Few components of your food business are more important than pricing. Your passion, your personal fulfillment, and quality are hugely important to building a successful food business, but so is ensuring that you’re building one that’s sustainable.
Pricing is more of an art than it is a science, and countless factors impact the price you set. For any food business, appropriate pricing is vital because it’s where your profit comes from.
Take these factors into consideration as you think about pricing your cottage food business’ products:
52 percent of restaurant operators say that high operating and food costs are a top challenge. Michigan State University research suggests that sellers set their production costs to 40 percent of a product’s final retail price. That means your ingredients, labor, and packaging costs total out at 40 percent of what your product will sell for.
Another helpful formula for calculating your food costs:
Food Cost Percentage = (Beginning Inventory + Purchases – Ending Inventory) ÷ Food Sales
You can keep food costs in check by shopping around for the best prices, and by keeping a close eye on portion sizes. If you stick to consistent measurements for your food products, you can more easily calculate food costs and eliminate potential food waste.
This signifies that they have found an amount of money that customers are willing to pay. If you’re competing for the same dollars, it’s likely that your customers are willing to pay a similar price. It can be challenging to strike a balance between staying competitive and making an appropriate amount of money to cover costs.
Have you hired a friend to help you package your products? Are you renting out a commercial kitchen? As you price your products, think beyond food costs. Common overhead costs for cottage cooks include (but are not limited to):
Licensing fees: If your state requires a kitchen license, what fees are associated with it?
Payroll: If you’re not working on your food business alone, budget for payroll.
Certifications and training: Does your state require food safety classes?
Insurance: Some states require that home cooks have liability or other types of insurance.
Marketing: If you plan to build a website, run ads, or promote your business in any way, do you have a budget?
Maybe you’ve built your culinary side hustle with a goal in mind: to buy a house, go on a special vacation, or simply to share the joy that cooking brings you. If your goals are related to money, what will it take to achieve them?
If you’ve calculated a certain dollar amount that you need to hit every month in order to stay profitable (which you should do if you haven’t already), work backwards to determine the amount of product you need to sell to hit that goal.
Parts of pricing are based on your gut feelings. If you think a product is priced too high, test out your pricing with a few customers and adjust course accordingly. After all: you’re the boss and have the freedom to experiment with pricing.
At the end of the day, you need to take your food costs, supplies and overhead into consideration when pricing your products. Remember: small costs add up. It’s key to know what your market is willing to pay — and to price accordingly.
What do you want to know about building your food business? Drop us a line and we might answer your question in a future post.