When I opened my bakery I didn't know much about calculating the price of bread. Later, once I'd grasped a costing method I'd find out that we had been drastically under-charging! I ended up struggling to keep the business going as increasing my prices upset many of my customers!
I don't want you to make the same mistakes that I did - so follow this costing guide instead! Here, you'll find a robust costing formula and everything you'll need to know to set the right price for your bread!
The easiest way to calculate the price of bread
If you are looking for a quick way of calculating the price for your bread, take the cost of your ingredients and multiply by 5. This is a simplified calculation so I recommend that you read the whole article to calculate more accurate prices for your bread.
Before we begin with my costing formula...
To set expectations, I must admit that it has been very hard to write this article! People who read the previous versions all had different intentions. From selling a couple of loaves to neighbours to operating several vans a day.
After months of edits, re-writes and frustration I decided to include all of the details necessary for a small or home based bakery. If you have (or intend to have) a small bakery, you'll have fewer costs. If a cost doesn't apply to you, simply skip it. For larger bakeries after reading this post you should find reading the costing for medium-sized bakeries post helpful.
I prefer to include as many costs into costing as I can as this providers a more accurate price and ensure profitability. Although, I understand the motivation for selling bread for many of you can be more about having fun and sharing artisan bread with your local community than making lots of money.
Dough, not dough!
The costing spreadsheet
I've included a download to the costing spreadsheet that allows you to use this information to calculate your costs with ease.
Simplifying the formula
Though I'd love to simplify the costs in a kinda done-for-you solution, you'll have to do the calculations yourself. As this blog is read worldwide it's impossible to estimate a simple one-figure cost price. Feel free to share your findings in the comments at the bottom of the page.
P.S, Just a disclaimer that I will do everything I can to help you although I'm not a financial adviser and will take no liability for your business - though if it helps you can always buy me a coffee!
Should every loaf be costed individually?
Yes, every bread made in your range should be costed individually and have a separate cost price. The formula to do it is below and once you've worked out your fixed costs once, it's a doddle to do it again!
Ok, let's begin...
How to calculate the price of bread
The selling price of a loaf is calculated by using 4 pieces of information:
Production costs - Dependant on the ingredients and labour used for the individual bread
Supply costs - How much it costs for your customers to receive your bread
Fixed costs - The sum of non-variable costs divided by your sold products to give a cost "per-loaf"
Profit index - A predetermined multiplier that constitutes the profit margin of the loaf
The formula used to determine the price of bread
Using these we can find our selling price by first working out the cost price:
Production costs + Supply costs + Fixed costs = Cost price
Then multiplying it by the profit index to provide the selling price.
Cost price * 1.7 (profit index) = Selling price
The industry standard profit index is 1.7. This adds 70% to the cost price which builds a profit margin of roughly 41%. You can change the profit index to suit your business model better, but for this example we'll keep it at 70%.
How to calculate the production cost
In bread products, the cost of labour and ingredients used in production will change for each product. A higher investment in production incurs higher expense thus more complicated products should be sold at a higher price.
Ingredients + Production labour = Production cost
The cost of ingredients
The table below is a copy of what is on the first tab of the spreadsheet. If you haven't already downloaded it, click here.
You'll be able to enter ingredients in the first column, the purchase price of the packet bought in the second, and the size of the packet (in weight) in the third.
To calculate the cost of ingredients used in one bread, enter the amount of ingredients used in the fourth column. The ingredient cost is calculated by a simple formula to appear in the fifth column.
You can enter several rows of ingredients if you wish and enter what you use for each recipe. If it’s zero then it won’t add a cost to the bread.
The total cost for the ingredients is displayed at the bottom. In this example it's 59p.
|Ingredient||Purchase price (£'s)||Sold quantity (grams)||Weight used (grams)||Ingredient cost|
Cost of ingredients per loaf is 59p
With the cost of the ingredients determined, we now need to find how much the labour is going to cost to produce our bread. If you are the sole baker, still charge a standard bakers rate.
