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Most cottage bakers and chefs got into the business because of their love for creating food — not for the love of business administration. But, as your kitchen venture grows from friends and family to a true business, you’ll need to spend some time calculating how to price a product so you’re actually making a profit.
Unfortunately, there is no one selling price formula. But there are some basic principles you can follow to get started. And remember — your prices aren’t set in stone! You can (and should) change your prices to match your level of experience as your business grows.
The first rule of all pricing models is that you should have a good handle on your cost of goods. How much did the flour and eggs cost? Did you buy specialty equipment just for this recipe? Price it down to the last 1/8 teaspoon of salt and then divide that cost out per serving. Don’t forget to include items like:
Next, you should take the time you spent on the recipe into account. Did it take you 30 minutes or five hours? That should be reflected in the price! You can determine this by calculating how much you want to be paid per hour and multiplying it by how long you spent creating this food. You should be paying yourself at least minimum wage, so be sure to look that up for your state as a baseline.
You can also use a pricing calculator to help you determine the cost of your goods and services. Some calculators only take into account the cost of goods. More sophisticated calculators will take into account items like your time and the amount of markup or profit you’re looking for. When it comes to pricing of services methods, there are several “soft costs” you should be including in your expenses. We’ll cover those in more detail below.
Whether you use a product pricing calculator app or work it out on paper, learning how to calculate selling price per unit is critical to the long-term success of your business. Luckily, when you’re looking for a product pricing calculator, there are dozens of options online.
You can even find a profit calculator that helps you determine profit margins for different types of selling situations, including retail and wholesale.
There are a lot of pricing formulas that you can play around with while you’re learning how to calculate cost/price of a product. Just make sure that you’re using a formula or pricing calculator that was created with homemade and craft items (food-based, if possible) specifically in mind.
One of the most commonly used formulas for home-baked goods is:
(Base production cost x Markup) + labor + overhead + seller fees = your product price
If doing it on paper is making your head hurt, here are a few product pricing calculators and apps that might help:
You can also try the product pricing calculator Excel created. This particular template is nice because you can keep a running history of your pricing models and tweak the formulas to suit your exact circumstances.
No matter which you end up using, your sales price calculator should take into consideration:
Really advanced calculators may also take into consideration things like:
If not, you may want to calculate those in as well--especially if they are recurring costs as opposed to one-time set-up fees.
While there is no one product pricing formula that works best for every food entrepreneur, there are some basic considerations that apply to every food startup when you’re learning how to calculate selling price of a product.
Here are some basic formulas to help you find the numbers you need to plug into your product pricing worksheet.
Material Costs + Labor Costs + Shipping/Postage + Marketplace Fees + Miscellaneous Expenses = Base Production Cost
Base Production Cost x Markup = Profit Margin
Profit Margin + Base Production Cost = Product Price
Whether you use this basic method or you learn how to calculate selling price in Excel, once you have your numbers, what’s next?
Next is evaluating the price of making, selling, and distributing your food in light of other important factors. For instance, if your product price comes out of the item price calculator much lower or higher than expected, examine that more closely.
Maybe caramels are surprisingly profitable for you, while jams and jellies are barely being sold for what you put into them. Figuring out pricing can lead you towards major shifts in how you advertise and what you end up offering in the future.
You’ll also want to take into consideration your competition. What are other bakers charging for their goods? How does the quality of your food compare to theirs? Should you charge more than that and frame yourself as a “boutique” experience? Or should you charge less to appeal to the bargain-hunting crowd?
And even once you’ve done all the work of learning how to calculate selling price in accounting and actually set your prices, there is no guarantee that anyone will buy your goods at those prices. Make sure you’re also factoring in:
Pricing Strategy Excel template - (Free)
Pricing Model Methods - (Mostly Paid)
Calculating Market Saturation - (Free)
In the world of retail, consumers have a preconceived perception of what things should cost. Before we pluck something off the shelf, we already have a price range in mind that is influencing our decisions. Supermarkets often price their products to accommodate these ranges.
