One of the elements of pricing that I see many foodie entrepreneurs struggle with is making sure they cover their overhead costs. You are comfortable working out the cost of ingredients and packaging – I am sure most of you can tell me off the top of their heads what the ingredients cost to make a batch. Adding in your time is bit more complicated, particularly making sure non creating time is included is tricky but it is overheads that seem to flummox the most people.
But if you don’t cover these overhead costs with your sales, you aren’t going to make a profit.
What are these pesky overheads? They are the things like insurance, electricity, marketing, the hire of your market stall and so on. All these costs add up and the only way to cover them in your business is by including them in your prices. The minimum price you should charge for your product is the cost of making your food including ingredients, packaging, your time, any other staff costs and your overheads. You also need to add in shipping if you are sending your product to retailers or customers.
Including overhead costs really doesn’t have to be that tricky. There are two ways I recommend to work out the amount to include in your prices to cover these costs. One is to apply a margin to your other costs. The other way is to incorporate the overheads in to your hourly rate. Usually in the food industry the first option, applying a margin, is used. But I would do what makes the most sense to you.
Method 1: Applying a margin
Using method one, you work out how much it costs you to produce your food products in terms of ingredients, packaging and your time. Then you add a margin. What that margin is will depend on your product but in the food sector this is often between 40% and 60%. If you can, talk to others who make similar products to you and find out what their margin is; to at least make sure you are in the pricing ballpark.
Taking an example, if a jar of pickle costs $1.60 to make including your time, ingredients and packaging and the margin you have decided to apply is 40% then you would divide $1.60 by (1 minus 0.4) = $2.67. This gives you the minimum price you should charge for your product. The amount of money you have per jar to cover overheads is $2.67 less $1.60, that is $1.07.
Method 2: Including the overhead costs in your hourly rate.
The other way to include your overhead costs is to include it in your (and your staff’s) hourly rate. Let’s say your hourly rate is $25 based on working 30 hours a week on creating your product. For the week, you want to pay yourself $25 x 30 hours; $750 per week.
Then work out how much you pay each week in overheads. Say these costs are $240 a week. Add this to the $750 you want to earn a week, $240 plus $750; $990. Divide this by the 30 hours you are going to work creating your product and instead of using an hourly rate of $25 to calculate your costs you would use $33. You have $8 per hour to cover overheads.
Of course with all of these options, whether you actually make a profit or not will depend in part on how much you manage to sell. The point where you are selling enough to cover your costs is called your breakeven point. Check out my article on the Condiment Marketing Co. blog to find out how to calculate this.
Are you covering your costs? How do you calculate your overheads?
Do you want to learn more about pricing your product? I recently recorded a webinar on pricing your food product. Pop you email below and I’ll send you the link to the webinar.