If you’re planning on starting your own food business, we know that you have endless things to look out for. Once you’ve decided what you want to sell, the next step is always determining the right price for your food product.
But a large array of questions start swarming in your head. How to price your food product to ensure that the profit margin is big enough for the business to run? Similarly, what should you calculate in order to come up with an overall sum for your food item?
It can all seem terrifying and confusing, but we’re here to help! We’ve simplified the process of pricing food products for you so that you can understand the basics better.
Calculate The Cost Of Raw Materials
Fairly simple right? Yes it is. Calculating the cost of the raw materials that you are required for each unit of food product you will sell can seem simple, but you have to be careful not to leave anything behind. From the cost of the bread you use to the meat, seasoning and the oil, you have to take everything into account.
If you’re purchasing your raw materials at a wholesale rate, be sure to calculate the costs accordingly. Remember, you want to know how much every ingredient for each item will cost, so do your division carefully. Once you have a clear idea of how much every item of food you wish to sell might cost, you have to consider the overheads.
Calculate Your Overhead Costs
The next step to pricing your food product is determining your overheads. In simple terms, it means determining how much it would cost you to run your food business. It’s essential you determine this as correctly as possible, so that you have a clear understanding of what the base price for your item should be.
Calculating your overheads involves two costs – Direct and Indirect, which we will simplify for you right here.
- Direct Costs – These are costs that are directly related to your food item. Some examples involve the cost of the equipment and tools used to produce your food items, the labor involved in the production and costs involved in marketing your food items. It’s fairly easy to come up with a total of these costs since it will most probably be directly laid out for you.
- Indirect Costs – As you might expect, indirect costs aren’t usually laid out for you in plain sight, but they are important and cannot be overlooked. As a definition, indirect costs are those that you will incur indirectly to keep your food business running. This involves anything from cleaning supplies you will need and operating expenses to service costs and your own salary.
Remember that indirect costs can sometimes add up to a big amount, so consider everything carefully. If you’re going to deliver your food items through a delivery agent or service, you need to take into account the cost of that too.
Final Base Price
Always add a profit margin of 20% to 30% of your cost price when you price your food product. It might seem a little steep, but it’s essential if you want to grow your business. We suggest that you start with a smaller profit margin first and gradually hike your price as your food business grows. You should also compare the base price you come up with to competitor prices and adjust it accordingly.
To come up with your base price, you can divide your total cost by 1, minus your profit margin. Too complicated? It really isn’t. If you want your profit margin to be 25%, you have to write it as a decimal while you minus it from 1. In mathematical terms, that’s 1 – 0.25. So, you have to divide your total costs by 0.75 and that will be your ideal base cost.
Consider Competitor Prices
Don’t we all check and compare the prices of similar food items available at different restaurants? It’s classic human nature to do so, and it is what should determine how you price your food item. Analyzing the prices of similar food items being sold by other vendors is something you must do before you decide on a final price for what you sell. Not doing so might cost you a great deal of problems at a later stage.
Let’s give you an example: if you price your food item at a rate much higher than a competitor’s, chances are that people will not purchase what you have to offer. On the other hand, if your food item has something extremely unique, or is made of high quality ingredients, you might just get away with a rate that’s slightly higher. In another scenario, you cannot price your item too low at the cost of incurring losses.
We suggest you take into account factors like the uniqueness of your food items and the quality of the ingredients and then decide accordingly. A trick that a large number of businesses use is pricing their food product the same as the competitors. It works extremely well sometimes, but it has its own risks, so make your decisions carefully.
Pricing your food isn’t as difficult as people might make it seem, but you have to look closely at every little detail. We suggest you leave some room for error, since you will definitely learn the tricks of the trade along the way. We hope you’ve gained a basic understanding of how to price your food product from our guide above. Good luck with your food business!