How To Price Bread to make profit
I can't lie, I had no idea how much to charge for a loaf of bread when I opened my first bakery. I had some dreams of "perceived value" and "loss leaders" etc but they were just dreams, in reality I had no clue.
Not knowing if you are charging the right amount for your product doesn't help anxiety levels. It is exceptionally stressful when you don't know your profit margins, especially in the early days. There are many things which you should be focusing on in a start up such as generating sales and building your brand.
I discovered this the hard way.
After a couple of months of trading and using my "finger in the air" technique of costing, I hooked up with a business mentor. My mentors advice for calculating my selling price was:
"Add all of the costs of production and add on 60% to get your price"
Like a good boy, I followed his guidance and adapted the shop prices to compensate.
"Good boy Gareth!"
And I found this generic strategy worked, but only to an extent.
When it came to my business making a profit, I still fell short.
I got a bit stuck with his costing method when it came to accurately charging for each product, it didn't seem right that my brioche rolls were 4 times the price of standard rolls.
My customers though so too.
Changing the price wound up my customers, especially those who had supported me back in the day when we had just a handful of customers a day.
So I made a better way
Using the method I created you will learn from my mistakes to charge the right amount for your bread products. It works for just about everything else that you sell too!
Once I put this in place, the pricing model of my bakery business became a strength, not a weakness.
I no longer had to worry about the price. This meant I could concentrate (finally) on growing my business.
How most businesses work the for sale price
The common way to work out the selling price is to add the ingredients and production labour costs together which gives you the cost of sales. Then a 60-80% profit margin is included to pay further costs and for profit.
The profit margin is usually industry specific, for example in car manufacturing the profit margin will be higher to compensate for the design, testing, improvement and infrastructure costs. Where as in a restaurant, costs are lower and more consistent so the profit margin is lower.
Other costs such as utilities, equipment, rent etc are included in the fixed costs. When working out how much to charge for a product the business owner will take the expected yearly sales in a spreadsheet and work out a sweet spot between how many units they will be sold and how much the fixed costs will be.
This does work, but it gets confusing when you have several products in the range.
I found that in order to have a good pricing strategy for a bakery business we should accurately compensate for the fixed costs as well as the costs of sales.
Only then can we charge for our products with confidence.
Why costing bakery products is different
Bread has an incredibly low ingredient cost. The cost of enough flour, water, salt and yeast to make a loaf of bread is in pennies, actually if you buy your ingredients in bulk for many loaves it will likely be in single digits!
The cost of labour, power used to bake the bread, distribution and rent are where the majority of the costs lie.
Though it's hard to work out (without this formula!)
Owning a bakery is not just about making good bread.
To have a successful bread operation you need to be an expert in selling, marketing, logistics and above all managing your costs.
Bread costing formula
To explain the process I am using an example where I set up a small bakery in my spare room at home and plan to sell 80 bread products a day. I will deliver to to 8 local businesses.
For this experiment are going to work out how much I should charge for my speciality white farmhouse loaf.
Here's the main spreadsheet that I use to cost the bread that I sell:
|Cost of sales||1.86|
Monthly fixed costs:
Cleaning & sundries
|Total fixed costs:||554.11|
Average fixed costs
|70 % profit||1.40|
Here my beautiful bread is going to be charged at £3.40 which might seem high at first but I think it's a fair price considering the quality they will receive and door to door delivery.
Let's break down of the costs involved and I'll show you how I get the values in the spreadsheet, it's downloadable at the bottom of the page.
The cost of ingredients
To start with, lets cover the cost of the ingredients.
I prefer to use a spreadsheet where I can input the cost of each ingredient that I use easily - see column 2 and 3.
To calculate the cost of ingredients used in one bread, I enter the amount of ingredients used in the fourth column and the ingredient cost is calculated by a simple formula in the fifth.
|Ingredient||Purchase price (£'s)||Sold quantity (grams)||Weight used (grams)||Ingredient cost|
The labour cost of production
Next we have the cost of production.
