Cake Pricing - How to Price your cakes

Does that sound like you? I use to be that person above!!

(yup hiding face in palms here)

These are some of the most common questions I get asked by beginners. And, it really resonates with me because I've had the exact same questions in my head all along.

• How should I price my cakes? And, how do price cakes or cupcakes?
• Also, can you share your price list with me? Please send me your cake pricing chart.
• And, what is the right price for a beginner?
• How much should I charge for this type of cake? And, what is the price of the cake for this design?
• In addition, do you have a cake pricing guide?

And, as much as I’d like to say, this is what I charge and you can charge the same; that’s not possible. So, I thought I'd write a little post on cake pricing (well, I planned to write a little bit ... it's long.. so grab a cup of coffee).

How much should you charge for your cakes?

I'll share with you what I do and how I go about pricing my cakes.

Now, having done two degrees and an MBA - you may find that my method sounds very geeky. And yet, trust me the books are not wrong and it's how you apply that knowledge to practical issues that make a huge difference.

So, hang in there - I will try my best to make it as simple as I can for you all to understand. In fact, I will give you more than one option on how to price your cakes. So grab a cuppa and let's make it a date with cake pricing.

1. Direct costs

• Cost of ingredients and supplies. Every ingredient no matter how little has to be included in your pricing.
• Cost of accessories - such as cake boards, boxes, and dowels.

You do not need to do this for every cake recipe. Pick some that are representatives of your most common cakes. Since we tend to use the same ingredients in almost all of our cakes. For example, flour, butter, eggs, milk, buttercream, and fondant cost you - 20 dollars to make an 8-inch cake. Also, keep these costs for your reference.
Other direct costs include delivery (taxi or fuel costs), and set-up costs (boards, poles, boxes).

2. Indirect costs

• Utilities - such as gas, oven, mixers
• Advertising - business cards, etc.

These would include what you pay for electricity, gas, water, phone, etc. It also includes any tools or accessories that you purchase in order to make and decorate your cakes. Any cost that is associated with your business but not a direct ingredient in each cake is considered an indirect cost. It's simpler to calculate these types of expenses on a monthly basis, rather than on a cake-by-cake basis.

For example, you can use a rough estimate that 25% of your utility costs are related to your business. Then calculate that total for a particular month and divide it by the number of cakes you've made that month. This will provide you with an estimated indirect cost per cake.

For example in an average month, your indirect cost is about 10 dollars per cake. Furthermore, marketing expenses, such as advertising, building and maintaining a website for your business, and even your business cards are part of your business expenses.

3. Labor

• The time you spend on the cake - you must include the time you spend designing the cake, shopping for the ingredients, baking the cake, decorating, and setting up the cake.
• You have to put a dollar value as a wage for your labor.

Yes, often people forget to include the time it takes them to design the perfect cake, the time that gets spent back and forth emailing customers for the order and design. The time you spend to go buy those ingredients, as well as the time you spend baking the cake.

4. Delivery

• This includes not just the price of the taxi or gas to drive the cake but also the time you spend setting up the cake.

Just for an example, let's price a cake (rough estimate)

Cost vs. value

Price your cakes based on their value, not their cost

The most important point I want to make is this. Pricing for decorated cakes is not about cost +. Rather, they need to be priced based on the value they provide to your customers. It's a luxury product. Therefore, it should be priced on value not cost. It's like the difference between the price of a dinner in a top French restaurant, and your local fast food joint. You don't know what is the cost of ingredients that go into your 5-course French dinner. Frankly, you don't care. You pay for the experience, the emotional value you get from it, and of course the great taste and presentation.

The same goes for custom-designed decorated cakes

Having said that, if you decide to make this your business, you need to make sure that you have a good business model. In other words, you can make the profits that you would like to have from this business. Otherwise, it can be an expensive hobby, or worst, a losing business.

Therefore, it's very important to have a very good understanding of your costs. These include more than just the direct costs of ingredients that go into your cakes. I will discuss that in detail below.

First of all, let's start with determining the value of your cakes.

The main factors that determine the value of your cake 

1. Where are you located and how much are your customers willing to pay?
   For example, the price of a cake in New York is not the same as in Texas. (New York and Texas are both in the US)
2. What clientele are you serving? (middle-class kids' birthday cakes? high-class wedding cakes?)
3. or What is your expertise? What unique value do you offer?
4. What is your reputation and demand for your product?

1 & 2 - Where are you located and how much are your customers willing to pay?  What clientele are you serving?

I'm going to use myself as an example so it's not so geeky.. (wink wink).

When I first relocated from the US (in 2005),  I regularly made cupcakes, cake balls, and cake pops. And yet, it wasn’t very popular here in Israel and to some, it was something new and fascinating.

I grew up with a decorated cake for every birthday, wedding and holiday. But, in Israel custom decorated cake was a luxury item and very rare to find. It was not a must-have item for a birthday party. A birthday cake was not even in the budget!  I was surprised that some weddings I attended did not have a wedding cake and no one seemed to miss it.

Most birthdays that my son attends have no fancy birthday cakes. Rather, what they often had was a simple cake that grandma made in baking foil, poured some chocolate sauce over it, and sprinkled some sprinkles around.

