Pricing in and of itself can be a somewhat daunting and frustrating thing to do. Most of us guess at what we think the customer will pay, then hope for the best – with the “best” being they don’t complain about or debate the price. While I know a lot of us start this way, it’s not a brilliant way to carry on business because (especially women) tend to under-price anyway. You don’t want to get into a situation where you can’t afford to keep going because you charge too little, or (worse) you almost end up PAYING THEM to take it off your hands.
Pricing is something I have talked about loads – you should go read the one about the story your price tells – and the one about how long it takes to be successful. Basic cake pricing consists of 4 things: cost of goods, labour, overheads, and profit. The one most people struggle with is profit, because it’s simply not as black and white as the other costs are.
So how much should you include for profit? In the restaurant industry, my experience has been they consider themselves lucky to get 10% profit (VERY lucky!). In cake however (or handmade food in general), we don’t have that kind of rule of thumb. Most of us starting out will consider ourselves lucky to cover our costs and labour, let alone see some profit. In my opinion, you should be aiming for no less than about 20% profit. In reality – you might start making NONE, and eventually end up making way MORE than 20%. Sometimes (okay, almost always!) we underestimate the time to create things, so whatever profit we accounted for ends up in labour. When we are faster than we think, that means we’ve made our profit target and then some.
As I see it, there are two ways to work out how much profit to include in your price:
- Apply a base percentage or dollar amount that is the same across all orders. So let’s say you want to be earning 20% profit on your cakes. You’ll add up the non negotiables (goods, labour, overheads) and then add 20%. This version is nice and simple. A word of caution here – you could do this math, add the 20% and then discover its below your minimum price. In which case, charge your minimum and smile at yourself for earning more profit. Don’t go below your minimum, you set it for a reason.
- Apply profit based on a minimum (either dollar or percentage) then take into account market demand, reputation, etc. This is when you say “I’ll take NO LESS THAN 20% (or $50 or whatever) profit on each order, but each price will then adjust accordingly. Sure, this makes each price a bit of a guessing game… but reality is this part of pricing isn’t fixed so it IS a bit of a “feel” and not just a numbers game. If your prices are WAY out of whack with your market, you’ll know it pretty quickly. If they’re too low, again, you’ll know it. So in this scenario, you add your minimum profit that you want – then add more to adjust for market. Sure, each cake will likely then have a different percentage of profit but at the least, each is making its minimum required. As an example – you work out that with 20% profit included, that drip cake is $100 … but you know that in your area, drip cakes are selling for way more than that AND that you have an excellent reputation – so you’d adjust your prices up. How MUCH you adjust them is up to you, as long as you’re covering both your costs and your minimum profit.
I wish I could tell you an exact science for adding in profit, but it’s based on so many intangible things (reputation, skill, area, type of market, location, etc) that it’s difficult to hand you a magic number. The thing to remember is that we have to start SOMEWHERE so my top 3 tips for improving your profit are:
- SPEED THE HELL UP. The faster you go, the less that price is being eaten up by labour costs. Move faster, charge the same, make more profit. I believe most of us are TOO DAMN SLOW. (Go read that article to see more on that.)
- ADD IN PROFIT FROM THE GET-GO. Sure, it might be profit on paper only or a very sad and pathetic amount, but it’s a habit you need to develop early on. It becomes WAY too easy to pretend that because you have a bit of money left over at the end of the month, that’s enough. Add profit to every single quote you do.
- MAKING PROFIT TAKES TIME AND INCREASES OVER TIME. Like I mentioned above, at first most of us are lucky to make profit at all. Don’t stress out about this – we’re aiming to get faster, get better at pricing, and command higher prices as time goes on. You’re going to get it wrong a lot (and beat yourself up about it a lot!) – but then, show me a business owner who didn’t under charge at first and I’ll show you one who is lying to you.
Profit is the hardest of all the pricing elements to get right because it’s flexible – the mistake most of us are making is not to include it at all. Start with making profit a part of every one of your quotes and you’ll find it’s a great motivator for you to start reducing the other three areas because the less you spend in those areas, the more you can make in profit.
And by the way… profit is what keeps you in business, it’s NOT your hourly wage or an optional extra.
We may never acknowledge it, but profit is why we’re in business – we didn’t get into it to break even or lose money. I don’t know about you but if I wanted to lose money, I’d gamble or buy a boat or a horse or something. Those seem like way more fun ways to lose money.