To discover the labour cost I work out how long it takes for me to make a batch of bread. Then divide the time by the rate you pay a baker.
Work out the time spent actually working on the dough, don't include rest or proofing times as you will be attending other things. You should include some time for cleaning for each bread made, even if you save it till the end of production.
Take the cost of producing the batch and divide by the batch size to get the cost for one loaf.
White farmhouse bread time allocation
Batch size - 24
Stretch and fold: 1
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 made:
£4.00 / 24 = 17p
Cost of production per loaf is 17p
If you are to be the main (or only) baker don’t be tempted to think this is your wage so it can be low to start with. Often excluding this cost is used as home bakers will make money from the profit. I don't like this way as when you employ someone to do your baking, you will need to pay them, and yourself.
Charge for oven rent
Realising that including the cost of baking the bread was a complete game changer in understanding profit in bread.
You could use a generic figure such as 20p per bread to keep it simple if you like. The issue with generic costing is that soft rolls which take 10-15 minutes to bake are then costed at the same price as a sourdough bread which takes 35-45 minutes.
Then there is then an issue with how may you can fit in your oven.
When baking small breads such as rolls you can fit a lot more in the oven when compared to large breads, so we should cost for this.
So this is how I do it:
Using the utilities bill, I work out how much the electricity costs 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 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:
20 / 6 = 3.33
To calculate the cost per minute I divided the hourly cost by 60.
3.33 / 60 = 0.6p
I multiply the cost per minute by the baking time.
0.6 * 35 = 1.94
Then divide by how many I can bake in the oven.
2.10 / 8 = 0.26
Cost of baking in the oven: 26p
Home bakers may find they can only bake one or two at a time in a normal home oven which is why it is hard to compete with the big boys at home!
That said, customers expect your costs will be higher as a small batch producer. Many will be willing to pay a little extra to get your fantastic loaves of magic!
Add a service or distribution costs
Selling or delivering a product to customers will cost time and money. Even if it is solely your time used to distribute the bread, a cost should be incorporated in your expenses.
There's two avenues to go down to determine the service cost:
1) In a shop environment:
To work out the cost of selling your product in a shop we first work out how long one member of staff takes to process the sale of a product. There's listening to the order, preparing it, making the transaction and saying goodbye.
Perhaps 1.5 minutes is needed per order if we take a rough average.
Using this data we can work out how much having staff will cost to make the transaction:
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
So the cost of supply is 24p. This will be added to the price of every product you sell. Once you have worked out this service cost you can use the same cost across all of your products, unless you would like to charge for slicing or other personalisations.
2) If distributing to local businesses or residents
If travel by car or van is needed you should account for a driver to make the deliveries and the mileage expense of the vehicle. Use the governments mileage expense rate (check mileage rate for US) multiplied by the amount of miles completed.
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 to load and deliver to the customers. Then divide the total cost by the amount of customer drops that you make.
- Directly expense the cost of the mileage and the drivers rate for each customer to find out how much it will cost to deliver.
The second option is best to use if delivering to customers that are at a considerable distance from you. The first is generally preferred if you are operating locally as you will pick up more customers as you continue trading.
Loading the van
There is also the cost of paying for someone to load the vehicle and make the deliveries.
It takes very little time to load a handful of loaves but if you manage to fill a van to capacity it can take some time to organise. A simple technique is to factor an average loading time of 2 minutes per customer.
Costing distribution as a start up
The above strategy works but if you are a start up it's impossible to know the cost of delivering to customers you don't have.
If I was to estimate how long it was going to take to deliver, I would never get it right especially where I live. There's traffic, roadworks and quick stops to the stores to get supplies to slow you down. Calculating the cost of distribution is not an exact science unless you subcontract the deliveries.
Here's a simple way to work out your distribution costs if you haven't started trading yet.
