How to price a food product: the complete method

To price a food product, start from your loaded cost per unit, decide what margin you need, and work out the price with one formula: price = cost ÷ (1 − margin). Then adjust that price for each channel you sell through, add sales tax if your prices include it, and compare the result with what the market pays. If the price you need is far above what people will pay, the problem is your cost, your channel or the product itself, and guessing a lower price will not fix it.

In this guide

This is the overview, start to finish. Each step has its own guide with more detail:

• Cost-plus pricing, step by step
• Markup vs margin: the difference that costs you money
• How to set a price that hits your target margin
• Pricing against competitors without copying them
• How to raise prices without losing customers
• Wholesale and retail prices for the same product
• How to price a catering order
• Price endings, bundles and sizes
• What a discount really costs you

Step 1: know your loaded cost per unit

Every price comes from a cost. If the cost is wrong, the price is wrong, however well you do everything else.

The cost you need is the loaded cost per unit: ingredients, packaging and labels, your working time, energy, and waste. What you paid at the wholesaler is only part of it. A batch of brownies does not cost you the price of the chocolate, butter and eggs. It costs that plus the baking paper, the boxes, the two hours you spent in the kitchen and the corner pieces that came out too dry to sell.

Cost a whole batch and divide it by what that batch actually yields, not by what the recipe promises. If the recipe says 30 bottles and you fill 28, divide by 28. The guide on how to calculate the cost of a food product covers the full method, ingredient by ingredient.

Step 2: decide what margin you need

Margin is the share of each sale you keep after paying the loaded cost. That share has to cover two things:

1. Whatever is not in the cost per unit. Market stall fees, the phone you take orders on, fuel to the market, ads, insurance, an accountant.
2. The profit of the business. If you counted your hours, your wage is already in the loaded cost. Profit is what is left to save, buy equipment or get through a slow month.

A simple way to find your minimum margin: add up those monthly amounts and divide by your monthly sales.

If your fixed costs outside the unit cost are $500 a month and you want another $500 of profit, you need $1,000 of margin a month. If you sell $2,500 a month, your margin has to be 1,000 ÷ 2,500 = 40%. If you sell $5,000 a month, 20% is enough. That is why there is no single right margin for everyone: it depends on your costs and your volume.

If you already sell and want to know whether a product holds up at today's price, the guide on how to know if your product is profitable walks through the tests one by one.

Step 3: work out the price from the margin

With the cost and the margin, the price comes from this formula:

price = cost ÷ (1 − margin)

With a cost of $5.00 and a 40% margin: 5.00 ÷ 0.60 = $8.33. Check: (8.33 − 5.00) ÷ 8.33 = 40%.

Many people do a different sum: they add a percentage on top of the cost. That is markup, and it works as long as you know that a 40% markup does not leave you a 40% margin. With a $5.00 cost and a 40% markup you charge $7.00, and your real margin is 2.00 ÷ 7.00 = 28.6%. The difference is explained in markup vs margin. If you prefer to work with markup, the cost-plus method shows how to pick the percentage so it leaves you the margin you are after.

Step 4: a price for each channel

The same bottle does not earn you the same everywhere. Each channel takes something:

• Direct sales (farmers market, your own stall, orders by message paid in cash or by bank transfer): you keep nearly all of it. If you take cards, the card reader takes a fee.
• Delivery apps: they keep a percentage of every sale. With a commission, the price works like this: price = cost ÷ (1 − margin − commission). The guide on setting a price that hits your target margin has the full calculation with tax as well, and selling on delivery apps covers which products are worth listing.
• Shops and cafés: they buy from you for less because they need their own margin. Your wholesale price has to leave something for you and something for the shop, without your product looking overpriced on their shelf. How to build that price ladder is in wholesale and retail prices.
• Catering and events: priced per person or per order, with staff time, transport and a deposit on top. See how to price a catering order.

Your price does not have to be the same in every channel. What you do need is to know what each one leaves you.

Step 5: tax goes on last

Whether you charge sales tax or VAT, at what rate and on which foods depends on where you are and how your business is registered. Check your local tax rules or ask an accountant.

