BY NOW, YOU REALIZE THAT THERE’S A LOT MORE to a food product than the product itself. Sure, it has to taste great, but plenty of other factors determine whether customers will try your product and keep coming back for more. Pricing your product right can be a big part of the equation. It can be the difference, too, between actually making money and just having a hobby.
Before getting into the nitty-gritty of pricing your product, you’ll need to get some sense of what it may take to get your business off the ground from a financial perspective. Below is a breakdown of the three general types of business expenses we’ll cover in greater detail in the Business Management section:
• Start-up expenses: including local, state and federal licenses, registration fees, and utensils, pots or pans and kitchen equipment.
• Fixed expenses: while very limited, these could include a business telephone line, hosting cost for your website and domain name registration.
• Variable expenses: including ingredients, packaging, gas for delivery and rental fees for a booth or exhibitor table.
Unlike a food product company that produces their items in a commercial kitchen, licensed home kitchen or rented space in a licensed facility, your state’s cottage food law means you don’t have this expensive start-up or fixed overhead expense. However, because of your setup, you cannot deduct your utility costs (electricity or natural gas) or the use of your home kitchen as business expenses.
It’s perhaps one of the more vexing issues of our day: How much is time worth? While the never-ending debate rages on about the minimum wage and exorbitant CEO salaries, when it comes to considering the labor involved in producing your products, can you get away with charging enough for your products to pay yourself, too? Price your products too high and you may only sell a few; price them too low and you may not earn enough to reimburse yourself for the ingredients or cover your labor. Economists call this “elasticity of demand”: the relationship between price and quantity demanded of a product by customers. Your market feasibility study, covered in Chapter 9, will help you determine your product’s fair market value.
You may feel your hard work and skills are worth fifty dollars per hour when decorating a four-tier wedding cake that takes about twelve hours to make and deliver. But what if where you live the going rate for a wedding cake like this is only $350? This is far below your labor costs and other variable costs, including the high-quality ingredients you decided to use. If they’re just starting out, some CFOs may proceed anyway, looking to grow customers by referrals, grow volume and then, down the line, when they have a great reputation, raise prices to better reflect the costs and labor involved.
As explored previously, some of us define success beyond the merely financial. Maybe it’s about time for delicious, local and organic sourdough breads to be available where you live, but due to the realities of the economy, your customers are only willing to pay $2.50 per loaf. In cases like this, the joy of running your own business, making social connections and a host of other considerations can compensate you in ways cold hard cash may never. Plus, when the economy picks up, you can raise your prices with it; economists call this “relationship inflation”. In many cases, you may be forced to raise your prices because the costs of your ingredients are likewise increasing.
Now that you have an idea as to some of your business expenses and the tricky part of determining the value of your labor, you can start to think about how to price your product. Unfortunately, there’s no steadfast rule, guideline or principle for this.
There are, however, several ways to determine the end retail price for a food item sold directly to the public:
1. Parity Pricing
By far the easiest way to set the price for your product is to just sell it for a little more or a little less than a similar product already sold in your community. If the going rate for a dozen muffins from an area bakery is $17, then your price could be about the same if you adopt this approach. Once your customers taste the difference, most will choose your better-tasting muffins, prices being roughly the same.
This approach may hit a snag if you decide that your competition is the bakery department of a local supermarket, selling that same dozen muffins on special for $12 per dozen. It’s unlikely they use the same quality ingredients and probably don’t make them from scratch like you do. At this point, your product positioning, packaging and other marketing come into play, to differentiate your product and justify the higher price you’ll need to charge for it.
A mini chalk board sign provides an easy and attractive way to clearly communicate the price for your products. JOHN D. IVANKO
2. Cost-input Calculation
A far more accurate way to set your item price would be to review your food costs by ingredient, add them together, then multiply by three to six times to cover your labor, packaging, overhead like electric or gas use, and delivery. The higher multiplier would account for the quality of your ingredients and other personal variables, such as more difficult recipes to prepare or the venue you sell at charging a fee. To simplify this calculation, some CFOs just use the most expensive ingredients as a benchmark and go from there to calculate a fair retail price.
Because this approach to pricing your product is much more involved, a cost-input calculator is available via our book’s website (homemadeforsale.com).
While related to parity pricing, market-value pricing carefully considers where you’re selling your product. As we’ll see in the next chapter, the distribution of your items may dictate what you’re able to charge for them. Selling muffins at a weekly farmers’ market where other vendors are competing with baked goods and edibles may be very different from selling them at a holiday bazaar where you have the only baked-goods display and everyone is in a festive, shopping mood; the holiday bazaar should naturally lend itself to higher prices.
The more high-end or upscale the event or place, the more you can charge, because in most cases, your customers will not be as price sensitive as people browsing the aisles for a deal or special. Don’t underestimate the pricing power of attractive packaging. Dressing up your box with some ribbons and colorful fabric can reinforce your premium price.
Like buying stock in a company or investing in real estate, the price is determined by what someone is willing to pay. Your customer is always queen or king. If your product is priced too high, what you sell doesn’t match your target market’s aspirations or your packaging doesn’t reflect your positioning well enough, you may find yourself returning home with what you made. Decisions about ingredients, packaging and labeling play a direct role in determining the profitability of your product.
