JLG Posted 11 Sep 2012 , 6:27pm
post #1 of

I have a few friends/neighbors that have asked me to do cakes for them. Then, I have had their friends asking me for cakes. My biggest dilema is I feel like I always undercut myself. I figure out my cost and round up slightly and that's what I charge them.

What would you say would be a good Mark Up percentage for charging? I pretty much figure out what it cost me to buy the ingredients, (shelf price plus I add the sales tax percentage that I get changed at the store). I know I need to increase that amount in some way to make it worth my while, but stuck on how much. 20% seems low, 40%? I'm afraid of going too high. I'm in the suburbs of Chicago if that helps figure that out.

Thank you for your constructive feedback.
Jan

25 replies
jason_kraft Posted 11 Sep 2012 , 6:42pm
post #2 of

Generally profit margins range from 10-30% depending on the market in your area. Note that this is after including ingredients, labor, and allocated overhead in your cost, not just ingredients.

Annabakescakes Posted 12 Sep 2012 , 2:37am
post #3 of

I have virtually no overhead, other than paying myself back for all the things I bought myself, er, for the business icon_wink.gif my markup is 5 times the cost.

jason_kraft Posted 12 Sep 2012 , 3:25am
post #4 of
Quote:
Originally Posted by Annabakescakes

I have virtually no overhead.



What about insurance, license fees, accounting fees, advertising, web hosting fees, and utilities?

Annabakescakes Posted 12 Sep 2012 , 3:54am
post #5 of
Quote:
Originally Posted by jason_kraft

Quote:
Originally Posted by Annabakescakes

I have virtually no overhead.


What about insurance, license fees, accounting fees, advertising, web hosting fees, and utilities?




virtually*ˈvɜr tʃu ə li(adv.)

for the most part; almost wholly; just about.


That's why I said virtually, Jason, not literally. I had my accounting taught to me by a free SCORE accountant, my Insurance is less than $40 a month, my yearly license plus health department fees are about $9 a month, I had my accounting taught to me by a free SCORE accountant, I am strictly word-of -mouth (after I did one wedding show), my hosting is $4 a month, and utilities are about $125 a month.

All in all, ONE medium sized cake a month goes towards the overhead, the rest of it after I buy ingredients and pay for gas, is mine. So, the way I see it, I have virtually (for the most part; almost wholly; just about) no overhead.

jason_kraft Posted 12 Sep 2012 , 4:18am
post #6 of

If you add up all those costs you're at $2100/year, which is in the right ballpark for a home-based business considering you don't advertise (although you didn't include the labor cost of doing the accounting yourself). I doubt many new home-based business owners would consider $2100+/year "virtually" no overhead.

If you have a decent order volume it does reduce to a small amount when allocated out, but it's still necessary to work that cost into the price of your cakes. Ideally all your customers would contribute a small percentage to your overhead, so you can earn a fair wage and a profit margin (which includes marking up your overhead) on every cake.

Let's say you have 2 orders per week, so your overhead would be $21/cake. Each cake has an average cost of $320 (including overhead) with a 25% markup to $400. If you fail to include overhead, your cost would be $300 with a price of $375. This reduces your true profit margin from 25% to 17%, which means almost a third of your net profit is gone. That's not insignificant.

It's also important to cost out labor separately, since setting a fixed multiplier based on ingredient costs will result in overpricing cakes with simpler designs and underpricing more complicated cakes. That pricing model works well when you make the same product over and over again, but it fails when applied to heavily customized products.

scp1127 Posted 12 Sep 2012 , 5:56am
post #7 of

I look at a true market price, then my expenses. I know the dollar amount I want per hour. If the business plan did not support my time, I would not have opened. My per hour rate is $40 for my time.

For my retail space, I use the same concept. Both the income for me and the net profit needed to be significantly higher. Again, taking into consideration market value and expenses, the numbers had to support the endeavor.

Annabakescakes Posted 12 Sep 2012 , 6:57am
post #8 of
Quote:
Originally Posted by jason_kraft

If you add up all those costs you're at $2100/year, which is in the right ballpark for a home-based business considering you don't advertise (although you didn't include the labor cost of doing the accounting yourself). I doubt many new home-based business owners would consider $2100+/year "virtually" no overhead.

If you have a decent order volume it does reduce to a small amount when allocated out, but it's still necessary to work that cost into the price of your cakes. Ideally all your customers would contribute a small percentage to your overhead, so you can earn a fair wage and a profit margin (which includes marking up your overhead) on every cake.

Let's say you have 2 orders per week, so your overhead would be $21/cake. Each cake has an average cost of $320 (including overhead) with a 25% markup to $400. If you fail to include overhead, your cost would be $300 with a price of $375. This reduces your true profit margin from 25% to 17%, which means almost a third of your net profit is gone. That's not insignificant.

