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eglies

Calculating costs and labour in chocolate business

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Hello I am a new chocolatier. I am calculating my costs to come up with a budget for my new business. I need help from you guys.

if lets say a box of 12 bonbons costs me 4 dollars including raw material and packaging, how much should your sales price be? Also how much would you charge for wholesale, assuming margin is between 20-40%?

How much is a reasonable labour cost per hour? 

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I'm not a chocolatier, but as a business person, I think your question is more complicated than just costs + margin = price.  What is your market?  Are you making very high end chocolates?  If so, price many times has nothing to do with costs, as sometimes the more expensive it is, the more popular it could be.  People, in general, do not want inexpensive luxury goods - they will inherently think something is wrong with it if it costs less than their perceived value.  Then again, if that's your angle, you also need to deliver on the experience to make the perceived value as high as possible.  If you're making a mid to low market item, then it becomes a commodity and it needs to be price competitive with all of its peers.

 

With that in mind, also, you need to broaden your idea of costs... it's not just raw material + packaging + direct labor... many times, the most expensive cost is overhead, including rent, electricity, insurance, marketing, etc.  These overall monthly or yearly costs must be amortized over the quantity you expect to make that month/year... how you amortize that is up to you... some businesses amortize overhead as a multiple of direct labor, some as a multiple of material costs, and others do it based on a per piece basis, but that is hard when some items in your line are more expensive than others because of either size or ingredient content - it depends on the nature of your business and what makes more sense to you.

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I agree with kenneth, much depends on the market.  Retail price is whatever the market will bear!  So is labor cost. 

 

What's the minimum wage in your area?  Here it's $14, maybe if I need someone to fold boxes and cup bonbons I could pay that little but someone skilled enough to do production would expect at least $16-18.  And payroll taxes add another 25-35%.  I don't have any employees, just a few friends who help me at events.  I feel like I should hire someone a few days a week for the holiday season but I'm not convinced it's worth it.

 

9 hours ago, eglies said:

Also how much would you charge for wholesale, assuming margin is between 20-40%?

 

Whose margin, yours or the retailer's?  Grocery stores tend to run on lower margins, but the cute boutiques want to at least double the wholesale price.  Some even want a 60% margin. Bonbons are premium, so i'd do at least $10-12 wholesale and $20-25 retail.  I do 50/50 consignment a few places and that also works. 

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Kenneth you are right I didnt mention the other costs because those are not directly introduced into the calculation of the price of my chocolates but are deducted from the assumed sales per year, those come as a separate entity. And yes I am doing this model for calculating my costs to project a 5 year project and see how viable this project will be.

 

I agree that luxury goods should have their price however when you dont have competition to compare yourself to you dont know what is a reasonable price. Similar competition who sell chocolates sell their chocolates at 0.81 cents per chocolate about 50 dollars a kg. I certainly dont fall in that category but then how high can you go to be sure you dont lose potential clients? 

 

Minimum labor here is 8 dollars per hour.

 

@pastrygirl, luckily here the margins dont go beyond 30 max 40% (retailers I meant yes) so its a good business if you want to sell wholesale but then again my product is not a supermarket product and I need to position myself correctly. 

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Although I have been a business making chocolates for several years, I have never actually dealt with pricing in a serious way.  After retiring in 2011, I began making bonbons as a hobby, giving them away at first, then when people asked to buy them, pricing them about at cost. I did not have any confidence that customers would pay more than that, particularly since I live in an area of the U.S. where people tend to be frugal with how they spend their money. Gradually as I discovered eGullet and learned more about chocolate, I drifted toward higher-end ingredients (I use Felchlin and Valrhona couvertures), but I kept the prices at about $1 per piece, plus a dollar or so for packaging, so a box of 6 bonbons was priced (and still is) at $8. I didn't really think too much about the cost of equipment (a tempering machine, a guitar, an Aw meter) because I still saw what I did as a hobby and did not depend on it for living expenses (I did not include anything in the cost for my labor or for utilities). From a tax perspective, I filed as a hobbyist because I could not meet the requirement that I show I had made a profit for several years. Some people who had traveled and had tasted "gourmet" chocolates in other places told me I was undervaluing my product, and I could see from chocolates I bought (Kate Weiser's, for instance) that mine were priced dramatically lower. Still I didn't have any confidence in my product because I saw myself as a learner--and still do.