Lets say I am going to spend 2 hours delivering to my 8 customers. This is what I would aim for in a start up. It's going to take 5 minutes to make each drop so the rest of the time will account for travelling and loading.
The estimated daily distance that is driven is 10 miles.
Drivers rate @ £12 per hour
Mileage expense: 45p per mile
Driver cost: 12 * 2 = 24
Mileage: 0.45 * 10 = 4.50
Making a total daily cost of £28.50
Divided by 8 drops:
28.5 / 8 = 3.56
For an average order of 8 loaves:
3.56 / 8 = 0.45
Cost of distributing a loaf is 45p
The packaging expense is cost of the packaging I wrap my bread in. You may seek value in using elaborate wrapping paper with a professional stamp.
Using more expensive packaging helps to justify a premium price of the product, though a low cost generic option which I'm going to use will let the bread speak for itself.
If we add up our costs so far I get the cost of producing and selling my bread. This called the "Cost of sales" which as you can see is £1.86.
|Cost of sales||1.86|
But there are going to be further outgoings to think about.
Things like marketing, website, utilities, rent and management costs all need to be factored into your costing.
Additional fixed costs
The fixed costs are the expenses that do not change much per month. Costs such as rent, rates, basic supplies, ink for the printer and WiFi are going to stay relatively the same.
In standard accounting these costs are included in the net and not the gross expenses, but in my model I'm adding them onto the bread. My mentality is the bread must pay for them somehow, so let's cost it in at the start.
Add all of your fixed monthly costs, excluding any loans or dividends to create a basic fixed cost per month.
Typical expenses include:
- Business rates
- Management wage
- Cleaning & sundries
Some of these costs can be tiny in a home bakery, but if expansion is on the cards it would be wise to consider them from the start. Zero some of these expenses if you don't think your business will require them.
I've included every fixed cost that I can think of but of course, tailor it to your needs.
Let's take a look at each fixed cost in more detail
This is the cost of the premises you are using to produce bread. If working from home you might want to charge a small amount for this for tax reasons. If you plan to get your hands on a set of keys to a bake house in the future you may wish to cost it in from the start.
If you are enjoying this guide, please take a moment to follow Busby's Bakery on social media by clicking on the links. If you think other bread bakers can benefit from this site, please share the page with them. It just takes a second and it really helps my motivation to keep writing more articles.
Tax paid to UK councils for the use of a business premises. Start up bakeries that are small enough will receive business rates relief and not pay any rates. If you bake at home you could look into telling your council about your baking area.
It is possible to be charged business rates for the bakery area instead of council tax rates. Business rates are lower than council tax charges. You may still qualify for small business rates relief and in effect not pay any rates or tax for your production area.
Check with your council for details.
*I'm not sure if this works in other countries, if you do have any insight feel free to send me a message.
If your bakery premises is separate from your home it will have it's own utility bills. If not you will have to estimate how much your utilities change when baking. The electricity cost is included in the oven rent so we can ignore it here.
A cost can only be included once in your expenses.
So it's just the water and gas to calculate. If you work from home it is up to you if you add a value in here or not. If only making a few loaves the extra utility cost will probably not be noticeable.
With the oven on you will save money heating your home anyway!
When investing in a piece of equipment for your bakery you have to ask yourself if the cost is going to either:
- Increase your efficiency (lower production cost)
- improve the quality of your product (higher price you can charge)
- Be essential to you being able to make bread (like an oven)
Once you purchase your equipment you need to cost it into the products you are selling. The way I cost my machinery is not very pro in an accountants eyes, but it should be included somewhere in the costing and I have found this is to be the best way.
Take the value of all of your bakery equipment and divide it by 36. That works out as 3 years to pay the equipment off. This gives a monthly cost for the equipment.
Bannetons & utensils £250
3100 / 36 = 86.11
Monthly equipment cost £86.11
Even if you have already paid for your equipment 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 you want to.
