When pricing baked goods or any perishable at your coffee shop you need to consider them very differently than any other product you sell. If, for example you have 10 coffee makers on the shelf, it is likely you will continue to sell them until all of them are sold. You may wish to discount them as stock gets old, but you will eventually sell through all of the coffee makers.
With baked goods, sandwiches, anything with a very short shelf life, you may not have the opportunity to sell all of your daily stock because you ordered too many, it was a bad weather day and traffic was reduced, or any one of a thousand reasons cafes have slow days. For this reason you need to think of them very differently, and price them differently.
Use this equation to determine target price from a known target margin.
Target Price = unit cost/((100-target margin)/100)
Example 1:
one dozen muffins:
purchase $12
re-sell $1.50 each
Break Even 8 x $1.5 = $12
Target Price = $1/(100-33)/100 = $1.50
Therefore our coffee shop does not make a single penny on any one of the first 8 muffin sales, it only pays back what we paid for them. All of the profit lay in the final four muffins. If we have a quiet day and we fail to sell at least 8 of our 12 muffins, we lost money on our muffin sales that day. As the day gets on towards 4pm and our baked goods sales slow, we may choose to discount, which further reduces profit especially if we are reducing more than the last 4 muffins.
Example 2:
one dozen muffins:
purchase $12
re-sell $2 each
Break Even 6 x $2 = $12
Target Price = $1/(100-50)/100 = $2
In this example we only need to sell 6 of our muffins to break even, pricing being the key factor. By moving the price up from 33% margin to 50%, we have set up conditions to make it unlikely that we will fail to profit from our perishables.
If our margin is: 25% we only break even when we sell 9 of 12 muffins
33% we only break even when we sell 8 of 12 muffins
50% we only break even when we sell 6 of 12 muffins
Remember, when dealing with perishables we calculate profit not on a per unit basis, but as a group because at the end of the business day, they are worthless if unsold.
Let me know if this is helpful, and if you have any pointers that you'd like to pass along.
Subscribe to:
Post Comments (Atom)
Posts
Interesting, but somewhat simplistic. As you said in the first line, "When pricing baked goods or any perishable at your coffee shop you need to consider them very differently than any other product you sell."
ReplyDeleteWhat you failed to account for is that customers do not come in to buy "just" the muffin. Rather the muffin is an extra to the coffee.
Whilst raising the price, will bring you to a break even point faster, sometimes you may need to go the opposite direction. If muffins at $2 disuade customers, then you may also loose them as coffee customers.
It is possible that you are better to have the muffins at $1 and never reach break-even on that product, in order to have more customers sitting drinking coffee.
Interesting comment, Coffee etc. Although my business isn't in coffee, I suspect that the coffee business is similar to others in that its staple product/service provides the lowest profit margin. Gas stations, for example, make very little from selling gas, and grocery stores have very small margins on milk, bread and eggs. It's on the ancillary products that the profit is made. So, if they discount on their otherwise higher-margin products in the hopes that they sell more lower-margin items, they place themselves in a very precarious position. I may be wrong, but it seems to me that coffee shops are in a similar situation.
ReplyDeleteThanks so much for the comment. I'm really happy to have different views and opinions expressed. What I hope to reveal is that there are no right or wrong answers to business related questions, but that when armed with sufficient information each business owner can make better decisions. You are right to state that in some instances, treating baked goods as a "loss leader" can actually benefit a business. The important thing to take from this exercise is how to do the math in order to determine what is appropriate pricing for each and every item a coffee shop sells. Do me a favour, try to run your costs/prices through that equation I posted and let me know whether it is useful in determining how much of a contribution your baked goods are making to profit.
ReplyDeletethanks very good ideas i am starting perishable goods business so these ideas are useful to me
ReplyDelete