = (Net income / Revenue) X 100

 

When Will You Be Profitable?

 

Remember, Rome was not built in a day. Many startups take years to start reaping profits. In the first few years, you may need to bring about a lot of changes in prices, advertisements, and products while you pay off your startup costs. An advantage of home bakeries is that you do not need to have a lot of investments.

 

The more you diversify your menu, the more profit you will be able to earn. A diverse menu offers a large variety to customers and indeed does please them. This increases your chances of receiving a higher number of customers through word of mouth. A customer may help bring in 4 new customers who may then spread the word to 4 more (each) and hence, expanding your reach at a small expense from your end. 

 

If you plan all your financial aspects and establish realistic revenue goals for yourself, then there is nothing stopping you from becoming a profitable baker.

 

Leave Space for the Unpredictable

 

We must learn from our lessons from 2020. Life is unpredictable and it is better to be prepared to the best of our capabilities.

 

There are certain events that you cannot predict and plan for. Your kitchen equipment could malfunction or an important delivery may get postponed. You risk losing out on revenue in case anything happens.

 

Essentially, you should have a certain amount kept aside as savings in case things go awry. You should ensure that your cakes and cupcakes are priced right so that you are earning enough to make your budget flexible.

 

What to Avoid While Pricing Your Cakes and Cupcakes

 

There are few things one must avoid while pricing cakes and cupcakes to reduce the chances of facing heavy losses and ensure that the business is profitable with sales rolling in.

 

1.Undervaluing Yourself

 

Never undervalue your skills! Likely, customers ordering cakes, cupcakes or any custom cake need requiring immaculate frosting and decorations will be willing to pay higher rates. Avoid undercharging on cakes that need a lot of hard work and the best use of your skills.

 

2.Don’t Price Goods Based on your Competitors

 

Pricing your goods based on what your competitors are charging is the wrong method to choose. No two bakeries are alike. The amount of labour and the cost of ingredients may be different for you and your competitor. Thus, your selling price would vary as well.

 

3.Cheap prices “for love”

 

It may be difficult to charge your friends and family since you may feel guilty asking them for payment and so you put in all your time, skills, hard work and money into baking only to give it away for free.

 

But here, consider another perspective. Your friends and family are buying from you to support you and because your goods may be of much better quality than your competitors. They want you to succeed.

 

To make things easier, you can create a fixed discount for them. Essentially, this discount should not be higher than 10%.

 

Takeaways for Pricing Your Goods

 

  • High quality and custom products such as wedding cakes are usually charged at a high price due to their high quality.

 

  • You can make changes to your prices overtime for more efficient sales.

 

  • While introducing a new product, you can begin with an expensive number and then decrease the price as sales go up.

 

Ensure that you have a well-balanced profit margin. Do your best to maintain a profitable business.