When comes to product specific equipment you should charge them against the products they make. For example the cost of a pastry sheeter for making croissants and other viennoiserie could be factored on the products made from it. In this instance add the monthly cost of the equipment on top of the basic monthly charge calculated for those products only.
If you plan to scale your business and not do all baking yourself, you will need to charge a wage for yourself. This will also cover invoicing, marketing, selling and all the other bits you need to do as a business owner. The management cost will unlikely to be a decent rate for the hours worked initially, but as you scale it should get larger.
If you are baking bread at home and management doesn't involve much time, you should charge something for your time and expertise. I am going to take a £200 a month payment for my extra services, this will increase if I expand my customers and staff and lower my cost of sales.
A business that sells food must have indemnity insurance. This covers you if someone becomes ill after eating your bread. If you are not using dangerous equipment than it shouldn't cost very much at all.
If you plan to make doughnuts using a deep fat fryer it will increase a little.
If you are planning to deliver, vehicle insurance will be factored in here as well. First time van owners be aware that in the UK will start with 0 years no claims, even if you have driven a car for years. Expect high insurance premiums if it is your first van policy.
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 to replace any worn equipment such as tea towels and banetons.
The cleaning and sundries cost will be tiny in a home set up, it can increase into the thousands in a commercial setting.
Bakery machinery will bread every now and again. Newer equipment is obviously less prone then older so you should adjust your budget accordingly. Even if you have no expected faults it's best to store some money away each month just in case something happens.
If transporting your bread or supplies you should include a cost here for servicing and maintenance of your vehicle.
To get sales you need to let people know what your about. The typical marketing budget for most industries is 30% of the sales. Bakery margins are usually too tight for this amount of investment in marketing.
As bread prices are low it is hard invest enough in advertising to get noticed whilst still being able to offer a profitable product. You may choose to pay for marketing when you launch your business, this should be classed as in the start up costs and not as a regular outgoing so they should be excluded in this costing method.
Many small bakeries use local social media groups to promote their business without a marketing expenditure.
I often ran price promotions on my products to help establish my business, this should be factored in somewhere in your costing to keep your business profitable. I choose to add this in to the fixed costs of the business as they build awareness of the brand and, well it's easier!
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. Most accountants do the majority of their work at the end of the financial year so it's best to cost and reserve some cash so they can be paid.
Accounting software is commonly used in businesses in 2020. Being able to input the data online into software saves money paying for data entry whilst providing an up to date figure on where your financials sit.
For small business a simple spreadsheet is fine and you can do the majority of tasks. 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.
You can get yourself booked on many free training events or webinars which will teach you how to do the end of year figures yourself. Using online accountancy solution and doing the work yourself will save you a lot of money.
The fixed cost charge to add
To show you how I arrive at the fixed cost charge which will be added to every product it's easiest to walk you through an example. I'm going to keep with the same 8 customers ordering an average of 8 loaves a day for 6 days a week. As it's a small operation that I complete in a few hours at home, I'll be keep my costs down as much as I can.
To get your monthly fixed cost figure first, take all monthly fixed costs and add them up:
Cleaning & sundries 10
Next estimate how many loaves of bread you’re planning to sell in a month- Always downplay your expectations when budgeting.
8 customers * 8 average breads * 6 days trading = 384
Bread make per week is 384 units
Then calculate how many units will sell in a month.
bread per week * weeks in a year = total bread per year
384 * 52 = 19968
Divide by 12 to get monthly total:
19968 / 12 = 1664
To get the fixed cost figure divide the fixed costs by the quantity of bread sold.
554.11 / 1664 = 0.33
Fixed cost mark up is 33p
The fixed cost mark up should be added to every products price. When selling products in batches, for example rolls in packs of 6 the cost is added to the total pack that is sold, not on individual rolls. When calculating the amount of units sold per month the sales of packs of the rolls should be taken as 6's and not individual unit sales for this to work.
