The theory behind pricing your cakes in order to make a profit is pretty simple. In practice it might be a little time consuming to pull all the numbers together and you might need some help to do it but essentially all you need to do is to make sure that all you know all the ongoing costs associated with your business and then construct your prices around those costs with a bit added on for profit.
You can categorize all of your costs as either fixed or variable. The variable costs are your costs of ingredients (eggs, flour sugar etc), materials (cake boards, ribbons, cake boxes) labour costs (number of hours multiplied by your hourly rate) and delivery costs. They are called variable costs because they depend on how many cakes you make. Your variable costs should be easy to calculate as they are the cost of producing the cake.
You also have some fixed costs such as rent, water, electricity, advertising, travel, etc which remain the same (or don’t fluctuate very much) irrespective of the number of cakes you make. These also need to be factored into your prices. You can make a good estimate of your electricity bill for example, based on your previous years consumption. It might change a bit but if your pattern of use isn’t radically different then you should be able to estimate it with confidence. The problem is how to allocate these fixed costs between the individual cakes you make.
Then, it’s a simple case of deciding on what percentage of your costs to add on for profit and this will give you your ideal price.
But what if your cakes are more expensive than a neighbouring cake makers cakes? You could try to find a way of reducing your costs, perhaps by finding cheaper ingredients. But then what happens when a new cake maker launches a business nearby? There would be more cakes available to buy but not more people to buy them, so in order to attract customers you might need to cut your prices further still, and unless you can reduce your costs again, your profit will start to be eroded until eventually it’s not worth being in business at all.
The alternative is to find customers who don’t just want the cheapest cake and get them to believe that your cakes are worth more than the other cake makers. Faced with competition, rather than reducing your costs, tell your potential customers why you use the more expensive local butter – because it’s made by hand by someone who cares about the animals and it makes your cakes taste better. Some people will still want the cheaper cake but some will care enough to pay the extra because for them it’s worth it.
If you would like to find out more then download my free guide to charging more for your cakes.