To discover the labour cost, first work out how long it takes to make a batch. Only include the the time spent actually working on the recipe. Don't include rest or proofing times as you will be able to attend other things. You should also include time for cleaning in each batch.
Then multiply the time spent, with the bakers per minute rate. Take the batch cost and divide by the number in the batch.
Here's how it works in this example:
White farmhouse bread labour cost
Batch size - 24 loaves
Weighing and mixing: 7
1 Stretch and fold: 1
Total 20 minutes
To calculate the cost:
Bakers rate @ £12 per hour
12 / 60 = 0.20 per minute
20 minutes * 20p = £4.00
Then divide by the batch size:
£4.00 / 24 = 17p
Cost of labour per loaf is 17p
Totalling up the production costs
Just add up the values of the ingredients and the labour used in the bread to find the total production cost.
Ingredients + Production labour = Production cost
0.59 + 0.17 = 76
Cost of production per loaf is 76p
The supply cost
Selling or delivering your products to your customers is going to cost time and/or money. There are two avenues you can go down to find this expense:
1) Selling in a shop environment:
To work out the cost of selling your product in a shop, we first work out how long a member of staff should take to process the sale of a product on average.
Included here is:
- Listening to the order
- Preparing it
- Taking payment
- Saying goodbye.
Staff wage @ £10 per hour
£10.00 / 60 = 16p
16p a minute for the length of the transaction.
16p x 1.5 = 24
Cost of supply is 24p
Once you have worked out this cost you can use it across the whole range of products - though charge extra for slicing or any other personalisations if you wish!
2) Distributing locally to businesses or residents
Another common way of servicing your local area is to have a delivery service. Delivering to people and businesses in conjunction with selling in a shop is a great way to improve sales. Though it is adding an extra service thus it must be correctly costed and "worked out".
If you deliver the products in a car or van you'll need to account for the driver's wage as well as the cost of running the vehicle.
If delivering small batches locally a simple costing solution is to copy! See how much Just Eat (or another food delivery service) charge in your area and incorporate it into your price. They've done the costing work for you!
Running a supply chain
In the UK, the mileage rate is currently 45p, in the US it is 58c.
There are two ways you can do this:
- Add the mileage cost from your daily round and the wage of a driver. Then divide the total cost by the number of customer drops and loaves delivered to get an average cost per bread.
- Directly expense the cost of the mileage and the driver's rate for each customer to find out how much it will cost to make the journey.
The second option is best if serving large orders that are a considerable distance away. The first is preferred for local operations. You'll also pick up more customers in close proximity which will drive down the cost.
In the example below I've found an average cost per loaf.
In this example, 8 drops take 1 hour in a 10 mile round trip.
Drivers rate @ £12 per hour
Mileage expense: 45p per mile
Driver rate p/h * time = Driver cost
12 * 1 = 12
Mileage: 0.45 * 10 = 4.50
Add the driver cost and the mileage expense:
12 + 4.5 = 16.5
Making a total daily cost of £16.50
Divided by 8 drops:
16.5 / 8 = 2.06
Cost of one delivery is £2.06
For an average order of 6 loaves:
2.06 / 8 = 0.34
Cost of distributing a loaf is 34p
If you're a bit confused I have a guide for calculating distribution costs in a new bakery.
Adding the distribution cost to the price
Once we've found how much it costs to distribute our bread we have to add it to the price somehow.
This can be done as a delivery fee where it's added to every order, or it can be factored (or hidden) in to the for sale price.
Should you add a delivery fee to your orders?
If selling one or two loaves per customer then adding a delivery fee is preferred. It shows transparency to the customer and encourages people to spend more where a "spend £x for reduced delivery" offers are used. Not doing so also adds quite a lot to the individual price!
Most business to business traders won't charge for delivery. Instead the distribution costs are included in the unit price. These prices can be negotiated down for bigger clients where economies of scale will produce better profitability margins.
It is wise to do a bit of research into the method your potential customers would be most comfortable with or how similar suppliers charge for delivery.
