Costing For Medium-Sized Bakeries And Pricing FAQ’s

Pricing bread in a medium sized bakery
Published on
02 January 2021
Gareth Busby
Gareth Busby

When I wrote the standard bread costing formula to keep things simple, I omitted a few costs as they add little value to a small bakery set-up. If you’re reading this you should be looking to scale big or (at least) looking to get tighter control of your expenses. Using this bread costing formula introduces previously unspoken expenses to provide improved accuracy to my original article. If you’ve not read it, this article won’t make much sense, so go back and read it first!

Why costing larger bakery operations is more complicated

There are of course extra costs in running large scale operations. These costs need to be identified and controlled to ensure you have a profitable bakery business. Also, with more accuracy in your product costs, the more potential you have for passing on the value to your customers or money in your back pocket (depending on your approach!).

Aside from including extra expenses, the biggest change is that the oven cost is calculated by the length of time the bread is in, as opposed to an average cost. I’ll show you how it works in a moment.

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Full bread costing formula

Here’s the detailed costing spreadsheet for bakeries I use to work out what price to sell bread. Using the same example as last time, I have a small bakery and plan to sell 80 bread products a day, delivering to 8 local businesses. We are going to work out how much I should charge for the same white farmhouse loaf and see if we see a difference in price compared to the previous calculation.

Here’s the full costing spreadsheet for large operations

Direct costs:   
 Ingredients 0.59
 Production 0.17
 Oven 0.26
    
Cost of production: 1.02 
    
Supply costs:   
 Distribution 0.34
    
    
Cost of supply: 0.34 
    
Monthly fixed costs:   
    
 Packaging 10
 Rent 340
 Business rates 0
 Utilities 0
 Equipment 86.11
 Insurance 18
 Cleaning & sundries 10
 Finance 51
 Management wage 100
 Marketing 0
 Accounting 13
 Maintenance 20
    
Total monthly fixed costs: 648.11 
    
Estimated production quantity 1248 
Average fixed costs per bread 0.52 
    
Total costs  1.88
    
 70 % profit 1.31
    
Selling price  3.19

Sorry to be a spoiler, but the basic costing formula produced a selling price was £2.70, this increased to £3.19 using this strategy.

Change #1 -Include more expenses in “fixed costs”

Considering more expenses in the costing increases the expected sale price of your products. This can be a little scary but it means you are protecting your business in the long term. Many businesses don’t do this, then they get a leaky roof and close down. The owners will have lost everything because they didn’t generate enough profit. For long term success, a “rainy day” pot should be established and every potential cost should be considered.

Here are some fixed costs that I didn’t mention in the standard costing method. These extra costs should be considered if running (or planning to expand into) a large bakery format. There may be plenty more to consider depending on your situation. If there’s any that I’ve missed let me know in the comments below!

Management & admin costs

Managing people and the day-to-day paperwork of a business takes time or if you hire someone, money. In a lean start-up, you might do the bulk of this sort of work yourself initially, otherwise outsourcing experts or building your own team will be necessary to complete these tasks.

Either way, you will have to incorporate these expenses into your monthly fixed costs.

Common expenses include:

  • Invoicing
  • Marketing
  • Sales/lead generation
  • Accountancy/books
  • H & S checks
  • Recruitment
  • HR

If all this side of business management is done yourself there should still be a cost accounted for. As you grow you’ll likely look to hire someone to do these tasks for you. Therefore it’s best to include a charge for your time whenever you offer a price.

Here I’m going to take a £100 monthly management wage (all my roles will add up to a decent wage). I’ll spend around 2 hours a week on this side of the business to start with. As the business grows there will be more time spent managing which will see this monthly cost increase.

You could break down the weekly tasks and multiply them by an hourly rate as we did in the production and supply tasks if you want a more accurate cost.

Marketing

social media marketing

To get sales you need to let people know you’re around. A typical marketing budget is 30% of the sales, yet bakery margins are generally too tight for this amount of investment. Customers tend to buy because of the price, quality or place instead of a promotion or branding campaign.

As bread prices are so competitive it’s hard to justify investing much in marketing. You might want to invest when you launch a bakery business. This should be classed as a start-up cost and not as a regular outgoing so excluded from this costing method. Many small bakeries use local social media groups to promote their business for free. If you choose to use regular paid marketing, enter it here.

Accounting

If you are going to hire an accountant to run your books you should figure in the yearly total for their work and divide it by 12 for a monthly figure. Accountants do the majority of their work at the end of the financial year but it’s best to cost monthly and reserve some cash to pay them.

Accounting software is commonly used in modern businesses. For small businesses, a simple spreadsheet is fine. But as your accounts get busier, spreadsheets tend to slow down to the point they are painful to use. In this case, get yourself an online solution such as Quickbooks. Being able to input the data online into software saves you money by paying for data entry and provides you with an up to date figure on your financials.

Maintenance

Bakery machinery will break every now and again. Newer equipment is obviously less prone than older ones, so you should adjust your budget accordingly. Even if you have no expected faults budget for some money each month in case something happens. If nothing breaks, save it in a rainy day fund for when it does! If transporting your bread you should include an expense here for servicing and maintaining the vehicle/s.

Change #2 -Making the oven a cost of production

Including the electricity cost with the other utility bills gives us a set “oven cost”. This is great for simplicity, but not for accuracy between products. For bigger operations, higher accuracy in our expenses enables us to make better decisions and ensure profitability is maintained.

When running a bakery at full capacity, bread that takes 15 minutes to bake is a lot more convenient and profitable than loaves that take 45. Not only can more quick-to-make loaves of bread be produced but it’s easier to manage proofing and prevent bottle-necking at the ovens.

