I am just beginning to think about a home-based cake business.  I have already checked with the state about the policies.  I made this cake for a distant family member and only charged her $75 (and still feel like I am overcharging).  I figured about $25 for supplies and it took about 10 hours.  I've seen some people say they charge 4x supplies plus $20/hour.  That would be $300!  Does that seem exorbitant for this cake?  It is about 5 layers 8" (plus a little tiny 4-5 inch one out front), so that's about 50-55 servings I think.  That would be $6 per serving, which seems high.  I just don't know if that is appropriate for specially decorated cakes.  Maybe a basic buttercream would be more around the $3 mark?  I know prices vary widely, but just looking for a little advice for a newbie.  Thanks so much!

Well, if you have a business you'll have other expenses besides the ingredients, which I assume is what you mean by Supplies.  You'll have license fees, costs for car use, self-employment taxes,  insurance (you'll need commercial insurance to use your personal car to deliver cakes), advertising, utilities, etc etc etc. I can only speak for myself, but I net about 54% of my gross on cakes. If I charged $300 for that cake I'd be making a little over $150 profit, and if it took 10 hours that's $15 an hour, so that's too low for me personally. You also have to take into account the time that it took you to answer emails and phone calls about it, shop for the ingredients, plan it, etc, so it isn't just hands-on kitchen time that you have to take into account.

If you're using $50 as what you cleared on this cake, and ten hours of time went into it, that's $5 an hour. That's way less than minimum wage, so that is not good. And if you take the rest of the things I mentioned into the formula you probably made less than that, to tell the truth.

What you need to do is to figure out what your market will bear and what you want to make per hour. That will vary per person so that's up to you to decide. You should research what people are charging in custom bakeries in your area, NOT at Walmart and mass-market bakeries. You can't compare the price of a sheet cake to that cake that you made, it isn't the same thing. If you open a business and are immediately swamped with orders you're probably not charging enough. You don't want to start too low, because the customer base that you build when your price point is too low will disappear when you raise your prices to where they should really be. And you'll burn out in the meantime.

Don't tell yourself that you're going to charge less to start because you're new to the business. If your cakes are good enough to sell then they're good enough to charge the right amount for. If you want practice or to build a portfolio donate cakes to organizations that YOU choose (not to everyone who calls, because they'll all call and it won't get you any business) or do dummy cakes that you can use for display and to take pictures of.

$300 may or may not be right for your area, but that's hard for any of us to say. Some places will have a customer base that will drop $300 on a birthday cake without batting an eye, and others will have not one person in a 50 mile radius who will. The variable here is how much you want to make, but $5 an hour isn't good, you might as well go work for someone else's bakery for minimum wage and avoid the aggravation of having to run the business end of it.

AWell said.

Amen.  I think you should just cut and paste this for when pricing questions come up.

To the OP: one of the hardest things to do when starting out (particularly as a home baker) is thinking how much YOU would pay for that cake and feeling like you can't charge appropriately because you would/could never pay that much. You can't have that mindset if you want to do this a business, you need to take into consideration all the things mentioned above.

A

I can tell you that $6/serving is not high. You've got some really good advice here about checking your area. $6/ serving is not high for that though not at all

Thanks so much for all your help and advice.  I am actually going the home-based vendor route, which doesn't require license fees, self-employment tax, or insurance, and doesn't allow delivery, so I don't have to worry about covering those costs, but I understand that other bakeries do and I don't want to undercut them.  I did figure in utilities, but forgot advertising and time spent planning and shopping.  You are right that I would never pay that much, but I suppose if others are willing....  I'm just not quite sure how to give an estimate for specialty cakes beforehand when I have no idea how long it is going to take me.  I'm in kind of a rural area, and the prices I have found for other local bakeries seem pretty low.  It looks like when I add up all the prices below for the cake I did in the picture, this person would charge around $150. Maybe I will contact her and see what she would charge.  Thanks again!

