What is an appropriate profit margin? I am thinking about renting a new space, but was looking at the numbers first...

So far, I am making at most 53%. This does NOT include charging by the hour or rent. And of course, the rent would eat up everypenny.

What do you guys think is a good profit margin?

I think about 2/3 of your gross should be your net, but I'd be interested to see if anyone does better than that and how they do it!

Whoa. Seriously? I don't know if I can charge that much....hmmmm....
Thank you for the advice!

Well, I don't know if that's normal...I have a business from my home, so my expenses are different. If anyone else has different numbers please add your input! I have no idea if that's right, but for me it seems to be what I tend to make after expenses every year, give or take a little, so that's what I try to maintain.

costumeczar, are you counting labor as an expense?

My general thinking is that, without profit, you could divide a cake price into "quarters." If you have

1/4 in the ingredients and consumables (cardboard circles, ribbon, and so on),

1/4 for overhead (if you are renting a shop, or otherwise...to cover utilities, insurance, rental, equipment investments, etc)

2/4 (1/2 ) for your time and possibly profit, depending on how much time a given project takes.

Working from home (black market caking ) and only doing it for friends, I tend to look more at a 1/3 rule and discount the part that would cover rent and insurance and advertising and so on. I have pretty much all of the equipment I need already accumulated to do cakes at the pace I do them.

You could use that basic idea as sort of a guide, and add on a profit percentage if you find that counting 1/2 for labor and profit isn't enough. And it may not be, if you are still slow (me!), and have to pay your self employment taxes and other "benefits" of employing yourself.

For example, I did a cake for a friend for 250 people, and without using a serious formula, figured I would give her what she wanted for $500 for the labor (I figured on 4 days of baking (inefficient home oven), decorating, delivering, etc. She agreed to pay her materials, so I kept track of the ingredients and consumables. The total for that stuff came to about $240 (scratch cakes of pretty expensive stuff). So basically, this was a cake for $740, or roughly $3 per serving.

Had I needed to worry about shop rent and so on, I would have wanted another $250. The whole thing falls into the four quarters idea...the cake costs ~$1000, with 1/4 to ingredients, 1/4 to expenses, and 1/2 to labor.

And the cake, per serving, would be $4.00, which is higher than a lot of people charge for a pretty simple cake, but pretty middle of the road for commercial pricing. Anything beyond that $4 to charge would be in theory "true" profit, assuming that the amount figured for labor accurately covered labor.

Obviously, the faster one works the more profitable; the cheaper one's expenses (rent, etc.) the more profitable.

Just a couple cents pitched into the pot

Edited to add: A few days ago I saw Gordon Ramsey's kitchen show, where he revamps people's restaurants. He was talking to a chef/owner about a recipe and pricing it on the menu and he followed a basic "menu price is four times the expense" formula (he only counted ingredients, not utilities and stuff like that) to help the guy figure out whether something would be a good addition to the menu (if it could be priced appropriately). Just FYI.

I don't pay myself a salary per se, and since I don't have employees I dont' really count labor as a typical expense. What I do is periodically do a count of how many hours I'm working on cakes, including EVERYTHING, and then calculate what I'm taking in gross and net for those weeks. If my hourly "profit" is what I consider to be in the okay-for-me hourly wage, I'm okay with that. If it's too low, then I think about raising prices.

It would be different if you have employees, since you have to include salaries as part of your expenses, so that would drive your overhead up. Since I end up keeping about 60-65% of what I'm making in total as my "profit," I think I'm okay. I'm definitely not under or overcharging for the market I'm in.

I do understand the fine point of the single-proprietor calling all final net income "profit" without taking out what's considered salary, but I'm not too concerned about it as long as what I end up with after all expenses stays in a certain range. My economist best friend would yell at me, but oh well...

I have to add that I'm mad that I forgot Gordon Ramsay's show was starting up again. I love that show and I missed it because my husband was hogging the tv to play Tiger Woods golf...

rent is what can kill us all. I am like you in that I could not imagine charging some of the pirces people here charge. I am jealous they can get that much, but in my area, that is a joke. I am lucky to get to work in a licensed kitchen and not have to pay rent. It is a long story as to how I got into this scenario (old friends and I do things for them free of charge) and help them when it comes to their party functions.

Geeze. I have got to figure this out...
Right now, I chage $2.50/serving. I've tried $3, but very few take me up on it. I did find out somethings, like I really lose money on decorated cake drums with the fondant and ribbon, etc, so I need to increase the charge for that.
The rent will be about $250/month, and then an extra $50 for insurance. I am not sure if I can charge that much to cover it and still make a profit.
How do people do it?

It would depend on what kind of volume you do. For example, if you made 8 cakes in a month, and need to clear $300 in expenses, you would need to get an average of $50 more per cake. If you only made one cake per month, obviously there is more to make up on that one cake.

Or another way to look at it: if you increased your serving price to $3 and kept everything else equal, you would need to sell 600 servings of cake in a month to make up your expenses with just the 50 cent price increase. If you only bumped to $275, you would have to sell 1200 servings of cake in that month.

It all has to depend on how many cakes you are actually making and selling.

Hmmm. That doesn't sound too bad. I usually do 3 cakes a weekend. I do 99% birthday cakes, though, which cost a little less. On the average two tiered cake, I would make about $42 profit (which seems so little!). To be even with where I am now if I was paying for rent and insurance, I would need to make an extra 7 cakes a month. ($300/$42).
But, if I increased to $3, my profit is $58.23. I would have to make an additional 5 cakes per month, or a little over one a week.

Or, does Mike's math make more sense?

The hardest part is convincing my DH. He does NOT want me to rent a space. He has been so supportive about everything else, but has no interest in me renting. So I'm trying to run the numbers to convince him.

If people won't pay $3, what if you tried $2.75 instead? Or is that just a bad idea? You did a wedding recently right? If you could book 1 wedding a month, that would likely cover it too...

Great information on setting your retail prices. Summernoelle, have you thought about setting your price at $2.75 instead of $3.00 for now? You could always do a gradual increase to $3.00. Your rent price sounds great! Wish I could find rent for that amount--I'd be in a store front in no time.

True. A wedding could totally cover it, and there are additional setup fees, etc that would help.

I could try $2.75. I have gotten 3 for more complex cakes (like the Over The Top on in the gallery), and for rush orders I charge more. People WILL, but there are just less of them. However, I would rather make 3 cakes a week than 4 for the same amount of money.

Thank you for the advice everyone! I'm starting to get excited.

My interns just did a project where they cost out every item on our menu. We try to keep the food cost about 20% on high labor items, and 25% on low labor items like bars.

We get $38 for an 8 inch cake with basic decoration, filling and icing. Carrot, Almond pound, ganache or fresh fruit fillings all add $4. I budget 20 minutes for decorating ( 1/2 hour for each $50), and designs that are more complex than can be done in the alloted time cost $20 and hour.

I'm purchasing a bakery and could really use some help about profit margins.

Appreciate any help..  Please email me if your interested in helping.

Thank you,

[email protected]

The formula I learned in school was that in certain expensive areas, rent should be no more than 10% projected gross, and everywhere else, it should be no more than 7%. There are industry benchmarks you should consider before purchasing turnkey or having a go as a startup. Consider buying a copy of a recent edition of Restaurant Industry Operations Report from the National Restaurant Association. You can use it to give yourself a crash course in hospitality management.

wow good advice, dangefrousfruit --

i think i used the correct word for 'advice' -- gotta reboot computer so forgive me if i goofed it :)

can't get to dictionary right now