How to price a cake

There is no single rule

There are a few well-known ways of getting around this without much effort: multiply the ingredients by three, charge a fixed amount per kilo, or match the competition. All of them assume one bakery is much like the next, and that ends up hurting the business.

Two people making the same cake can have very different costs. One takes two hours, the other takes four. One works in a fitted kitchen, the other mixes by hand. One buys from a wholesaler, the other buys at the supermarket. No single multiplier can absorb that, and matching a competitor is weaker still, because you know neither their cost structure nor whether they are actually making money.

What can be standardised is the method. The calculation below does not return the right price. It returns your real cost. Everything after that is a decision, and it becomes an informed one rather than a guess.

The five cost stages

These five stages give the production cost, and that is what the price is decided on. Sales tax sits outside this calculation and comes at the end, applied to the price once it is set.

1. Ingredients, costed by the amount used

What matters is not the pack price but the fraction the recipe consumes. Divide the price by the quantity in the pack, then multiply by what the recipe uses. A 1 kg bag of flour at €0.79 works out at €0.00079 per gram, so 400 g enters the calculation at €0.32 rather than €0.79.

2. Packaging and supplies

Box, cake board, greaseproof paper, ribbon, bag, label. Each item looks trivial on its own and together they add up to more than they appear to. They are easy to forget, much like overheads.

3. Labour

Count all the time, not just the active time: preparation, baking, assembly, decoration, packing, cleaning, and the messages exchanged with the customer. Then multiply by an hourly rate.

There are several ways to set that rate. What would it cost to hire someone to do the same work? Or how much do you want to take home each month? Wanting €900 a month across 150 hours puts an hour at €6, which is the figure used in the example below. Either way, remember what comes off before the money is yours, such as tax and contributions, or your hour is worth less than it looked.

Anyone working from home tends to skip this stage, under the illusion that they are not spending their own time. The consequences are not immediate, but they do show up: a price built on unpaid work makes hiring harder, makes delegating harder and leaves little money to grow the business with. In short, you worked for free.

4. Waste

The sponge that did not rise, the buttercream that split, cream past its date, a decoration redone twice. It happens to everyone and it has a cost. A figure between 3% and 8% applied to the three previous stages covers it without having to log every mishap. Those direct costs are the right base, because they are what you lose when something goes wrong: the ingredients, the packaging and the time. The example below uses 3%.

5. Overheads

These are the costs the business needs in order to exist, but which belong to no cake in particular. In Sieve Studio we separate them into two groups. Fixed costs, paid whether you produce a lot or a little: rent, insurance, internet, licences. Variable costs, which follow production: electricity and gas for the oven, water, cleaning products, delivery journeys.

None of it appears in the recipe, yet it is still money leaving your pocket. So that each cake pays its share, add up what you spent last month and spread it across what you produce:

• Per order: monthly costs divided by the number of orders you expect that month. It is the simplest method and the one Sieve Studio uses, because most businesses can estimate how many orders they take in a month more easily than how many hours they produce.
• Per production hour: monthly costs divided by the hours you produce per month, then multiplied by the time the cake takes. This is worth it when orders differ widely, since a six-hour cake then absorbs more than a one-hour one.

You do not need precision to the cent or months of records. You need the figure to stop being zero, because zero is the only number guaranteed to be wrong.

Worked example: chocolate birthday cake

A round cake with covering and simple decoration, twelve slices.

The prices below are illustrative and are there to show the method. They vary by country, brand and chain, so always use your own.

1. Ingredients

2. Packaging and supplies

3. Labour

Two and a half hours across preparing, baking, assembling, decorating, packing and cleaning, at €6 per hour: €15.00.

4. Waste

3% of the direct costs, which come to €26.18 across ingredients, supplies and labour: €0.79. Overheads come next, outside this percentage.

5. Overheads

Production cost

From cost to price: the margin

With the cost established, the remaining decision is how much you want to earn. In Sieve Studio, and in this article, the margin is the percentage of profit you add on top of the cost. If you want 35%, the price is the cost plus 35% of that cost, which is the cost multiplied by 1.35:

At €40.46, rounded in practice to €41, each slice comes to €3.42. That figure has already paid for the ingredients, the packaging, your time, the electricity and the cake that went wrong last week, and the €10.49 left over is profit for the business, because your work was already paid inside the cost. It is not entirely free money either, since taxes and contributions then apply to profit, depending on the scheme you are in.

When the customer says it is too expensive

You did the calculation, gave the price and the answer was that it is too expensive. Either the customer compared it with what others charge locally, or you looked at the number yourself and found it steep. That is normal, and it does not mean the calculation is wrong. It means you have a decision to make, and you now make it with information. There are three routes.

Cut the working time. With labour at half the cost, that is where there is most to gain, and without touching quality. Faster decoration, batch production, bases prepared in advance. The same cake with simpler decoration takes an hour less and comes out at €32, keeping the same margin. Cutting ingredient costs returns far less and shows in the product.

Work on perceived value. Good photography, reliable delivery dates and proper packaging change what a customer accepts far more than a discount does. Often the problem is not the price, it is the product not looking worth it before it is tasted.

Accept a lower margin, deliberately. It makes sense when starting out, on volume orders, or with customers who keep coming back. It is not the most advisable route, because selling more units is not the same as earning more money, and it is easy to end up with twice the work and the same balance at the end of the month. Done in full awareness of what you are giving up, it is a legitimate decision and it is yours to make.

Mistakes that cost money

• Not counting your own time, or counting only the active time.
• Leaving out packaging and supplies, which add up to more than they appear to.
• Leaving overheads at zero because they seem hard to work out.
• Copying a competitor's price without knowing their cost structure.
• Keeping the same price list for years while costs rise.
• Charging the same for a plain cake and a decorated one that takes twice as long.

Now it is your turn

Take your best-selling product and work through the five stages with your own figures. It takes about twenty minutes and the result is usually surprising. Once it is done, pricing everything else becomes a variation on the same exercise.

You do not have to do this by hand

Now that the logic makes sense, here is the good news: you do not have to repeat it every time you create a product, or build the whole thing into a spreadsheet that is hard to follow.

That is what Sieve Studio is for. You enter each ingredient once, with the pack price and pack size, and the unit cost is worked out for you. You fill in supplies, production time, the month's fixed and variable costs and the margin you want. From then on, creating a product is a matter of picking ingredients and quantities, and out comes the full cost with a suggested price, with labour, overheads and waste already inside it. What you actually charge stays your decision.

And it stays there. When butter goes up, you change the ingredient price in one place and the cost of every product using it is recalculated, so you can see straight away what happened to your margin and decide whether to move the price. When you put an order together, the costs come straight from it, with no calculations to redo.