Image courtesy of Merritt's Bakery
Pricing products correctly starts with your cost to make them. “You have to start with the numbers themselves, the initial cost,” says Christian Merritt of Merritt’s Bakery in Tulsa, Oklahoma.
Founder and owner Susan Sarich of SusieCakes, now with 19 locations in California and Texas (she recently opened her first Dallas store), explains that her pricing philosophy is simple and effective: “I believe that quality is remembered long after price is forgotten,” she says.
“We price according to the costs associated with operating our business. By nature, scratch baking is extremely labor intensive and can be a more expensive operation to run than other bakery models. We offer a very fair price for a premium product, which allows us to appeal to a broad audience. Having a wide variety of decoration options also allow us to appropriately charge for the amount of time that goes into our hand-decorated, custom designs.”
Once you have figured out cost, you can begin to set up your pricing structure. “If you can figure out the ingredients and the labor, I wouldn’t stray from 50% gross profit,” says Paul Sapienza, owner of Sapienza Bake Shop in Elmont, New York. “However, every bakery, area and market differ. You must figure out your own market.”
Managing customer expectations is crucial to success. Social media and the internet have opened the floodgates for consumers shopping around for signature products and looking for bargain prices. It behooves you to get a handle on the staff time you spend on everything from quoting cake prices via email to decorating elaborate specialty cakes.
“Identify the time wasters in your bakery,” says Beth Fahey, owner of Creative Cakes in Tinley Park, Illinois. “Establish ahead of time what you will and won’t do.”
One of the most useful practices she recommends is observing your staff through a time study. Knowing how long each task requires – from responding to emails to decorating an animal print cake – will go a long way toward helping you maintain profitability in business.
One decorated cake example: $55.99 in ingredients, $146.23 in direct labor and $122.40 in overhead contribution. This adds up to a total direct cost of $324.62. 
“When you get to a high-end cake, it costs a lot of money to produce it, so you have to charge accordingly,” Fahey says. “Once you do a time study on certain things, it’s going to open your eyes.”

"There are so many things you can do that will increase profitability." - Anne Heap, Pink Cake Box
Cake decorating instructor Jorg Amsler of the Sugar Arts Institute recalls that when he owned a retail bakery where he focused on premium cake artistry, “people would come and ask for crazy cakes, but would have no clue what we do and how much time it takes.”
Although three-dimensional cakes can be very popular with customers, Amsler points out that this type of cake is very labor intensive. He started to concentrate on two-dimensional cakes as a more affordable option for customers who want something unique but aren’t willing to pay a higher price.
A two-dimensional cake like a purse cake can be very appealing without the elaborate costs involved in adding structure. Amsler explains there are two basic methods: carve a cake into a two-dimensional shape and then decorate it, or make fondant pieces that you can place on the cake.  
“You don’t want to say no to the customer because you’ll lose money, but very often they want to work with you,” he says. “If you explain the labor involved, they typically understand.”
At Bakery Nouveau in Seattle, the shop doesn’t make shaped cakes and only offers a limited number of boutique two-tiered cakes. During the hectic holidays, their goal is “to allow our production to still run efficiently without a lot of ‘one-off’ flavors or finishes,” says William Leaman, owner of Bakery Nouveau. “For example, we use raspberry cremeux in a couple of different desserts. Since it’s in production to start with, it’s not a stretch to make a little extra to offer as an option for chocolate cake filling.”
Like any bakery, Bakery Nouveau strives to make great-tasting desserts at a reasonable cost. “This lets us still do some fancy or custom work here and there, or other higher production cost work, without it impacting our overall margins,” he says. “Again, we do have some added leeway as well since we have such a diverse line of products besides cake.”
Lynn Schurman of Cold Spring Bakery suggests that efficiency is your best friend.
“When you are making your designs for the year, keep in mind the amount of time it takes to decorate that cake so that you can as efficient as possible when you have a number of racks of cake in front of you,” she says.

Understanding food costs

Profitable bakeries and bakery cafes tend to keep food costs below 35 percent. This is an estimate and can vary depending on the types of products your bakery sells. But it is a great starting point to use as an effective measuring stick.
For bakery owners, start with a defined time period over which you are going to calculate food costs, say 28 days. Include all food and beverage expenses in your food cost percentage.
Don’t forget to factor in the cost of your inventory. Calculate your inventory adjustment for each 28-day period by recording your beginning inventory (in dollars) and ending inventory. Subtract your ending inventory from beginning and add that number to total purchases. This is your total cost of food sales. Divide this number into total sales for the 28-day period to compute your food costs.