Making a profit
We've got our cost of production and distribution which is called the "cost of sales" in accounting terminology. We can also now factor in our fixed costs which in this example is 32p.
|Cost of sales||1.67|
|Average fixed costs per bread||0.33|
This takes our product cost to £2.00, but there's something missing.
You go into business to make a profit, not to have a job. Margins are tight in bread baking so in all honesty it is hard to make much of a profit.
There is also tax to pay for if your sales become high enough. You may have got a loan to launch your business, the repayments on this will eat into your profit. Though to clarify, the equipment fixed cost should cover any equipment purchased, not here.
To cover these costs and protect from any inefficiency from your processes a further buffer of 70% should be added to your selling price.
|70 % profit||1.40|
You can choose to increase or lower the profit margin if you wish. If you have a zero debt, lean start up you will be able to charge lower prices, if not you should include a profit buffer of at least 40% in my opinion.
Profit is not always about greed. Making some profit enables you to invest in your business. Profit also protects you in quieter times or when making batches not at full capacity.
Faults in this costing method
Every costing method has flaws or risks that are not accurately measured. The main one here is the wages.
Bakers & Drivers wage
We've costed the bakers and drivers wage on them being 100% active all of the time. Unfortunately in the real world, mixes go wrong, people make mistakes and sometimes the production routine is less efficient than expected. I suggest you over compensate the time needed to undertake tasks to be on the safe side.
There will be nights when the orders are low and therefore production is not at capacity. This is not helpful and can eat into your margins but there is little you can do about this other than get more customers or persuade existing customers to buy more bread.
This is why there is a profit buffer of 70% placed on this formula. Another way to calculate this is to reduce the profit margin and lower the capacity baked. I personally think it is easier to manage this as a top level figure which is why I have included one buffer instead of several buffers which will constantly need updating.
If you are an employer of people including yourself, you have to make an employee national insurance contribution to each of your taxable employees. This is a tax payable to the government each month. The employers national insurance contribution is currently set at 13.8% above £732 a month.
This is not clear in my hourly rates so be sure to account for an extra 13.8% on the wages given.
The owners salary
It is best to take a salary from the management of the business. If you are working part time in this venture it is up to you how much you charge your business for your time.
If you plan to do everything yourself you may be happy taking a small managers salary as there is a buffer in place from the bakers and drivers (if delivering) wage.
If you plan to grow the business quickly into a large format production where you employ people you must include a decent management wage from the start.
Most business owners strive to make the business run itself with a team of bakers and management in place to drive the day to day operations. In my opinion achieving such a profitable bakery business must involve being profitable and scalable from the start.
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 out you will be receive the payment for your time and as you go you will take your earning from the management wage and from the profit.
How to I pay myself as I grow
As you employ staff you will probably find that you will still be baking with your team anyway. As you become more hands off you will find your economies of scale reduce ingredient purchase costs, delivery costs (as they are closer to each other), and the fixed costs will lower per item sold as you are selling more items whilst they will stay the same.
As you make savings in your costs you will be able to increase your management wage to compensate whilst still having the same profit margin set for the products.
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 there products for years.
A change in price can alienate your previous customers whilst other people who considered your product as cheap (and maybe nasty) might have ignored you at first and then take a while to realise you are a premium product.
How to charge a more competitive price for my bread
To reduce your costs to compete with price a little better you will need to produce bread on a bigger scale. This will require better equipment that a larger capacity to bake from.
Having the customers to buy all the products is hard to start with so it is best to start small, gain experience and build a team and some business systems before making these investments.
You can choose to lower the profit margin to say 40% but this is serious high risk and should be avoided unless you are sure that your business can afford it with the volume you are creating.
The marketplace is dominated by major players who will be able to out price you. It is best to focus on quality.
Click to download a copy of the costing spreadsheet.
An opportunity to learn more:
For more information on how to start a bakery business including marketing, writing your business plan, building a team, you should take a look at the book that I wrote after my first business failed.
It's a great read and you'll learn lots about how to run a bakery business, especially the mentality needed to be a successful.