I am having a TERRIBLE time with the pricing part of my business. We are just getting started and it is so overwhelming. Now I know why people hire accountants! Unfortunately we are not at a place yet that we can afford such help.
I have the CakeBoss software so at least I am aware of how much it is actually costing me to make each product etc. But then there are all the other expenses. Supplies, gas, etc etc. . . .how do you figure that in to your pricing? How do you know what to charge?
I'm already having a hard enough time adding labor in to the mix. HAHA! It's very weird to throw this large number out to people. . .even though I know they're worth it it's odd being a newby at this business side of things ya know?? I mean lately I've been charging $5-$10/hr. . which is ridiculous. . how do I overcome this and how do I price correctly so I don't end up hurting myself in the long run financially.
I'm sure lots of you are shaking your head at me . . .be nice and please share all your expertise!! =)
Regarding undercharging for labor, if you are think you are worth $15/hour (based on your photos I'd say you're worth at least that) then work that number into the price. If the customer thinks the cake is too expensive, you can offer a simpler alternative that would require less labor and would therefore be priced lower. But if they want to compromise on price without compromising on complexity you need to show them the door (politely of course). The price shouldn't just be thrown out there, when we quote prices for large custom orders we always preface the discussion with an estimate of how many hours the entire order will take.
For the other non-labor and non-ingredient costs (usually called overhead) I put together an estimate of all annual overhead costs and divide that by the estimated number of orders per year. This is not an exact science so I tend to overestimate annual overhead costs and underestimate the number of orders per year to err on the side of making too much profit. Each order contributes the same amount towards overhead, whether it is a $50 8" round or a $1000 tiered wedding cake.
If you are handling accounting yourself I strongly recommending buying an accounting program like QuickBooks, Cake Boss is great for pricing but it is not meant for serious accounting.
You should also take into consideration your place in the market, the prices, taste, and decorating skills compared to all of your competitors. You will fall into a correct slot if you are honest with yourself. That is your market price. And then you work down from there by adding up your expenses. The rest is what is yours for labor and profit. If you don't like that number, lower your costs or up your skills.
If you don't price this way, your customers will. And if you are wrong, you will either be very busy because you are too low, or you will not have the business you want if your price is too high compared to the market.
Jason, this is the one area where I don't agree with you. I know that for your business you know exactly what you are doing. But for those less experienced, it looks like you can pick your profit margin, regardless of market price or skill level.
I agree that looking at the demographics of your area and the prices competitors charge is an important factor in determining your own pricing, and starting from market pricing and working backwards is certainly a valid approach -- as long as you know what your costs are (including overhead and a fair wage) and can make an informed decision as to how much of a profit margin you are willing to accept.
It's also important to be able to recognize when competitors (especially illegal competitors) are charging prices at or below cost, and avoid trying to match the price by paying yourself 50 cents an hour or setting your profit margin at -20%.
Thank you so much for the responses!
Jason, I appreciate your compliment on my cakes being worth the higher hourly charge. Thank you for explaining how you price your overhead. . .that helps a lot!
I haven't "officially" figured out what most bakers charge in my market, but I have an idea based off my wedding a few years ago. most of the quotes I got back then were between $3.50 & $4.00 per serving. My cakes are a minimum of $2.50 per serving and go up from there, but typically end up right around that range. . . so I guess I need to do some re-structuring.
Jason, in my particular business, the illegals don't factor in, but if the bulk of my business was wedding and celebration cakes, it may be a factor.
I have known all along that your plan also put you in the correct market position. I just don't want someone to be less than thorough on finding the lowest price on expenses and just add the extra onto an unrealistic final price.