So in 2005, there was very little awareness or demand for custom-decorated cakes in Israel.

Much has changed since then. However, the market here is still lagging behind the rest of the world.  And yet, this is where I chose to start my business. So as you can understand, the level of awareness, and as a result, the demand for, and value of decorative cakes has a direct effect on how much I can charge for my cakes. Hence, I had to find and focus on those customer segments where there is a demand for decorated cakes. For example, the ex-pat community, and people who immigrated to Israel from the US or the UK.

You need to do the same in your location. Find out what are the trends. What types of cakes are more popular? What are people willing to pay for those cakes? In some places, sheet cakes are very popular, while in other places no one cares much about them.

Decorated cakes take a long time to make. There are some customers who view them as a waste of money. And yet, there are those who value the work and effort put into it and are ready to pay for that.

3. What is your expertise? Or what unique value do you offer?

It is important that you be honest with yourself when answering this question.
Also, almost anyone who starts a business wants to make money. However, your success is largely dependent on your expertise and the value you offer customers.

Most cake decorators will tell you they provide a unique value. Some examples include: doing something new, personal consultation, design expertise, modeling expertise, etc.  But is that enough to create a differentiated value?

First of all, you need to ask yourself what makes your product better than others. Do you bake the cake from scratch? Are you offering free delivery? Are you a unique artist? Do you have creative and unique designs? Are you offering any extra frills? How are your skills compared to your competitors?

Supermarkets cakes vs. homemade cakes

One of my mom’s friends used to take the price list of a local bakery, mark it up by 30%, and use it as her price list. As a kid, I was amazed at how easy pricing was, but after doing my MBA  - ah not so impressed.

Never ever compare your product to a supermarket product, not even if you are at a basic level of cake decorating. This is not a good price guideline. Why? Because supermarkets have a very different business model than ours.

• Supermarkets' business model is based on low-profit margins, backed by a cost-driven, highly efficient operation.
• A bakery sells about 300 to 600 cakes a week.
• They purchase ingredients in bulk and at a fraction of the price that we buy them from the supermarket!! So the same flour that you pay two dollars for probably cost a few cents for them.
• In addition, they work on a large scale, which puts quantity before quality. We deal in quality and custom orders.  There is no comparison - right?

As a home baker, you try to use top-quality ingredients as compared to generic supermarket brands, and you customize each and every cake. While supermarket cakes are flash-frozen; you offer freshness, consultation, designing, and much more.

Competitors 

There has got to be another home baker not far from you. Check out her cakes, and see the value she provides – compare those to your skills and values.
What would get a customer to choose your cakes over hers? You definitely do not want people coming to you just because your prices are low. Do you? There is no honor in being that 'cheap cake lady'

Unique expertise and value

Identify your unique skills and expertise. Try to use them to create value for your customers.
While cake decorating was a new venture for me, baking, on the other hand, is my expertise. I have been baking for more than 20 years and take pride in the fact that I make the best-tasting cakes from scratch.

Since in my present market baking a cake from scratch is considered unique and valuable, I use it as my competitive advantage.

4. What are your reputation and the demand for your product?

To get cake orders you first need to create awareness and generate demand for your product.

• Do people know you?
• Have you built a good reputation?
• Does your product have a market presence?
• If you have a good reputation, your cakes will be in high demand and you will be able to charge a higher price.

Personal example - Most of my business comes from word of mouth. I do not advertise. As such every client that comes to me, comes through someone I know or has tasted my cakes at some event.
Because I work in a price-sensitive market this is the best way for me to build my business and reputation.

Once people hear about you and your skills from a reliable source their attitude to pricing changes. I have seen that with my customers. There is real tangible value to a good reputation.

Is your business model profitable?

As I mentioned above, unless you're doing this as a hobby, the purpose of your cake business is to generate a profit. The more the better.

Therefore, it's crucial that you understand both sides of the business. How to create demand for your product, reach your customers, price your cakes correctly, and deliver them. And at the same time, what are the real costs of making your cakes, and running your business? Of course, your goal is that your income from selling your cakes will be higher than what it costs you to make and deliver them to your customers

Hence, understanding what are your total costs, and calculating them correctly is critical to your long-term success.

My personal experience

When I began my business I priced my cakes lower than the market value, not because I wanted to get more business. No!

Unlike most professionals that go to courses and learn by practice, my practice was on the job.
While I was very confident in my baking skills, I still had to prove my decorating skills not only to my customers but for myself too.

So I made a lot of cakes by just charging for the cost and was very happy about it. I let friends pay me the cost of the cake so I could learn and it was a win-win situation for us all. I considered it as if these customers are funding my education.

But as my level of skill and expertise grew so did my prices.

We all have to start somewhere. And sometimes we have to make compromises along the way to reach our goals. What’s important is what works for you. Which customers are you aiming to serve, and what are they willing to pay for the value you provide?

The Price Tag vs the Name Tag

To me, it doesn’t matter if the cake has a price tag on it or is for FREE. Once it leaves my hands it’s a work of art made by Veena Azmanov.

People who see the cake don’t ask how much you paid for it. They ask who made the cake. So I take pride in what I do and the value I offer.

Here's another post that speaks on pricing cakes. I think you'll find it a good read too.  - I bet most of you are underpricing your cakes