Cottage food businesses and food entrepreneurs often have to charge outside of these ranges to justify the production of their products. This happens for a variety of reasons, but they are all centered around the inefficiencies of small-scale food production. Your costs are higher per product than a chain bakery’s because you are not buying in bulk, you have no assembly line, and you don’t have any employees to help reduce prep time.
When you’re selling wholesale, you should generally markup your price around 20%. When you’re considering how to price a product for retail, that markup jumps to at least 50%. This happens because you also have to take into consideration the percentage that the store itself takes in return for selling your products.
If you’re selling to a grocery store, you’ll likely have a set number of products to sell to the grocery store each month and then they will sell those items at a higher markup to cover their shelving costs.
If you sell with a local coffee shop or boutique, you may work out a deal where they display your goods and if they are sold, then you get a cut of those sales on the back-end.
Either way, you have to include markup to cover the cost of distribution through a brick-and-mortar- retail store.
Markup is calculated by multiplying the purchase price by a percentage of increase. Here’s how to calculate selling price using markup:
Purchased Product Price x Percentage of Markup = Markup Amount
To determine your retail margin percentage, use this formula:
Retail Price - Cost / Retail Price = Retail Margin %
To determine your retail price, use this formula:
Wholesale Price / (1 - Markup Percentage) = Retail Price
To calculate your target cost price to maintain a certain percentage of profit margin, use this formula:
Wholesale Price x (1 - Wholesale Margin) = Target Cost Price
There are so many pricing strategies for new products. Consider these popular product pricing methods and retail pricing strategies when you’re figuring out how to charge your customers in a way that feels right for your business. We’ll share these pricing strategies with examples of how they apply to a culinary start-up.
This is the simplest method of pricing goods. You simply calculate your costs to ensure they are covered and then add markup. Generally, 20% for wholesale (out of your home, at the farmers market, etc.) and 50% for retail.
When considering pricing strategies business owners who are just starting out tend to use this model. It’s an excellent place for beginners to start--especially if they are running a very simple setup.
Competitive pricing is just what it sounds like--basing your prices on what your competition charges. This applies whether you decide to charge more or less.
If you live in an area that is saturated with similar businesses, you should look closely at your competitors’ pricing and discern how they came to that number. Do they use specialty or organic ingredients or special techniques that justify the cost?
If not, you may be able to undercut their prices. If they use the same ingredients you do, you may have to raise your prices to meet market expectations of quality. No matter how you use the information, you can see how competitive pricing informs your overall strategy
Pricing based on what the customer thinks your product is worth.
This is a pricing method that many cooks and bakers adopt later on in their careers. As you hit the limit of what you’re able to produce and your product is still in high demand, you can charge more for it because the perceived value skyrockets.
If you only make 16 pies a week and people are obsessed with your pies, you can basically set your own price. Start charging more until you hit the threshold where sales start to flat-line.
To figure out how to price a food product, you can use a craft pricing spreadsheet, a food cost calculator app, or a food pricing calculator. Use the formulas above, or try some of these helpful tools:
The easiest way to calculate your cost per serving is to calculate your cost per recipe first. Just add up the cost of all of your ingredients (the bag of flour, the carton of eggs, etc.). Then, divide by how much goes into each recipe (three eggs, a cup of flour, etc.).
Once you have the cost of the recipe, just divide by the number of servings you produce and you have a basic cost price of each cookie, muffin, and scone! When you’re learning how to price food, this is the easiest method with which to start.
If you package your food, don’t forget to take into account the price of the packaging! Any boxes, cellophane bags, ribbon, bag ties, labels, stickers, jars, decorations, sticks, handles, etc. need to be priced out and accounted for.
Just add up the cost of each product you bought and then divide by how many you use for each serving to figure out how much needs to be added to the price.
So if you paid 20 dollars for 100 cellophane cookie bags and you use one per serving, that would be an extra 20 cents added to the final price.
Make sure you’re tracking all of these things to remain profitable:
Remember, even though this may be overwhelming now, just start with cost-based pricing and evolve your strategy from there! All food entrepreneurs learn as they grow.
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