How to price a packaged food product

To price a packaged food product, first work out what each finished unit costs you: recipe, packaging, label, your time, energy and waste. Then look at the road to the shelf. If you sell to shops or through a distributor, each one keeps a margin on their own selling price, and all of it comes out of what the shopper pays. So the method runs in two directions: up from your batch to find your cost, and down from the shelf price to find what you will be paid. If the two numbers do not meet with a profit you can live on, the product needs a different price, a different pack or a different channel.

In this guide

• Cost per jar for sauces, chilli pastes and condiments
• Jams and preserves: costing cook-down loss and jars
• From your price to the shelf price
• Selling to supermarkets: costs and payment terms
• Co-packer or your own kitchen: cost per unit
• Packaging minimum orders for jars, labels and boxes
• Label and barcode costs per unit
• Gift boxes and hampers: pricing bundles
• Shelf-life tests and batch records

Step 1: from batch to unit

It all starts in your kitchen, not on the shelf. Write down what a full batch costs and how many sellable units really come out of it.

• Batch cost: every ingredient at the price you last paid, receipt in hand. If you buy oats at the cash and carry and nuts from a wholesaler, use those prices, not last spring's.
• Sellable units: the ones you count at the end, not the ones the recipe promises. Broken cookies, sauce stuck to the pot and the jar you open to taste are not for sale. The guide on how to measure recipe yield shows how to count them properly.
• Ingredient cost per unit = batch cost ÷ sellable units.

For anything that cooks down, this is where most people go wrong. A sauce loses water in the pot and a jam can lose a good part of its weight while it boils. If you work out the number of jars from the weight that went into the pot, you get more jars than you fill and a cost per jar lower than the real one. The guides on cost per jar for sauces and on jams and cook-down loss show how to weigh before and after.

Step 2: packaging, labels and everything the product wears

In a packaged product, packaging is a real share of the cost. A glass jar with a lid can cost nearly as much as what goes inside it. Add up per unit:

• Jar and lid, pouch, bag or box.
• Label and, if the retailer asks for one, a barcode.
• Tray, divider, shrink band or tamper seal.
• The outer case you deliver in, divided by the units it holds.

The guide on how to cost packaging and labels shows how to turn each purchase into a cost per unit. Two details change the number. First, suppliers sell in minimum quantities, and buying 1,000 jars to sell 200 a month leaves cash sitting on a shelf in your storeroom. See packaging minimum orders for jars, labels and boxes. Second, labels carry costs that never appear on the printer's invoice: design, reprints when the recipe changes, and barcodes. Those are covered in label and barcode costs per unit.

Step 3: your time, energy and waste

Ingredients and packaging are not the full cost yet. The loaded cost per unit also includes:

• Your time, including filling, sterilising jars, labelling and packing cases. Give it an hourly rate even if you do not pay yourself a wage today. Leave it out and your price breaks the day you hire help.
• Gas, electricity and water for the production day, plus the product's share of costs like permits or lab tests.
• Waste after production: samples you give away, units that expire unsold, jars that break on the way. If one bag in 25 never sells, the cost of all 25 is paid by the 24 that do.

Shelf life decides how much of that waste you will have. A product that lasts two weeks cannot survive a channel where stock waits in a warehouse before it reaches the shelf. The guide on shelf-life tests and batch records covers what it costs to find out and why it pays to know before you start selling.

Step 4: your price to the shop

Your wholesale price is what the reseller pays you. The usual mistake is to start from your market-stall price and "give the shop a discount" without knowing what the shop needs. The guide on wholesale and retail prices for the same product walks through the whole ladder. The short version:

1. Decide the price the shopper will see in the shop.
2. Ask the shop what margin it needs on that price. Do not assume one.
3. Your price to the shop = retail price before tax × (1 − shop margin).
4. Subtract your loaded cost and what it costs you to deliver the order.

Work the chain on prices before any sales tax or VAT. How tax is added and who collects it depends on where you are, so check your local tax rules or ask an accountant.

Step 5: distributor and shop, one after the other

If there is a distributor between you and the shop, another margin comes in. Each one takes it on their own selling price, so you calculate them as a chain, from the shelf back to you:

• What the shop pays = shelf price before tax × (1 − shop margin)
• What the distributor pays you = what the shop pays × (1 − distributor margin)

Margins do not add up. A shop on 30% and a distributor on 20% do not take 50% of the price between them: you receive 0.70 × 0.80 = 0.56, which is 56% of the shelf price, and they keep 44% together. The guide from your price to the shelf price works the chain in both directions.