Production cost + Supply cost + Fixed cost = Cost price
Production cost = 76p
Supply cost = 34p
0.76 + 0.34 = 1.10
1.10 + Fixed costs = Cost price
We now have a running total cost of £1.10 for our bread. Now we incorporate the fixed costs to get the "cost" or "break-even" price.
Including fixed costs to the cost price
The fixed costs are expenses that remain roughly the same each month. They are still essential for your bakery business but not dependant on how much you produce. Costs such as rent, rates, basic supplies, ink for the printer, and WiFi are going to stay relatively the same.
Accountants will classify these as net expenses where in a business plan they will be. I include them here in the cost of the bread as the business must generate enough income to pay for them.
Formula used to calculate the fixed cost value
To find the fixed cost value we first find the monthly cost of each expense:
Equipment + Utilities + Insurance etc. = Monthly fixed costs
Then divide by how many loaves you'd expect to produce each month. This provides an average fixed cost per bread.
Monthly fixed costs / Monthly volume of bread = Fixed cost per bread
Let's look at where these fixed costs can arise...
Where fixed costs come from
The fixed costs are as simple (or complicated) as your business needs them to be. If you're selling a handful of loaves to your neighbours you might wonder why all the faff?
Some of these costs will be low in a small start-up. But if expansion is on the cards it's wise to consider them from the start. Many of these bills will be paid yearly or quarterly so work out how much they cost a month to obtain your monthly expense.
If this is a new business and you're not sure of the price, get quotes or estimate as close as you can.
Common fixed expenses:
- Business rates
- Management wage
- Cleaning, office costs & sundries
- Business loans/finance*
* Finance agreements are not a fixed cost in accounting terms but should be included in this costing forecast
More common costs are included in the advanced section of this formula.
The packaging expense is the cost of the packaging to wrap the bread in. You might see value in elaborate wrapping or using a professional stamp. Using expensive packaging can justify premium prices.
Action: Calculate the monthly packaging spend on the number of products produced.
This is the cost of the premises used to produce your bread. If working from a home kitchen you might want to charge a small amount for tax reasons. There is also an option where you rent part of your home and the utility bills to your business if that’s where you work/bake from. Take advice from as accountant for this!
Action: Calculate the monthly rent cost
Tax is paid to UK councils for the use of business premises. Bakeries that are small enough will receive business rates relief and not pay a thing.
If you bake at home you can tell your local council that you are using an area of your house for baking. This can reduce your household council tax bill or at least offset it for tax reasons.
Action: Determine monthly business rate expenditure if there is one
If your bakery premises is separate from your home it will have its own utility bills. If not you will have to estimate how much your utilities change when baking.
The electricity used when baking is going to add a lot to your bill so if you have a small set up you won't want to ignore this one. Even a rough estimated cost should be included. There is also wifi, water, and heating/air-con costs to consider.
Action: Calculate monthly utility costs
When investing in a piece of equipment for your bakery it should:
- Increase your efficiency (lowers production cost)
- Improve the quality of your product (you can charge a higher price)
- Be essential to produce a product (like an oven or a pastry sheeter)
Once you buy the equipment, you'll need to cost it in.
Take the value of all your bakery equipment and divide it by 36 months. That's 3 years to pay the equipment off. If you have a loan or equipment finance you cannot include both costs so ignore those items here.
Even if you've paid your equipment outright, you should still charge your customers for it. Any actual profit made from this charge can be saved and invested into new equipment later on if they break or for expansion.
Bannetons & utensils £250
+ pastry sheeter on finance £2000
3100 / 36 = 86.11
Monthly equipment cost £86.11
The £2000 pastry sheeter cost will appear later as a £51 a month finance cost
When it comes to product specific equipment you can cost it against the items they are to be used for. For example, the cost of a baguette roller could be added as a separate charge against baguettes. But, it's up to you.
Action: Calculate the monthly cost of your equipment
A business that sells food must have indemnity insurance. This will cover if someone gets ill after eating your products. It also usually covers employee liability so if you plan to make doughnuts with a deep fat fryer, the cover cost will increase.
If you are planning to deliver, vehicle insurance can be factored in here as well.