It's also important to cost out labor separately, since setting a fixed multiplier based on ingredient costs will result in overpricing cakes with simpler designs and underpricing more complicated cakes. That pricing model works well when you make the same product over and over again, but it fails when applied to heavily customized products.




Well, Jason, I believe i mentioned in my first post, that is not how I price my cakes. If my cake cost $300, not including overhead, at the very least, I would charge $1200. If I did that 2 times a week, that would be $2400. That would leave me $1758 at the very least to pay myself and put back into the business. I do think the $41 is pretty insignificant, when dealing with 4 figures. I don't even care if I forgot a time or two and actually paid taxes on it, Lord knows Obama and the rest of the government can find a way to spend it. (My calculator and I don't even know how to figure up how many times we would all have to overpay our taxes by $5 a week to pay off the $16,000,000,000,000 we are as a nation.)

And I do have my pricing per hour worked out, (I would like to give a shout out to KellyM and cakeBoss!) Thank you for your concern....

FYI, You have entirely too much time on your hands. I hope you aren't neglecting your wife and child. While a small portion of your posts are helpful, and I agree with you much of the time, if my husband spent 1/10 as much time meddling in other people business on the internet as you, I would have to hang my head in shame. Image

Crazy-Gray Posted 12 Sep 2012 , 8:23am
post #9 of

Man you get slammed sometimes J... I actually found this really helpful, it made me think more about the time I spend on the business, when I added up the time I spend editing photos, posting them on facebook, taking phone calls, comparing insurance quotes, researching designs, trialling recipes that I just enjoy after dinner (or bin which happens too often lol).... I need to make an additional cake per month to cover the 'cost' (attributing myself an hourly wage just for the model), all these things I just do because they need done and I feel like a prat that I never actually attributed them to having an oppertunity cost let alone a financial one... Thank you.

jason_kraft Posted 12 Sep 2012 , 2:14pm
Quote:
Originally Posted by Annabakescakes

Well, Jason, I believe i mentioned in my first post, that is not how I price my cakes. If my cake cost $300, not including overhead, at the very least, I would charge $1200.



I'm well aware that's not how you price your cakes, I was suggesting an alternative pricing method that works better when labor costs vary widely from order to order. As you said overhead is usually not a large portion of costs, but marking up your cost 400% (where cost = ingredients + labor) does not work in the real world, unless you are lumping together your hourly wage and your net profit.

Quote:
Quote:

And I do have my pricing per hour worked out, (I would like to give a shout out to KellyM and !) Thank you for your concern....



KellyM and I agree on this point, if you read her article on pricing she also suggests pricing based on ingredients, labor, and overhead (plus delivery).

http://www.cakeboss.com/PricingGuideline.aspx

I won't even address the last part of your post, I recommend deleting it ASAP since it really reflects poorly on you.

jason_kraft Posted 12 Sep 2012 , 2:17pm
Quote:
Originally Posted by Crazy-Gray

I actually found this really helpful, it made me think more about the time I spend on the business, when I added up the time I spend editing photos, posting them on facebook, taking phone calls, comparing insurance quotes, researching designs, trialling recipes that I just enjoy after dinner (or bin which happens too often lol)....



Thanks! There is a lot more overhead involved in running a business than many people consider or account for, I'm glad you found my post helpful.

Alicebel Posted 12 Sep 2012 , 4:46pm
Quote:
Originally Posted by Annabakescakes

Quote:
Originally Posted by jason_kraft

If you add up all those costs you're at $2100/year, which is in the right ballpark for a home-based business considering you don't advertise (although you didn't include the labor cost of doing the accounting yourself). I doubt many new home-based business owners would consider $2100+/year "virtually" no overhead.

If you have a decent order volume it does reduce to a small amount when allocated out, but it's still necessary to work that cost into the price of your cakes. Ideally all your customers would contribute a small percentage to your overhead, so you can earn a fair wage and a profit margin (which includes marking up your overhead) on every cake.

Let's say you have 2 orders per week, so your overhead would be $21/cake. Each cake has an average cost of $320 (including overhead) with a 25% markup to $400. If you fail to include overhead, your cost would be $300 with a price of $375. This reduces your true profit margin from 25% to 17%, which means almost a third of your net profit is gone. That's not insignificant.

It's also important to cost out labor separately, since setting a fixed multiplier based on ingredient costs will result in overpricing cakes with simpler designs and underpricing more complicated cakes. That pricing model works well when you make the same product over and over again, but it fails when applied to heavily customized products.



