(This article appeared in the Spring 2021 issue of Pastry Arts Magazine)
By Michelle Ball
Whether you’re opening a traditional, full-service retail bakery, wholesaling your products to retail outlets, or running a food truck specializing in baked goods, you undoubtedly already know that offering superior quality is one of the most important drivers in this business. Many consumers are willing to splurge on dessert items when they find something that hits their particular sweet spot, and a growing number are willing to pay premium prices for everyday staples such as bread, rolls, buns, and muffins. However, pricing baked goods remains one of the primary challenges for fledgling bakery businesses, and you’re certainly not alone if you’re currently struggling with figuring out what to charge for your products.
Although the natural starting point is to check out the competition’s prices, don’t make the mistake of thinking that it’s absolutely necessary for you to undercut the competition. Consumers often shy away from the least expensive options because they associate rock bottom prices with inferior quality. Community demand is another consideration. In a community that’s already saturated with chocolate chip cookies or artisan breads, yours needs to stand out substantially if you plan on siphoning customers from existing providers and will probably have to price competitively, but if quality baked goods are relatively rare in your area, you’ll likely discover that you’ve got more leeway when filling the amount on the price tags.
Successful pricing is an important skill in its own right, and it may take some trial and error before you hit that particular price point that works best for you and your customers. Fortunately, you can minimize the trial and error period by following the strategies listed above.
Determine Your Target Consumers
Before you even begin to mentally set prices, you’ll need a firm vision of your target consumer base. For instance, those aiming to produce good quality products that are nonetheless budget-friendly will have different pricing considerations than those who want to break into the local market for high-end goods such as customized wedding cakes.
The first step in figuring out pricing for your goods is to determine how much they cost for you to produce. Be sure to include all associated labor costs in your calculations rather than simply the wages of the employees who actually do the baking. If you’ve got frontline workers who handle retail sales and back-of-the-house staff who does the cleaning, be sure to include them, and if you’re the sole proprietor and workers, be sure to pay yourself a competitive market wage. Knowing the exact cost of each of the products you plan on producing and offering for sale provides you with a realistic foundation for determining your profit margin.
Calculate Your Break-Even Point
Once you’ve figured out the break-even point for each product you produce, you can use that to calculate your desired profit margin. The term profit margin refers to the amount of money between the point at which you break even and the final cost of the finished product. Although experts recommend adding a 50% profit margin to the mix, this strategy isn’t written in stone, particularly for larger businesses that handle a wide variety of saleable items. For instance, larger businesses often include loss leaders in their sales strategies. In a baked-good business, this might translate to offering something such as cheesecake bites at an attractive price that reflects their production cost but doesn’t have profit factored in as a way to simply increase traffic and sales in the retail space. Baked goods businesses of all sizes, however, should tread carefully with this approach to avoid finding themselves in the position of pricing themselves out of business.
Conduct Test Marketing
Keep in mind that it’s always easier to lower prices than it is to raise them, so avoid trying to calculate the lowest possible price point right out of the gate. Price increases are always noticed by consumers, and often, the result is a loss of business. Of course, the market has the final say in matters of money, so consider conducting comprehensive test marketing to minimize price fluctuations as you move forward.
Soft openings are excellent ways for new businesses to test the waters in their communities. Soft openings are unadvertised, limited openings designed to provide a trial run for business owners as well as the customers they hope to attract. This approach can also be used for individual products for businesses that are already up and running.