Many buyers talk in markup rather than margin. A "40% markup" on what they pay you is a margin of 0.40 ÷ 1.40 = 28.6% on their price. If in doubt, convert it with the markup and margin calculator before you do the sums.

Step 6: the shelf price has to be possible

Now go to the shops where you want to be and look at what sits on the same shelf: pack size, presentation and price. The point is not to copy the price. It is to know whether yours makes sense next to the others. If the only price that leaves you a profit sits far above everything else on that shelf, you will see it in how slowly it sells.

Before you walk into a shop, also check what the law asks of a packaged product where you sell: registration of your kitchen or business, what must go on the label, allergen declarations, and any front-of-pack rules. These vary by country, so ask your local food authority. Whatever they cost belongs in your loaded cost.

Worked example: a 400 g bag of granola

You make honey and nut granola and want to sell it in 400 g pouches to delis and independent grocers through a distributor. All prices in the example are before sales tax.

The batch. You mix 12 kg of raw granola. After baking it weighs 10.4 kg (your own scale, every time). Filling loses about 0.2 kg to crumbs and dust, leaving 10.2 kg. That fills 10.2 ÷ 0.4 = 25.5 bags, so 25 bags, and the last 200 g becomes tasting samples.

Loaded cost per bag:

• Ingredients: 66.00 ÷ 25 = $2.64
• Packaging: pouch $0.42 + label $0.18 = $0.60
• Your time: 3 hours × $15 = $45 per batch; 45 ÷ 25 = $1.80
• Oven energy and other batch costs: $10; 10 ÷ 25 = $0.40
• Subtotal: 2.64 + 0.60 + 1.80 + 0.40 = $5.44
• Waste: one bag in 25 goes to samples or expires. 5.44 × 25 ÷ 24 = $5.67 per bag sold

From the shelf back to you. You have looked at similar granola and decide to suggest $12.99. The shop says it needs a 35% margin on its price, and the distributor needs 25% on theirs.

$0.66 a bag is about 10% of what you are paid. One rise in the price of nuts, or a few more bags coming back out of date, and you are working for nothing.

If you sell to the shop directly, with no distributor, you are paid $8.44. Subtract delivery: an $18 round trip to drop off 12 bags adds 18 ÷ 12 = $1.50 per bag. You keep 8.44 − 5.67 − 1.50 = $1.27 per bag, but now the driving, restocking and invoicing are yours.

What shelf price you would need. You decide that through a distributor you want at least $2.00 a bag. Work it backwards:

• Your price: 5.67 + 2.00 = $7.67
• What the shop would have to pay: 7.67 ÷ 0.75 = $10.23
• Shelf price: 10.23 ÷ 0.65 = $15.74

If a 400 g bag of granola at nearly $16 has no place on those shelves, the product as it stands does not work through a distributor. That does not mean the granola is wrong. It means this channel, with this pack and this cost, does not leave you the profit you decided on.

When the numbers do not work

You have several ways out, and it is worth trying them in this order:

• Go back to the cost. A bigger batch spreads your time and oven energy further, up to a point. The guide on how batch size changes your cost per unit shows where it stops paying. Check the packaging too: sometimes a window pouch costs more than it earns.
• Change the pack. A 250 g bag lands at a different shelf price. Do the full sum, because packaging and filling time do not shrink in proportion.
• Skip a step. Selling straight to shops leaves you more per unit, in exchange for your time and the delivery.
• Pick another channel. Some products earn well at farmers markets and through online orders and never on a grocery shelf.

Supermarkets are a separate case, because on top of the margins come listing costs, promotions, merchandising, returns and long payment terms. Before you say yes, read what selling to supermarkets really costs. And if your product makes a good gift, the holiday season opens another channel with its own sums: the guide on gift boxes and hampers shows how to price them without giving away your margin.

When volume grows

If the product sells and your kitchen cannot keep up, there are two roads: make more yourself in a bigger space, or pay a manufacturer to make it for you. The first is covered in moving from a home kitchen to a production kitchen. The second means comparing a manufacturer's quote per unit with your loaded cost, counting minimum runs and the cash tied up in stock; that is in co-packer or your own kitchen.

Either way, the method in this guide stays the same: loaded cost per unit at the bottom, shelf price at the top, and the margin of every step in between. What changes is the numbers, and you need to redo the sum every time a purchase price or a margin in the chain moves.

Do it with the calculator

In the cost calculator you enter your recipe, packaging and batch yield and get your loaded cost per unit. With that number you can work back from the shelf price and see whether every step of the chain leaves you the profit you need.