There is no sense having a business that eats you out of house and home. Why work so hard making great food, then sell it at a loss? Do you know how much it costs you to produce your product? How much time it takes to make your goods? How much your competitors’ products cost?
Cottage Foods Sandie has some ideas to help you price your products sensibly.
1. Determine the value of your product.
Most home food makers greatly under price their products it seems. Remember, just because you have lower overhead expenses does not mean that your kitchen creations should be dirt cheap. Remember this important rule – customers want good VALUE.
Think about it. You may not always buy the least expensive version of a product. You might choose certain ingredients, use a certain mixer, cook with certain pans not because of the price but because that brand gives you freshness, durability or consistency that justifies paying a bit more. In other words, its characteristics are worth the money. It is a good value.
Now consider your edible delights. What makes them special? Is there a “niche” market that they target (vegans, toddlers, gourmands, … )? Is there a rare ingredient, or combination of ingredients, that create a distinctive flavor? Do you have a refreshingly new version of some more common food item? Is it your decorative flair that creates awe-inspiring creations? Whatever it is, defining what sets your cottage food product apart from others will help you see its value to the customer.
2. Determine the cost of making your product.
a) Ingredients: How much does each ingredient cost per sale?
Calculate the cost of ingredients for one recipe. First, how much does that ingredient cost you when you buy it? Next, how many times can you make your recipe out of the ingredient package? Add the costs of each ingredient, keeping in mind the yield (i.e., one cake, a dozen cookies, a pint of jam).
You can determine the number of uses you will get out of a package by pouring it out and measuring it by hand, or by doing some conversions and math to calculate how many loaves, for instance, that flour bag will yield.
For convenience there are online culinary conversion charts to help. Some change pounds to cups (CLICK HERE) or volume (for liquids) into weight (CLICK HERE). For general recipe conversions try HERE . (Note: Sometimes it’s convenient to check the nutrition label where you can find the number of servings per package and the amount per serving already calculated. Cottage Foods Sandie just uses Google to convert the grams or ml. to ounces.)
Add the cost of each ingredient per recipe and divide the total by the number of sellable “units” it generates (one dozen, one pound, a 12 oz. bag, 1 quart, 1 pie, etc.)
For those who do a lot of baking you might find the Cake Boss Price Calculator Software useful. Designed by a cake decorator for home bakers and small businesses, for $149 it offers simple cost/pricing determinations plus other benefits for tracking orders, etc.
b) What is your labor cost?
Most cottage food makers tend to undervalue their time, a leading cause of underpricing their product. Cottage Food Sandie suggests thinking in terms of costs of an employee. If you were paying an employee $10/hour and needed to pay employment taxes, social security taxes, Medicare, etc., the total cost would be closer to $12-13 / hour before adding benefits (like health insurance). So it may be reasonable to consider your time as worth $15/hour in such a case. To calculate time spent, you should count set up time, the actual production time, packaging and clean up time. Add up all the time it takes you to produce your product—start to finish. Multiply those hours by your pay rate, then divide it by the number of packaged items you generated.
(For instance if it takes you 5 hours from set up to clean up that would be 5 hours x $15/hr = $75 in labor. IF you made 50 packages, divide the $75 labor cost by 50 packages and each package represents $1.50 of labor.
c) How much does it increase your utility bill?
San Diego Gas and Electric has a handy online display which shows on a day-to-day basis the amount of gas and electricity you use. Compare the days your Cottage Food Operation (CFO) is functional versus those days when it is nonoperational to evaluate the increased use of gas or electricity. Or, compare on a monthly basis to your use the year before. If you use significantly more water for your CFO, you might compare those utility costs, too. Keep a record of how much product you generate in a month to determine the utility costs per item.
d) How much does it cost to package and label your food product?
Don’t forget that the wrapping, boxing, printing, labeling, etc. cost you money, too. Again, determine how much the materials cost to package and label your product. Add the cost to your total cost per item.
3. The cost of selling
The least costly means of selling your product is through word-of-mouth to clients who will pick up the product from you. Sometimes picking up the product at your home business is not possible so you may need to arrange delivery or a meet-up. Either way, the added transportation costs should be included somewhere in your pricing—either as a delivery fee or factored into the overall costs of all of your products.
If you will be selling food yourself at a farmer’s market or local event, there is usually a fee to participate. Most farmers’ markets cost $20-40 per week. Remember to calculate the cost of gas to get there and home, too. A market that is 20 miles away could require a gallon of gas each way. Gas and market fees alone could cost $30-$50. Whether or not there is a good crowd that likes your product may help you decide if that is the right market for making a profit. Look for other opportunities to sell and advertise your products as well.
If you are planning to sell your product wholesale to a store, restaurant, or other business to sell at retail, you will need to determine how much to discount the item, how much to provide them and how often. Does your product deteriorate or get stale over time? It will be important to determine how much product to provide so that it is sold out while fresh. Spoilage reduces profit!
If you are just doing this for fun, you won’t need to add in profit margin. But who wants to do all this and not make a profit? Don’t just use a guess-timate of 2-3x ingredient costs to price your product. Calculate your real costs, include a reasonable profit, compare to other products like yours, and remember your VALUE. It’s not just about price, it’s why the price is a good value!
Don’t be discouraged by fees at the start. Remember that in the beginning your costs are generally higher than after you have established a regular production routine. You will get faster and more efficient, reducing your labor time. Also, knowing what you will need in advance means that you can order online and get free (or at least non-urgent) shipping, take advantage of sales when they occur, or buy in bulk. To reduce your selling costs, work on building a clientele that will pick up from you at certain locations at certain times.
Later this month we will look at strategies and locations for selling your delectable cottage food creations so stay tuned or subscribe to be notified of new postings.