Action: Calculate how much insurance costs per month
Cleaning & sundries
A small section of your monthly costs but a necessary one. This includes the costs required for buying cleaning products, hiring external companies to clean vents etc. and replacing any worn equipment such as tea towels and bannetons.
The cleaning and sundries cost will be tiny in a home set up but runs into thousands in commercial kitchens.
Action: Calculate cleaning and sundries average monthly cost
Add any loans or finance taken out for your business to produce a monthly cost.
If you are using your own money, you should see a return on you investment. Typically this is over 3 or 5 years. Calculate what the monthly payment to yourself should be over 3 or 5 years and include it here. It's up to you whether you actually take this money or leave it in the business.
Action: Calculate loans and finance monthly costs
Adding fixed costs to the price of bread
Here in my example we've calculated the the amount of our monthly fixed costs.
Cleaning & sundries 10
8 customers * 6 average breads * 6 days trading =
Bread make per week is 288 units
Then, for how many we will sell in a year.
bread per week * weeks in a year = total bread per year
288 * 52 = 14976
Next, divide by 12 for the monthly total.
14976 / 12 = 1248
The fixed cost per bread
To get the fixed cost figure per loaf, divide the monthly fixed costs by the quantity of bread sold each month,
615.11 / 1248 = 0.49
The fixed cost per bread is 49p
Calculating the cost price
So we know have all of the information we need to produce our cost price! So let's get cracking! We're going to use the formula that I shared with you at the top of the page:
Production cost + Supply cost + Fixed cost = Cost price
In order to find the cost price in this example we enter the figures we have discovered:
Production cost = 76p
Supply cost = 34p
Fixed cost = 49p
0.76 + 0.34 + 0.49= 1.59
Our cost price to £1.59.
This is the price where we could sell bread all day and break even. But there's something missing - and that's profit!
How to prevent losing money with the Profit Index
You should probably start a business in order to make a profit. Not doing so is going to cause problems! Making a profit is the reward for your risk and time, but can support future expansion. Generating profit also acts as a buffer for extra costs or a sudden cash flow demand.
View the post on how to improve your bakeries profit to learn about unexpected costs and cost management in detail.
There is also tax to pay (if sales are high enough).
To cover these costs and protect from inefficiencies a buffer of 70% should be added to your selling price. To do this we use a profit index of 1.7.
How the profit index changes the price of the bread
Cost price x Profit index = Selling price
1.59 x 1.7 = 2.70
|70 % buffer||1.11|
Adding the 70% buffer means my beautiful bread should be sold for £2.70. I think it's a fair price considering the quality of the bread and the door to door delivery!
Increasing the profit margin for your bakery
You can choose to increase or lower the profit index if you wish. If you are certain of efficiency, can produce high volumes and are confident of a constant supply of orders; you can lower the buffer. Your buffer directly relates to your profit margin. As the buffer rises, as does your potential profit.
If you don't expect to sell high amounts, increasing the buffer could help your business grow!
How price is important for your brand
As a products price rises, expectations build for it. So if you increase the profit margin of your bread, it has to deserve it in the eyes of your customers. Also, consider what extra value you can add to your bread such as classy packaging, memberships or clever branding/marketing.
Lower prices lead people to believe the product will be low quality. Producing a low priced product which exceeds expectations can bring in customers in droves!
The standard bread costing table:
Here’s the full formula in a table. You will find a copy in the costing spreadsheet:
Cost of production:
|Cost of supply:||0.34|
Monthly fixed costs:
Cleaning & sundries
Total monthly fixed costs:
Estimated production quantity
Average fixed costs per bread
|70 % profit buffer||1.11|
Is that it for costing bread?
You may want to look at the costing bread in larger operations section where some more expenses are broken down. But if you just want a simple guide then yes, that's about it!
If you are expecting to grow your bakery business over the next couple of years you should also create a cash-flow forecast. Here further checks should be made on the profitability of the business. Run the sums if you are 30% busier than expected, then 30% quieter. Then try 50% and see if things stack up.
You might want to tweak your profit index to ensure the business generates enough profit to keep you motivated.