The Fresh Loaf

News & Information for Amateur Bakers and Artisan Bread Enthusiasts

Pricing my products when using a rental kitchen

Agreenbean's picture
Agreenbean

Pricing my products when using a rental kitchen

Hello everyone!

I'm so glad to have found this forum to post my questions. After reading several posts, I know I can get the help I need. 

I am about to embark on my first real business opportunity to bake pies for a new restaurant that opened in my neighborhood. To do so legally, I'll need to rent a kitchen. I want to start slow first by renting by the hour then monthly. The rate is $25 per hour and $600 per month for 15 hours per week. I learned through the other posts, to price wholesale at my cost times 3. Then I saw a post that said to factor in labor and fixed cost like rent so, do I divide the hourly rental fee on top of my wholesale cost? If so, I might have a pricier product than I want and will have to really adjust. Should I just do what it takes to break even and then raise prices later when I know I'll need to move to monthly rental?

Thank you!

GermanFoodie's picture
GermanFoodie

Not sure what state you are in, for starters. We are in Ohio, and cottage rules apply. The only part that you have to do in a professional kitchen is the part that pertains to the temperature-controlled items, like making your (custard) fillings, storing the pies etc. I would do EVERYTHING else off-site if you legally can to keep costs down. We used to have a hybrid thing going like this for months before opening a full-fledged bakery. If you have the opportunity and if it figures for you, consider a home baking permit instead.

Whatever you are paying in rental figures in PER PIECE into what you are baking. Do you have a spreadsheet where you calculate costs? That's how we did it back then.

Agreenbean's picture
Agreenbean

Thanks for the feedback. I'm in Washington state. After reading your reply I researched the cottage law to happily find out that it passed in July but won't go into effect until early next year. I sent an email to the state in hopes to hear back with more information. My clients really want to get something going in December. If it means me baking at home to keep them happy, I will.

I have excel but am very new to it and don't know how to format cells to make a spreedsheet. I'm sure there are tutorials on Youtube or is there a site that has pre-formatted spreedsheets?

dryfire's picture
dryfire

I'm not sure if the 3x norm will work well if you are renting assuming that your rent includes utilities. If I understand the 3x correctly that is to include ingredients, utilities, equipment and wages.

You may want to consider some other factors and see how they compare to the 3x cost:

  1. Cost of rent per pie - how many pies can you make per hour? Minimum # of pies to achieve this (I assume if they order 10 pies the timing is different than 50, due to heating up the oven and washing dishes etc...)? What percentage of pices made can be sold (not dropped, damaged, burned etc...)? You may want to calculate a different price based on an hourly and a monthly rental at say 85% capacity
  2. Miles you would need to drive to deliver pies, acquire ingredients on a per pie basis (calculate for a full car/van/truck maybe). The going rate at cost per mile of a personal car is $0.45 to $0.55 per mile IIRC.
  3. Cost of ingredients, did you add in a buffer incase costs rise? Will the restaurant share the pirce increase?
  4. Packaging, include intial cost for reusable containers over their expected lifespan or over the time you'd like to make that cost back.

Personally, if there was not a big diference between the monthly and hourly cost per pie I would quote them the monthly and eat the difference as a startup cost. Otherwise you may want to quote them two different prices per pie based on order quantity.

If you have some more questions or need help with the spreadsheet I'm happy to help. I've never done the cost analysis for small batch production or baking, but I have done a little for larger plants.

 

mimifix's picture
mimifix

The 3x cost for wholesale pricing originated in the baking industry. This formula includes all reasonable components of a product, and certainly includes overhead (rent, utilities, insurance, etc) plus labor, packaging, and all aspects of bringing a product to market. (There is also the assumption that a minimal quantity can be produced. Not necessarily 10 dozen loaves of bread per batch; but certainly not making 5 loaves at a time.)

In my opinion, $25 rent per hour is not reasonable compared to the monthly rent most retail bakeries pay. In the past, when rates for shared-use kitchens were $10-$15 per hour I had recommended the shared-use kitchen to my students as a way to get started. Now, however, if they cannot use their home kitchen, I only recommend they find a commercial kitchen in their community such as a restaurant, deli, church, school, or social service agency kitchen.

Mileage is a separate expense category - for all miles incurred to purchase ingredients and supplies, deliver product, etc, the government allows a standard per-mile deduction. This is an important and excellent deduction, and can significantly impact your year-end taxes.

For anyone baking at home under the cottage food law, the 3x mark-up for wholesale works well considering there are few overhead expenses.

Elagins's picture
Elagins

it's hardly likely that they'll be using their kitchen 24/7, and it might be worth asking if they'd give y ou access for as many hours as you'd need to produce your pies.  in return you can offer them a price they can't refuse.

Agreenbean's picture
Agreenbean

Great feed back, thank you! I considered asking to use their kitchen. I had a barter
last year that started off well but soon turned into an inconvenience for the
owner. I'm sure I can arrange something like that with my new clients but I
want to keep things separate even though knowing it will save some money. The
plan I have in mind is to eat a majority of the cost of the hourly rate knowing
I have a professional place to operate as 'dryfire' posted. Seeing if the restaurant
will share the price increase is a good idea as well.

I am mainly concerned with the price of Pecans. They have gone up to around $18 per
pound due to droughts. I'll defiantly ask the restaurant to share the increase.

 

mredwood's picture
mredwood

Try Costco. I was there the other day. Much cheaper. 

Emelye's picture
Emelye

In my experience as a cost estimator (in other industries, not bakeries) I learned that the more detail you use in collecting your costs, the better off you are.  Of course, going too fine can make the process unwieldy so you need to guard against that too.  The ×3 equation is a rule of thumb that works OK but it assumes a great many things.  These assumptions can, if they are inaccurate, spell the difference between a business' viability or bankruptcy.

A spreadsheet that lists your fixed costs, the stuff you pay for all the time no matter what you bake (like rent, energy,  your wage, etc.), and then adds the variable costs (the costs that vary depending on what you produce) will get you a lot closer to the true cost of production.  Once you have that you can make better calculations on how to price your goods to ensure a decent profit.  You may have to make some initial guesses about what some of your costs will be.  This isn't a problem as long as you go back and check the guesses against your sales data once you have collected it.

Good luck on your new venture!