Never fear. Your market research and feasibility study will help you to better determine realistic pricing for your products. Don’t feel you should, or even have to, compete on price. In most cases, your products will be far superior to most of the competition already in the market where you live, because yours are homemade, fresh or custom ordered. Whatever you do, don’t pay people to buy your product because you are selling it for less than it is worth.
On the flip side, your products may be the only premium-priced items in the market, allowing you to command the top dollar from those customers eager to get their hands on something available nowhere else. Interestingly, there are people who, for various reasons, will only buy the most expensive item on a restaurant menu or at the jewelry store or winery. Justified or not, they equate quality with price. In marketing jargon, it’s called a “premium pricing strategy”, also called “skimming,” as in taking the cream off the top of a jar of milk. If you can back up such an approach with your great-tasting product, why not? It’s worked well for Apple, Tiffany and Tesla for their respective products.
Name: Jennifer Evans
Business: Cookies Plz (Fort Worth, TX)
Website: facebook.com/CookiesPlz
Products: decorated sugar cookies
Sales Venue: direct delivery of special orders via telephone, text and e-mail; custom orders
Annual Sales: $5,100
Jennifer Evans decorating her star cookies using a piping bag. COURTESY OF COOKIES PLZ
Custom Cookie Favors at a Premium
If the artist Vincent van Gogh came back in contemporary cottage food times and baked, he undoubtedly would be Jennifer Evans. A self-taught cookie artist, Evans blends sugar cookie shapes with vivid frosting colors and design techniques to create decorative cookies that look so much like mini works of art that you almost consider not eating them. Until you do. And then, as her loyal customers attest, you’ll just order another batch. From personalized pink pajama-shaped cookies for preteen girl sleepovers to multiple variations on Valentine’s Day hearts, Cookies Plz provides Evans with a rainbow-inspired palette of creative outlets and income opportunities.
Evans’ underlying success in starting Cookies Plz lies in her ability to connect the dots when it comes to business opportunity. By creating a niche business that targets those wanting — and willing to pay a premium for — unique, vibrantly colored cookies customized perfectly for their special occasion, Evans takes full advantage of her cottage food law to make money and have fun operating from the comfort of her family-centered home.
“No other job beats making cookies at night in my kitchen in my pajamas with a glass of wine,” shares Evans in her warm Texas drawl. When a neighbor brought over decorated sugar cookies and shared her recipe, Evans saw an opportunity. “That neighbor’s cookie delivery happened in February 2011, and our cottage food law in Texas took effect in September. It gave me a few months to practice.” Her motivation to start the business came from wanting to showcase her cookie-making talents while making a little money on the side. Evans focuses on creating thick and sturdy cookies in custom shapes and themes and topped with colorful royal icing that dries solid and smooth.
“My first cookies were outright ugly, but friends and family encouraged me to keep at it,” admits Evans. She found a supportive and helpful “cookie community” both online and in her local community of other Texas home bakers. Evans found a great resource in “The Sweet Adventures of Sugarbelle” blog (sweetsugarbelle.com), including a sample cookie pricing chart that serves as an industry standard in the home-baked sugar cookie market. “If someone wants to order my cookies and they live too far for me to deliver, I refer them to someone I know closer to them. These bakers do the same for me. Cookie bakers are super-collaborative.”
“It’s important to know your strengths and weaknesses. I am definitely not an artist,” Evans says. Looking at her cookies, though, you’d beg to differ.
Turns out you don’t need to be an artist to lend an artistic touch to craft cookies. Say hello to Kopykake (kopykake.com), a nifty specialized projector that projects any image downward so it can be easily traced onto cakes and cookies or any other material. The light (and thereby heat) is on the top so the tracing process won’t melt the icing. “I spent over three hundred dollars on my Kopykake, a big purchase for me, but I saw it as an investment. I can justify buying professional-grade items because I’m running a business and not just a kitchen hobby.”
The core customers for Cookies Plz come from upscale families with disposable income looking to buy one-of-a-kind, personalized favors for a party or an event. Her cookies garner an amazing reaction due to their unique designs accompanied by eye-catching colors. “Competitive soccer moms make up my most loyal customers. They love ordering cookies in their kid’s team colors and personalized with each child’s name and number,” adds Evans. “Rather than pay three dollars for a plastic party favor or some candy, folks like to order customized cookies made just for their event.” Baby showers, themed birthday parties and weddings serve as potential markets for cookie favors.
Her on-the-go soccer moms often send orders by text from their smartphones. Evans confirms details via text, then sends a PayPal “request for payment” a week before pickup.
“My minimum order is three dozen cookies. I’ve learned it just isn’t worth my time to take out my mixer and supplies for anything less than that,” shares Evans. Her prices range from $1.75 for a small, basic cookie, which would be her simple shapes like basketballs, baseballs or diplomas with a maximum of three colors in addition to black and white. Personalization or monograms cost an extra 25 cents per cookie. She charges up to seven dollars for an extra-large, elaborately decorated version which involves lots of colors and details that require multiple drying steps or labor-intensive techniques like brush embroidery or quilting.
