As a cottage cook or an entrepreneur starting or running your own food business, it’s helpful to make sure you actually turn a profit! Many cooks and chefs start their business with a deep need to provide delicious sustenance to others, but you can only reach the mouths and stomachs of a wider audience if your business stays viable.
Cottage food laws are one hurdle to overcome, but pricing your home-based or cottage food business goods is another. Cook Amy Padilla, of Austin, TX, knows the challenge well. After winning the Best Chocolate Cupcake in Austin Award, she wanted to grow her business, but the rent was going to cost her around $25 an hour. She had to quickly figure out how to make her cupcakes and sell them without going under before she even got started.
Fortunately, Padilla found success. She opened Bellissimo Bakery and now serves thousands of people hand-decorated cakes and homemade cupcakes every month. Her sales grew through the pandemic and she expects a 50% increase in sales this year.
The following article will give you some specific tools to use to price your food products accurately. You’ll learn the importance of menu pricing, how to calculate the cost price from the selling price and how to mark-up your goods for a profit, how to cost for recipes, food mark-up percentages, and the best food cost calculator software, so you don’t have to crunch these numbers with a pencil on the back of a recipe book, scratching your head in confusion.
We’ll take all the guesswork out of correct food pricing so that you can do what you love best - cook delicious foods from your home or rented kitchen and reach the most people while you do it.
Before you start to cook, you’ll need a solid menu pricing strategy. Setting your menu prices right can have a huge impact on profit margins, and even a 1% difference in food costs overall can eat into your profits.
Knowing the true costs of each dish can help make sure you maximize profits. By utilizing a selling price calculator, markup price calculator, and menu pricing formula, you'll know exactly what your profit margin is.
Step 1: List every ingredient for each dish. It can be easier to use an excel spreadsheet, table, or food ingredient software to come up with a comprehensive list. Don't forget spices, oils, and other items used to create a dish.
Step 2: Calculate the total cost based on the ingredients used for each dish.
Step 3: Calculate the cost per meal based on the ingredients used for each item presented.
Step 4: Calculate which dishes account for the total percentage of your food costs (Are there any ingredient substitutions you can make to maintain the dish’s flavor while increasing your profit margins?)
Step 5: Determine your food cost target (What you’re willing to pay for each dish to make it consistently.)
You now have a menu pricing formula that you know will keep you profitable for every menu item you serve. Once you know the true cost, you can calculate your markup price using a calculator - apply a 5%, 10%, 50% markup as necessary. It may sound remarkable, but average restaurant food markups hover around 300% compared to wholesale costs to keep food companies profitable.
The reason for this markup is that you still have to figure in costs for labor (your own and anyone you hire to help need all that dough), rent, utilities, packaging, marketing, administering, and delivery transportation if that’s something you offer your customers.
You might, for example, be able to source fresh produce from a local farm in order to reduce costs for eggs, honey, milk, cheese, veggies, and spices, or buy in bulk to lower your menu item pricing.
There are food cost formula PDFs available online as a resource.
This chart shows a great analysis of the distribution of costs in relation to your net food markup:
A food pricing calculator in addition to a food markup calculator can be invaluable when trying to come up with a profitable plan to sell your cottage goods.
There are many free resources for food pricing online. Cottage bakers and food makers can utilize these resources:
Small businesses and cottage ships can’t usually compete with huge profit margins available to massive manufacturers with ways to cut corners and costs simply because of the volume of food they produce. However, you can use a food profit margin calculator to guarantee at least 30% profits to stay in the black on your balance sheets. The problem with calculating a true profit margin is that there are so many changing variables, like:
Using a database or software that allows real-time manipulation of these different variables can make it easy for you to track your profit margins. Every grocery store trip can be accompanied by a grocery markup calculator, too, so that while you’re shopping for a new menu item’s ingredients, you’ll know if it can still be profitable. Knowing your profit margins can add to your creative inspiration for new dishes, rather than keep you up all night wondering if you can make any money.
The best food mark-up practices can be challenging to master, but once you do, it will be worth it so that your cottage business can experience real financial success and sustainable growth. There’s no point in making a killing one month, only to find that the following month you work just as hard and barely make a profit because a food ingredient just doubled in price, your labor costs unexpectedly went up, or in the worst-case scenario, a food ingredient you need for a favorite dish of your most avid customers is no longer available!
Calculating menu item and food costs are imperative for knowing your needed markup.
Now that you know how to calculate food costs for a single recipe, you’ll need to figure out how to price each menu time for sale. To calculate markup, you’ll need a margin of error, and remember that retail food markup percentages vary based on your industry and location. You'll also want to consider changing your profit margin for direct-to-consumer and wholesale food pricing.
According to small business service Chron, the average cottage retail food industry markup is 60%. Industry-standard markup percentages vary across types of food service, with restaurants having much larger markups than cottage food makers, home bakers, or people who bring their goods to a local farmer’s market.
To calculate markup for your menu items, you’ll figure out the ratio of gross profit to gross sales. For example, if you have an item on your menu that costs $4 to make, but you sell it for $8, you have a 50% markup for that food item.
You can determine the profit margin on food products that you need to maintain to keep your business viable. If you live in an area that is used to shopping at Whole Foods, Zingerman’s, or other specialty stores, then you can charge more.
If you live in Seattle, Washington, Queens, New York, or Anchorage, Alaska, people are used to paying up to 40% more for their food, so you should definitely consider hiking your prices because your profit margin on food products could potentially be higher.
If you’re lucky enough to get customers for your goods, which are fine delicatessens and luxury food shops, then you can charge a premium. You can find the top 75 most expensive luxury food shops here. Just take a gander at their menus, and you’ll notice the markup on food retail is sometimes in excess of 3000%! For example, Despana Brand sells a bone-in ham and a bottle of extra virgin olive oil for $200. Cavierhouse & Prunier out of Europe sells fish eggs for $50 a gram. The profit margin on restaurant food can be even higher.
On the other hand, if you live in a small town where the cost of living is lower than the national average, and you’re just trying to build a name for your brand, start with smaller profit margins. You can increase them over time as your goods become more popular and sought-after.
As a cottage chef or food entrepreneur with tools like a grocery markup calculator, a food cost calculator app or spreadsheet, and a food pricing calculator, you now know how to calculate markup and margin on your menu, how to calculate food costs for a specific recipe, the industry standard markup percentages, and how to keep your food business thriving.
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