Round 2-Layer Cakes

6” Round - $25.00   (Serves 8-12)

8” Round - $30.00   (Serves 15-20)

10” Round - $40.00  (Serves 22-30)

12” Round - $50.00  (Serves 35-40)

14” Round - $70.00  (Serves 55-65)

Extras

Icing Character or Icing Decorations on Cake - $5.00-$25.00

Cake Filling - $5.00-$20.00 (Any flavor other than buttercream)

Fondant Trim, Bows, Dots, Ribbon, Cutouts - $10.00-$40.00

Fondant Covered Cakes - $10.00-$60.00 (Depends on cake size)

Specialty Cakes - $5-$20 (Depends on cake size)

Tiered Cakes - $5 for each tier

Icing other than Buttercream - $5.00-$20.00 (Depends on cake size)

Fondant Figures - $5.00-$10.00/each for small and $10.00-$30.00/each for large

Rice Krispy Fondant Designs - $10.00-$50.00

Wedding Cakes

Wedding Cakes Starting at $2.00/per slice

AIt's the IRS that requires you to pay self-employment taxes, not the state. If you work for yourself you need to look into that. Also the insurance...if people are coming to your house to pick things up and one of them trips and breaks a leg you'll need to be insured. Call your homeowners insurer to make sure you're covered for clients being on your property. It will save you trouble in the long run.

Laws are different everywhere, but in my area it is the law that you have to carry $10,000,000.00 public liability insurance if you are selling a product to the general public, and NO my home insurance does not cover it.  I had to get a separate insurance policy, read the fine print on your insurance policy because insurance companies rather infamously will look for any loophole they can find to get out of paying out a claim.

If you are planning on making this your income what about holiday pay, superannuation or whatever the equivalent is in your area, creating savings to grow your business.  Most people starting out put all their time and energy into the cakes, recipes, ingredients and the reality is unless you pay as much attention to everything else involved in running a small business you will be one of the many fb businesses that I see open and close.  This might sound a bit brutal but whenever a new fb starts up I check out their pricing do the equivalent of a snort/hollow laugh and ignore them because I know it's only a matter of time before they fail.

AI'm not really starting a business, so that is where it is confusing. It is a home-based vendor arrangement, kind of like a road side stand, or selling things made from home at a farmer's market. There is a required statement indicating that the food is produced in a facility that is not inspected by the Health Department....buyer beware, consume at your own risk, kind of thing. Thus I'm not sure that the insurance applies. I contacted the person whose prices I found and she has been operating under the table, per her own admission, and knows she is only making about $5 an hour, so that explains the low pricing! Thanks for your help again...those that were helpful. Just because I don't know what I'm doing yet doesn't mean I will fail. That's why I'm trying to figure it out beforehand!

Even at a farmers' market, you do need insurance and to file self-employment taxes.

Your investigating everything is admirable! But I'm not clear on the distinction between a "home-based vendor arrangement" and a "home-based business." Whatever the differences are, you would still need to declare that income, file taxes, and as @pastrypet mentioned, get insurance. Best of luck.  

Well, thanks for the heads up on these issues.  I totally understand the income tax, and probably sales tax.  Guess I'll have to check on the insurance as well.  No wonder that lady was operating "under the table!"  :)  

NOBODY wants to pay for insurances...ever. But if something goes wrong, or some nut case sues you, you will thank everyone here on CC for "preaching" that issue. Whether or not YOU call it a business, is not really important. Will your insurance carrier call it a business if you make a claim? If you own nothing, have nothing, have weak credit... well maybe.... you can take the risk to NOT have insurance. Remember Susy Customer can sue you because "It had peanuts in it and I went to the ER", "I slipped on your front step when I picked it up.", "Grandma found a nail in it and chipped a tooth", and even the famous Wendy fraud of "I found a dead man's finger in it". IF YOU OWN ANYTHING, you then have to defend yourself, however fraudulent, frivolous, or crazy the customer may be. Does it happen often? Nope. Can it happen to you? Yup. 

Self employment tax is easy. You pay 15% of your profit/ income for "self employment tax" PLUS you add that to your other "regular" income and pay regular income tax on that "cake income" as well. It adds up quickly, so calculate it to be sure you don't have a nasty surprise at the end of the year. 

"Under the table" is hiding from whom? The IRS? Not smart. Susy Customer so she doesn't sue? How? Sounds like she is an ostrich hiding with her head in the sand "hoping" things don't catch up to her. 

I don't want to preach, just understand the risk. Will I speed going 65 in a 55, and "risk" a ticket? Yup- and pay the penalty if I get caught. I understand the risk. Will I rob a bank and "risk" 10 year in a federal pen? Nope.