So you’ve landed on a new food product that people love. You perfected your recipe and figured out how to package and ship your products to customers near and far. Congrats!
It sounds like you’re ready to start selling your line, but… how do you decide how much to charge? Setting the right price for your products is crucial to laying a sustainable and successful foundation for your business. Price your products too low, and you may run your business at a loss; price them too high, and it may be difficult to reach a broad enough audience to achieve the right volume.
1) Find the break-even price for each of your products
Determining the break-even price—the cost of producing, storing and packaging a product—for each of your items is the first step to setting the right retail price. One friend of ours, a cook explains, “Before I understood the actual cost of making my pitas and cookies, I sort of stuck my thumb in the air and charged what I thought people were willing to pay. My goods were selling like proverbial hot-cakes, but it wasn’t until I sat down and looked at my costs that realized I was undercutting myself.“
To arrive at your break-even price, use the following equation:
Break-even price = Cost of Goods + Overhead Costs + Labor
Your Cost of Goods (also known as COGS) includes all of the ingredients that go into making your product and any materials you use to package and store it. Overhead costs account for things like the commercial kitchen space, insurance premiums, or web-hosting fees. Labor should be calculated as the hourly rate multiplied by the time it takes you or anyone who works with you to make that product.
“Don’t forget about your own labor!” our friend said. “Early on, I didn’t account for the hours I spent actually making my goods. Without factoring in those hours as an expense, I wasn’t properly compensating myself for the work, and that made it impossible for me to bring on staff to help.”
After running the numbers on her Cookies, she determined her break-even cost for each one was $1.00.
2) Set the mark-up that’s right for your business
Once you have a clear picture of the actual cost of making your products, the next step is to determine the right mark-up—the difference between your break-even price and your retail price.
If you plan to sell your products in retail locations, like grocery stores, boutiques, or cafes, you must factor in a mark-up to the end customer that’s four times your break-even cost. A four-fold increase in price may sound like a lot! But let’s break that down:
In order to make a profit, your mark-up should be at least 2x your break-even cost. In the case of our friend’s Cookies, that means she needs to sell each cookie for $2.00 to her wholesale customers (since each one costs her $1.00 to make), who will in turn sell them to their patrons for $4.00 each.
Suggested Retail Price = Break-even Cost x Wholesale Mark-up (2) x Retail Mark-up (2)
If Zoe plans to sell her cookie both online and in stores, she should set the retail price of her cookie at $4.00 across all selling channels. Even if you don’t currently sell your product to wholesale customers, consider a future in which you may decide to, and ensure your pricing will enable you to do that.
3) Understand the competition
Once you have a clear understanding of your costs and the mark-up that’s right for your business, do some research on the competition. What are your competitors charging for similar products?
“It might sound clichéd, but you need to know your competition.” Research at least three other independent brands your customers might be buying from already. How does your product fit in? If it’s far below your competitors’ pricing, you may have room to raise your retail prices. If it’s far above your competitors, are there ways to bring some of your costs down or clearly communicate to your customers the superior quality that’s baked into your prices? [Learn more about branding on a budget.]
“Once I had a better picture of my costs, it was clear I had to raise my prices. I was afraid I’d lose customers, but after studying my peers and seeing the ways in which what I had to offer was really novel—I felt confident to do it,” she explains.
How are things going? “Business is thriving! My customers have stuck with me, and I’m gaining new ones every day. It feels like I’m on a solid footing and able to plan for an exciting future.”