Well, Jason, I believe i mentioned in my first post, that is not how I price my cakes. If my cake cost $300, not including overhead, at the very least, I would charge $1200. If I did that 2 times a week, that would be $2400. That would leave me $1758 at the very least to pay myself and put back into the business. I do think the $41 is pretty insignificant, when dealing with 4 figures. I don't even care if I forgot a time or two and actually paid taxes on it, Lord knows Obama and the rest of the government can find a way to spend it. (My calculator and I don't even know how to figure up how many times we would all have to overpay our taxes by $5 a week to pay off the $16,000,000,000,000 we are as a nation.)

And I do have my pricing per hour worked out, (I would like to give a shout out to KellyM and !) Thank you for your concern....

FYI, You have entirely too much time on your hands. I hope you aren't neglecting your wife and child. While a small portion of your posts are helpful, and I agree with you much of the time, if my husband spent 1/10 as much time meddling in other people business on the internet as you, I would have to hang my head in shame. Image




J, thank you for the info. very helpful. I have been wondering myself how to calculate the cost of baking and decorating etc.. I have been doing cakes for friends and family as gifts (most times) and it's getting really expensive. When they come ask me if I can do a cake I'm not sure if they expect me to do it for free or are willing to pay. I feel awkward even bringing the subject up. I agree to bake a birthday cake 9free) this Saturday and I was comparing prices and it sells for about $450.00. They thing is too that I am the one that buys all the ingredients and materials. I need to figure out my cost of overhead, ingredients, material and time and start appreciating my own work.

SugaredSaffron Posted 12 Sep 2012 , 8:18pm
Quote:
Originally Posted by jason_kraft

Generally profit margins range from 10-30% depending on the market in your area. Note that this is after including ingredients, labor, and allocated overhead in your cost, not just ingredients.




The profit margin and mark up are two different things, the OP is talking about mark up. You are using the two interchangeably which is completely wrong.

Regardless I would think a profit margin of 10% is extremely low. That would basically mean that a cake that cost you $100 to make you would sell on for $111. You might as well do something far less stressful for change!

jason_kraft Posted 12 Sep 2012 , 8:28pm
Quote:
Originally Posted by SugaredSaffron

The profit margin and mark up are two different things, the OP is talking about mark up. You are using the two interchangeably which is completely wrong.



I'm referring to markup as the difference between the cost of a product and its selling price. Profit margin is conceptually the same thing in my mind.

The main difference is how you calculate them. Profit margin = (price - cost) / price, while markup = (price - cost) / cost. You're right that I should have distinguished the two better, but as long as you keep consistent with your calculations (and are aware that profit margin will always be smaller than markup for a given cost and price point) you should be fine. Thanks for making that clarification!

Quote:
Quote:

Regardless I would think a profit margin of 10% is extremely low. That would basically mean that a cake that cost you $100 to make you would sell on for $111. You might as well do something far less stressful for change!



Don't forget that your hourly wage would also be included in the cost of the product. So if your wage is $15/hour and you spent 3 hours making the cake, $45 of that $100 cost would be flowing to you as income, while the $11 in profit would flow to the business.

SugaredSaffron Posted 12 Sep 2012 , 8:47pm
Quote:
Originally Posted by jason_kraft

I'm referring to markup as the difference between the cost of a product and its selling price. Profit margin is essentially the same thing in my mind.

Can you share your definitions for the two terms?




Your mark up is how much you add to cost price to get the selling price. The profit margin is the % of the actual selling price that is profit. For example if I have a cake that cost me $100 and I wanted a 50% mark up, I would price it as $150. The profit margin however is not 50%.
The profit margin is (price - cost)/price. So in the case of this cake its ($150-$100)/ $150. Multiplied by 100 to get a percentage. The profit margin is therefore on 33%, which is a lot smaller than the 50% you'd think is the profit margin.

This would cause you problems at the end of the year when you wonder where all your profit seems to have disappeared to. Mark up isn't very useful for anything, because you want to know how much of the price is profit, not how much of the cost.

Quote:
Originally Posted by jason_kraft

Don't forget that your hourly wage would also be included in the cost of the product. So if your wage is $15/hour and you spent 3 hours making the cake, $45 of that $100 cost would be flowing to you as income, while the $10 in profit would flow to the business.




You may as well get a job that pays $15/hr, it would be much less stressful. I think part of the pull of owning your own business is the profit you can make from it, not just the wages. With such a low profit margin, you'll just end up putting a load of your own wages in to further the business. Really, you need to be looking at closer to 50% profit margin. But I guess it depends on locality and what you actually produce.

SugaredSaffron Posted 12 Sep 2012 , 8:52pm

Sorry I quoted before the edit! The main difference is that they are two different things, that mean two different things.