Whatever your situation, work out your price and margin before tax, and add tax at the end:

• Price with tax = price before tax × (1 + your tax rate)
• Price before tax = price with tax ÷ (1 + your tax rate)

If you calculate margin on a price that includes tax, you think you keep more than you do, because you are counting the government's money as yours. More detail in including sales tax in your prices.

Step 6: check it against the market

Only now do you look at competitors. Not before, because copying someone else's price means copying a cost you know nothing about. The stall next to you might be losing money on every jar without realising it.

To compare properly:

• Compare the same quantity: price per 100 g, per unit or per portion.
• Compare within the same channel. Supermarket prices and farmers market prices are different markets.
• Compare products that are genuinely alike: ingredients, presentation, freshness.

One of three things will happen. If your price falls within the range, good. If it falls below, check your cost is complete before celebrating. If it is well above, you need to bring the cost down, change the size, choose another channel or show why yours is worth more. How to use their prices without copying them is in pricing against competitors, and how to present a price (endings, bundles, sizes) is in price endings, bundles and sizes.

Worked example: a bottle of hot sauce

You sell 150 ml bottles of hot sauce. You costed a batch and divided it by the bottles you actually filled:

From step 2, you need a 50% margin on direct sales. All prices in this example are before tax.

Direct sales. 3.20 ÷ (1 − 0.50) = $6.40. You keep 6.40 − 3.20 = $3.20 per bottle.

Delivery app. Say the app charges 25% of the price. At the same 50% margin: 3.20 ÷ (1 − 0.50 − 0.25) = 3.20 ÷ 0.25 = $12.80. Nobody will pay $12.80 for a bottle that costs $6.40 at your stall. If you accept a 35% margin on the app: 3.20 ÷ (1 − 0.35 − 0.25) = 3.20 ÷ 0.40 = $8.00. The app keeps 8.00 × 0.25 = $2.00, and you keep 8.00 − 2.00 − 3.20 = $2.80, which is 35% of $8.00.

Local shop. The shop wants a 30% margin and will sell at the same $6.40 you charge, so it does not undercut you. It pays you 6.40 × 0.70 = $4.48 a bottle and keeps $1.92. You keep 4.48 − 3.20 = $1.28: a margin of 1.28 ÷ 4.48 = 28.6%.

Now the market. Say small-batch hot sauces of that size sell for $6 to $9 around you. Your $6.40 sits inside the range, so the price is possible. You might even round it to $6.50, which takes your margin to (6.50 − 3.20) ÷ 6.50 = 50.8%.

How to read the table: the shop leaves you the least per bottle, but you do not have to stand at a stall or handle orders one by one. If it takes 60 bottles a month, that is 60 × 1.28 = $76.80 a month for very little extra work. The app leaves you nearly as much per bottle as selling direct, as long as customers will pay $8.00 there. That decision is no longer about price. It is about channel.

Step 7: check the product is worth making

A good margin per unit is not enough. How much kitchen time each product eats matters too, because your hours are what runs out first.

Following the example: if a batch of 30 bottles takes 3 hours and you sell them all direct, you keep 30 × 3.20 = $96 above the loaded cost, or $32 per kitchen hour. If another product leaves you $20 an hour, you know which one to push when time is short. That comparison, with contribution margin per unit, per hour and per channel, is in how to know if your product is profitable.

Watch discounts too. A 10% discount on a price with a 40% margin eats a quarter of what you keep: at a $10.00 price and a $6.00 cost you keep $4.00; with the discount you charge $9.00 and keep $3.00. Before you run a promotion, read what a discount really costs you.

When to recalculate

A price is not set once and left. Chillies go up out of season, the oil you use jumps without warning, the bottles you used to buy at the cash and carry are discontinued and the replacements cost more. Recost when an important ingredient changes price and, if your margin drops below what you need, raise the price. The guide on how often to update your costs tells you when to check, and how to raise prices without losing customers helps you do it and explain it well.

Do it with the calculator

Put your recipe, your real yield and the margin you want into the food cost calculator, and it gives you the price with tax and commission included; repeat it with each channel's commission.