“Another equipment investment I made is a heat sealer. It allows me to seal a plastic bag around my cookie,” says Evans. “People buying cookies as favors like this. With the sealed plastic wrap, these cookies look like they came from a large, professional bakery. Plus the wrap increases shelf life by keeping my cookies fresher longer, so I don’t have to make them all the day before.” The heat-seal bag also helps protect the cookies when customers transport them home.
Time management is a priority for Evans. Her family and young kids remain the top priority. “I require folks to pick up their orders, which saves me a lot of time driving and delivering. Plus the moms who buy my cookies are often out and about anyway so another stop doesn’t phase them,” explains Evans. She aims to limit herself to one cookie order a week to keep her family time in check. She homeschools her daughters and makes the cookies after the kids go to bed. “I turned down three Valentine’s Day orders in February, but I’ve learned it’s better to do that and keep things manageable and fun.”
Set up as a sole proprietorship, Cookies Plz generated more than $5,100 in sales last year, with approximately $4,500 in expenses. “I made equipment investments last year. My biggest challenge with managing my expenses is deciding where to invest my money. Do I want to be able to further my business by attending expensive classes and buying equipment or do I use the money for what I really started my business for, which is supplementing our income? Plus ingredients keep increasing in cost. But I’m learning to manage things better as I go and keep evaluating my pricing to make sure payments reflect my inputs,” sums up Evans.
“With cookies like these, I’ve realized folks are willing to pay a premium for something awesome and different. That’s where I deliver.”
While we touched on the value of your labor and some of your fixed startup costs, where you can cut corners without impacting the quality of your product may be with your packaging and the ingredients themselves.
Slashing Ingredient Costs
There’s nothing like sourcing some of your ingredients from your own gardens or growing fields. From pumpkin for muffins, raspberries for preserves and cucumbers for pickles, using your own ingredients (if your state’s law allows it) can cut your variable costs considerably.
If that’s not feasible, bulk up. Don’t overlook ways to buy bulk ingredients at prices just over wholesale through a food cooperative or buying club. Food cooperatives are member-owned grocery stores that specialize in more health-conscious food options. Membership fees are nominal and give you access to discounted pricing and better sourcing options with a focus on local and sustainable agricultural products and specialty foods. Food co-ops often have bulk aisles; they can special-order a fifty-pound bag of flour or sugar for you, often at an additional discount.
Securing a bushel of pear “seconds” from a local farm can be a great way to cut variable food costs. JOHN D. IVANKO
If you don’t have a food cooperative where you live, check and see if there might be a buying club that offers similar options. A buying club allows a group of people to collectively place an order with a distributor. Because of the volume, the distributor can offer wholesale pricing. Other options include United Natural Foods (unfi.com), a food wholesaler, or a food distributor that specifically serves food businesses in your community.
Don’t rule out supermarkets. Some chains, like Whole Foods Market, offer a bulk aisle and may be able to order a full bulk bag for you. Warehouse clubs may also be an option for large case-size packs of key ingredients; increasingly some warehouse clubs, such as Costco, sell large bulk bags and even organic items.
Another way to cut down on your ingredient costs is by purchasing “seconds” or overstocks directly from area farmers. You don’t need perfect tomatoes to make salsa; a box with a few blemishes you can cut around will work fine. This works great if you’re into producing preserves, marmalades, salsas or pickles. Some of these farms might end up partnering with you by helping you sell your value-added products to their customers (if allowed by your cottage food law).
Penny Pinching on Packaging and Kitchen Supplies
The cost for various packing materials can add up, reducing your profit per item. So why not try to locate some of the materials you might need that may cost you little to nothing? The following short list offers several ways to locate packaging, kitchen supplies and other items at prices much less than full retail.
Co-author Lisa Kivirist with one of her fresh strawberries harvested from her organic growing fields. Always remember to eat the strawberry. JOHN D. IVANKO
Craigslist: craigslist.org
This classified online portal can reveal a wide assortment of items relatively close to home at bargain basement prices. It does require a time commitment to check the postings, but if you decide you need a stainless steel counter, you may find one for sale in town.
Freecycle: freecycle.org
A penny saved is a penny earned. Look to your community for items you might need for your business, without paying a cent for them. This online portal for your city or region allows you to post items you either need or want to get rid of. No money changes hands; everything is free. We load up on our canning jars this way.
Ebay: ebay.com
It’s the most popular online auction site in North America. If it has ever been produced, it’s probably listed here, sometimes at a price so cheap you wonder why someone would even go through the effort of listing it. If you’re lucky, you might find odd lots of boxes, baskets and a dizzying array of items you can use in your packaging or kitchen.
Etsy: etsy.com
An e-commerce website featuring handmade craft items and supplies. It can also be a place for packaging design ideas or, if your cottage food law allows it, online mail-order sales.
Don’t underestimate your local thrift store for attractive baskets, containers, boxes, ribbon or other packaging materials for pennies on the dollar.
Your pricing may also need to account for any promotional costs and food samples given away at events. But as we cover in the next chapter, most cottage food enterprises will launch without the need to spend much on promotion.