For accounting, tax and all other purposes your mark up means nothing, so I have to disagree and say it does make a difference. Someone can believe that they are making much more money than they actually are. Especially as its so easy to confuse the two in your head.

jason_kraft Posted 12 Sep 2012 , 9:06pm
Quote:
Originally Posted by SugaredSaffron

Someone can believe that they are making much more money than they actually are. Especially as its so easy to confuse the two in your head.



Agreed. I actually had to look up the difference myself, I'm sure they covered that in one of my MBA econ classes but it has been a while. From now on I will be more careful about the difference between the two. Luckily you can easily convert them: Margin = Markup/(Markup + 1) and Markup = Margin/(1 - Margin).

In the US most cake shops are in the 10-30% range for profit margin (or 11% - 43% markup) once you factor in all your cost components, most markets won't support higher margins than that. If you are consistently at the low end of that range and can't reduce your costs or increase your prices then I agree running your own business may not be worth it.

scp1127 Posted 13 Sep 2012 , 5:29am

Anna, I like your posts and Jason's.

I believe Jason and I have very specific reasons why we are on CC and they may not be just that we have nothing better to do.

Jason is correct in that those small items need to be taken into consideration. I am taking the next big step with my business and I have to account for every tiny detail, be it a cost or a time issue. In pm's I work with people to realize the time it takes to buy the paper towel, the cost, and the time we use while cleaning with it.

Keeping track of all costs and time is a lot more than you think when you do it correctly. Once factored in, a true picture will be apparent.

diane706 Posted 13 Sep 2012 , 2:34pm
Quote:
Originally Posted by Annabakescakes


FYI, You have entirely too much time on your hands. I hope you aren't neglecting your wife and child. While a small portion of your posts are helpful, and I agree with you much of the time, if my husband spent 1/10 as much time meddling in other people business on the internet as you, I would have to hang my head in shame. Image




Wow! I was going to stay away from this one, but I just can't! I believe you owe Jason a public apology for that nasty remark!! If you don't agree with him, then agree to disagree and move on or debate in a FRIENDLY manner!!

jason_kraft Posted 13 Sep 2012 , 6:57pm

Yeah, that part of her post was really puzzling to me, especially considering that I average about 15-20 minutes a day here. I chalked it up to cognitive dissonance, which can sometimes cause a disproportionately hostile response when one is confronted with facts that are inconsistent with existing beliefs.

Godot Posted 13 Sep 2012 , 8:19pm

*snort*

icon_razz.gif

vgcea Posted 14 Sep 2012 , 9:44am

#TeamJason <333 icon_lol.gif

Alli1027 Posted 7 Dec 2012 , 11:46pm

This discussion was really helpful. I am new to the cake business. I purchased the cakeboss pricing software after a few sales this year but with my background in accounting i noticed that it was calculating profit incorrectly. It is assuming that the amount generated for labour was part of the profit. none the less i simply markup the suggested selling price by 35% to calculate final selling price. 

BakingIrene Posted 8 Dec 2012 , 3:50am

You can think of pricing cakes this way: the costs plus the wages.

 

Wages means AT LEAST minimum wage.  

 

There is no reason to bake if you are not earning at least that much.  Better to just donate the cake ingredients and all.

howsweet Posted 11 Dec 2012 , 6:50am

Regardless of what it costs you to make a cake you can only charge what the market will bear.  But to do so, you have to find your target customer, and when you do, you should know your costs. But you should charge as much as you can. If you don't, you negatively effect the market price which hurts everyone.

 

With the new cottage food laws, lots of ladies baking cakes are undercharging. If they have hopes of one day owning a storefront, they are shooting themselves in the foot by driving prices down.

 

If you simply decide a wage per hour that you want to make and add your costs to that, you become a cake making service, not a cake business. A cake business considers what it costs to pay employees to make a cake and then make a profit on top of that.

 

Your target market is not people who want to pay $40 for a grocery store cake. Nor is it people who want to have a cake lady who makes awesome cakes for really cheap.  Nor is it a person who wants you to charge less because there will be lots of people at her party and, "surely it will drum up business for you".

 

 

BakingIrene Posted 12 Dec 2012 , 6:35pm
Quote:
Originally Posted by howsweet 

 

If you simply decide a wage per hour that you want to make and add your costs to that, you become a cake making service, not a cake business. A cake business considers what it costs to pay employees to make a cake and then make a profit on top of that.

No, sorry.  If you are a one-employee company,  then you should be able to plug in the costs and the salary, and see if that comes out to less than your per serving prices.  I'm not saying that is the primary way to determine prices--but it is an important self-audit.   

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