Then there is the how many items can fit in the oven question. When baking small rolls you can fit a lot more in the oven compared to large bread. So we should be able to lower the cost of the bake to compensate.

How to charge for oven rent

Using your businesses electricity bill, work out how much it costs for electricity per day.

The oven is going to be the majority of the electrical expense,  any other use will be minimal in comparison and likely include mixers and other bakery related equipment anyway.

My electricity is £20 a day, I divide this by how many hours the oven is in use each day (6) and work out the cost per hour:

how to charge for the oven rent
20 / 6 = 3.33

To calculate the oven’s cost per minute, divide the hourly cost by 60.

3.33 / 60 = 0.6p

Multiply the cost per minute by the baking time.

0.6 x 35 = 1.94

Then divide by how many can be baked in the oven.

2.10 / 8 = 0.26

Cost of baking in the oven: 26p

Home bakers can only bake one or two at a time in a domestic oven which is many find it impossible to compete on price with the big boys! That said, your customers will expect high prices as a small batch producer. Many will be willing to pay a little extra regardless to get their hands on your fantastic loaves!

Change #3 -Employer costs

One thing a lot of new entrepreneurs fail to grasp until it’s too late is that a £12 per hour worker, costs your business more than £12. In the UK you’ll have to make an employee national insurance contributions for each of your taxable employees. This could be the case if you’re elsewhere too. Then there are holidays, sick pay, parental leave, uniform and other employee benefits that you might potentially have to pay out.

Check your local authority to find your employers tax rate and add a buffer to your hourly rates to compensate. You’re budget might increase up to an extra 20% on top of the advertised wage, including your own!

Change #4 -Your salary

It is best to cost a salary from the management & admin expenses. Even if you plan not to take a wage, you should cost this in. A profitable bakery business must begin with profitability. Your business plan may involve rapid growth over the first few years. If this is the case, include a high management wage from the start so your model will require a full-time manager to drive the business and manage the team.

An opportunity to learn more:

For more information on how to start a bakery business including marketing, writing your business plan, and building a team, you should take a look at the book that I wrote about my first bakery business.

It’s a great read and you’ll learn lots about how to run a bakery business, especially the mentality needed to be successful.

Frequently asked bread costing questions

Can I change the prices for creative price tiering?
Yes! I think that’s a great idea. Once you’ve calculated the cost for each bread you are welcome to add a bit of hierarchy to your range. To do this, you can increase the cost of the bread that you want to appear more premium. Also, you could reduce the price of another (providing it won’t be selling at a loss) to entice customers to make additional purchases or draw them in for the first time. This said it’s important that the costing is completed accurately beforehand so you are in control!
Can I round the prices up to be more attractive?
Of course. The costing formula is a guide and you should adjust your prices to the nearest 10p or £1. I’ve found that numbers ending in 99 should be left at the supermarkets as they look too “commercial” for local producers.
Are these the same figures that I could use for a business plan?
These figures can be a part of a business plan however, this exercise is about ensuring your products are selling at a profitable price. A business plan should have a cash flow plan which details your bills and what you expect the income to be. As it’s not possible to purchase the exact amount of ingredients or pay a worker for the exact amount of minutes needed each month (unless you’re very smart!). A separate cash flow plan is required.
Why charge for a driver or baker when I will do these things myself?
If you scale up your bakery business you will have to pay a driver and a baker to work for you. It is best to include these costs at the start, rather than put your prices up later on to absorb the cost. When you start you will receive the payment for your time and as you grow you can take earnings from the management wage and/or from the outstanding profit.
How do I pay myself as I grow my bakery business?
As you employ staff you will probably find that you will be baking with your team anyway. As you become more hands-off you will find your economies of scale reduces ingredient purchase costs, delivery costs (if the customers are close to each other), and the fixed costs will lower per item sold as you are selling more items. As you make savings in your costs you will be able to increase your management wage to compensate whilst selling the products at the same price.
How often should I review my products’ prices?
Prices of the ingredients can go up because of a bad harvest. They can also increase if the government introduces higher national minimum wage levels. You will also have to readjust supply costs and any changes in fixed costs. You might also be able to negotiate better prices from suppliers as your buying increases. Review your product’s pricing every 6 months in the first 2-3 years.
Do I calculate my selling price in units or package size?
The fixed cost mark up should be added to every product’s price. When selling products in batches like selling rolls in packs of 6, the cost is added to the total package sold. When calculating the total amount of units sold each month, the same products should be counted as packet sales and not individual units.
Why can’t I charge less when I start and increase if I get busy?
Price rises will annoy your customers and lead to a negative brand. If you test your market with one price and then increase it later down the line you will enter a new price tier. It’s the same reason Adidas have charged roughly the same amount for their products for years. A rise in price can alienate your previous customers. Whilst other people who previously considered your product as cheap (and maybe nasty) take a while to realise you are now a premium product with premium prices. Getting your price strategy right at the start of opening your bakery is crucial.
How to charge a more competitive price for my bread?
To reduce your costs to compete with the competition you will need to produce bread on a bigger scale. This requires better equipment that has a larger capacity. It is usually best to start small, gain experience, and build a team and business systems before making these investments. You can choose to lower the profit margin to say 40% but this is high risk and should be avoided unless you are sure that your business can afford it with the volume you are making. The marketplace is dominated by major players who’ll be able to outprice you. It’s usually best to focus on producing quality products for a good price. Click to download a copy of the costing spreadsheet.
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