As a baker who wants to start, or if you have already started, a small baking business; it’s important to understand why costing and pricing is a very important aspect of your business.
Many bakers will start small baking businesses and they will estimate the prices of their baked goods. Some will even price based on how other large bakeries are pricing their cakes. This is a very big mistake and could cost you your business. The best thing to do before pricing your baked goods is to find out how much it actually costs to bake them. With that information, you will be able to set a price for your cakes and pastries, accurately. Today, I want to highlight why it’s important to cost properly for those bakers who may not quite get what the fuss is all about when it comes to costing.
You will make a profit in your business
The main reason why costing properly is very important, is because if you do it well, you will make a profit in your business. This will help your business grow and prosper. If you don’t make a profit, it’s inevitable that you will end up closing your baking business over time. Now I’m very sure that all of us who start small baking businesses want to make profits and have our businesses grow. This means that in order to do so, you have to make sure you’re costing the products you’re selling accurately. BOTTOM LINE: Do your costing well in order to make money in your business.
You will be able to know where to reduce your costs & expenses
Another very important reason why it helps to cost properly is the fact that you will realize where you can improve and reduce your expenses. When costing your baked goods, you have to include the costs of running your bakery e.g. rent, utilities, labor, etc. As you find out the actual cost of producing your cakes. You’re able to pinpoint certain expenses in your baking business that can be reduced. Over time, this will help you reduce your overall costs of producing your cakes, which means more profit for you. An example of this is a baker who buys wheat flour from a supermarket at a retail price; once they discover that their cost of ingredients is a bit high, the baker can choose to start buying in bulk from a wholesale shop. This will reduce the costs of ingredients for making their cakes which will mean that the baker can make more profit from the cakes. BOTTOM LINE: Streamline and reduce your costs in your baking business; this will help in your costing.
You will know how to give discounts and offers without making a loss
As business owners, we are aware that giving offers and discounts periodically will help in marketing our small baking business as well as increase our sales. One aspect that bakers don’t consider while having their discounts and offers is how low to price. To give you an example: if it costs 1,300/- to produce your 1Kg Vanilla Cake and your regular selling price is Kshs. 1,800, you should be able to know how low you can sell that Vanilla cake when you’re having a sale. You can choose to sell it at Kshs. 1,500 and work on selling a lot of them in order to still get your profit due to high quantity (e.g. 100 cakes x 200/- profit = Kshs. 20,000) If you’re a baker who isn’t quite aware of the cost of making the cake; you may choose to give an offer of Kshs. 1,000 per Kg. What you don’t realize is that you will be making a loss, e.g. (100 cakes x -300/- loss = -Kshs.30,000). As much as we want to build our bakery brands, no one wants to do it at a loss. You won’t get very far with this strategy. BOTTOM LINE: Cost properly and know your price thresholds and limits when it comes to giving discounts.
I hope this has put into perspective the importance of costing the right way. It will greatly improve your business and help you not only make a profit, but grow your business over time.
If you feel that you need more insight into costing and pricing; click on this link to see more details on our E-book on pricing.
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