“We as an industry have a horrible habit of undervaluing our product,” says Christian Merritt of Merritt’s Bakery in Tulsa, OK. “Listening to that little voice in your head that says, ‘Maybe nobody will buy it. If it’s that expensive, nobody will come in.’ we have to always fight against that.”
Raising your prices can instill fear, it’s understandable, but the outcome of a price increase might surprise you and not raising your prices for the wrong reasons can prove detrimental to the bottom line. “It took us three years, from 2008 to October of 20ll, to raise our prices, and we suffered because of it,” says Paul Sapienza, owner of Sapienza Bake Shop in Elmont, NY.
Don’t be scared
The first thought that might enter a retail bakery owner’s mind when considering a price increase is that the business will lose customers, and while this might be true, it’s not always a bad thing. It only makes sense that the bottom line is the important thing. “If you’re losing unprofitable customers, it’s sad, but you’re in business to stay in business,” says Dennis Stanton, owner of Swedish Bakery, Chicago, IL. “Our head counts have declined significantly over the past 10 years, but our sales per customer have continuously increased.”
Nobody likes to lose customers, but unprofitable customers are simply not good for business. With premium priced products, you’ll often generate higher profits with fewer customers.
Premium pricing strategies
Sometimes when a product doesn’t do well, a bakery needs to consider whether or not it’s time to drop the product. However, dropping something temporarily and then bringing it back for a special occasion, can get customers excited again, and pricing that product higher is a must. “That’s what we’ve done several times, is bring it out for a certain holiday. Maybe the anniversary of the bakery or a certain season and say, ‘Oh we’ve got these back for now!’” Merritt says.
Give the product enough time back to see the response from your customers. If customers receive the product well and buy it, it’s worth continuing it. “But always re-price it,” Merritt says, “and it will shock and amaze you. When you’ve re-priced it, you’ll think, ‘Oh I did not have the right price on that before.’”
“We used to make cookies in an old fashioned way by scooping them out and things like that, and that just wasn’t efficient enough. It was raising the labor cost higher and higher, to where we could not keep up with the lower- priced market,” Merritt says. “We were able to get a portioning machine to speed that up so that suddenly we could do the same thing with one man in an hour that used to take three hours to do with two men.”
Numbers then market
Pricing products correctly starts with your cost to make them. “You have to start with the numbers themselves, the initial cost,” Merritt says. Once you have this figured out, 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,” Sapienza says. However, every bakery, area and market differ from another. You must figure out your own market as well.
Shop products from other bakeries in your area, literally, and bring them back to your shop for a side by side comparison. While some competitors offer better pricing and will most likely sell more, if your product is a higher quality, then it’s okay to charge more. Your customers will notice the difference. “Are you going to sell as many as they are? No,” Merritt says. “But if you price it so that you’re still making a profit, you’ll be okay on that product.”
A unique business
A retail bakery both manufacturers and sells its product. “Everybody else either buys a widget, a cake in a box, and sells it, or they make that widget and they sell it to some other guy that’s going to sell it,” Sapienza says. “But we have to do both. There is a whole extra set of things that can go wrong and extra costs associated with that.”
Retail bakeries offer specialized and artistic products. Pricing needs to reflect this. It’s okay to lose a few bargain shoppers to higher pricing on your products because customers who understand the high quality and customer service of a retail bakery will pay for those things.