 

Brief summary of the above:  I committed the classic mistakes of a beginner when "going commercial," particularly with pricing. But I drifted along. Then several wakeup calls came in:  First:  As word of mouth spread, sales last Christmas doubled from the previous year's, and I made and sold several thousand bonbons last December. Sales continued to grow as those Christmas gift boxes were given as presents.  Second wakeup:  When I did my taxes for 2018, I discovered that the major revision to the U.S. tax law had completely eliminated the deduction allowed for hobbyists, so even though the deduction had been a relatively small amount, it still helped me cope with my business expenses. Now the total amount I had taken in from sales was just part of my taxable income, and I owed taxes.  Third wakeup:  As a result of the tax shock, I went to see a tax advisor who specializes in food businesses. It took her only a few minutes of looking at my records to reach the judgment I knew she would: "You need to raise your prices."  But there was still the tax rule that a hobby has to show a profit in several preceding years to declare as a business and be able to take deductions from expenses. I had hoped that 2019 would be the first of those years because I could not foresee that I would need to spend large amounts of money on any more equipment or supplies. But then came the fourth wakeup:  In doing an inventory of boxes, I discovered a mislabeled carton, which meant that I needed to reorder the largest size of box. These are expensive boxes, and the minimum order is 500 of them.

 

All of these details have led me to the decision to raise my prices--and see what happens with sales. Many may suggest I begin by cutting expenses, but I think one of my selling points is that customers appear to appreciate the ingredients I use.  I am not willing to consider lowering the quality of ingredients or switching couvertures. I own too many molds to switch to ones that make smaller bonbons (and thus would cost less to make and would require less expensive, non-custom packaging). My immediate question (aside from the general one of how I could have been so obtuse in my business decisions--but maybe that's a question requiring a therapist) is how much to raise prices. My plan is to move from a price per piece of $1 to $1.50, with a small discount as the box size gets larger. And yes, I know that is still lower than practically any other chocolatier in the world. But my current plan will mean that a 6-piece box will cost $9 (up from the current $8), 12 pieces will cost $17 (up from $14), 20 pieces will cost $28 (up from $22), and 30 pieces will cost $40 (up from $32). It's a very large jump for the larger sizes, but is it too large? My sister thinks I should move to $1.25 per piece now, and increase that to $1.50 next spring. I tend to think it's better to go all the way now and then leave the price alone for a long time.

 

If you just take as a starting point that I have made some obvious mistakes, any advice on how to proceed?

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5 minutes ago, Jim D. said:

My sister thinks I should move to $1.25 per piece now, and increase that to $1.50 next spring. I tend to think it's better to go all the way now and then leave the price alone for a long time.

 

I agree with you, less fuss and confusion if you only raise the price once. 

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At what price will you break even? At what price will you begin to make a profit? Looks like you should find the price that allows you to keep doing what you love without taking a tax hit. @Jim D.  it sounds like your goal is to not lose too much money... what price do you need to charge to meet that goal? That is the price to set and then see how your old & new customers react. Wishing you all the best.

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14 minutes ago, curls said:

At what price will you break even? At what price will you begin to make a profit? Looks like you should find the price that allows you to keep doing what you love without taking a tax hit. @Jim D.  it sounds like your goal is to not lose too much money... what price do you need to charge to meet that goal? That is the price to set and then see how your old & new customers react. Wishing you all the best.

Thanks for your ideas. As you are a fellow Virginian and somewhat familiar with Staunton, you probably know a bit about the customer base. I think $1.50/piece is about the most that will fly. It will certainly come closer to covering what was lost with the tax change. The question is whether moving all at once or gradually is preferable.

 

I should have added to what I originally wrote that I don't think I will be disturbed if I lose some customers (maybe my ego bruised a little). I have about all the sales I can handle now and fully expect the number to increase at holiday time this year. I am too old to think of hiring help and growing the business dramatically. Many of the customers are my friends, though, and that makes raising prices all the more difficult.

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@Jim D. Staunton's customer base is starting to be interested in quality and the prices are going up -- that is if the acclaim that The Shack, https://www.theshackva.com/sample-menu, is getting is drawing in locals as well as out of towners.

 

For pricing, I would go with raising the pricing to $1.50/piece now (vs. staggering your price increase). If you can, sweeten the deal for your favorite customers by giving them a little something extra (lagniappe) with their purchase. You decide the criteria for being a favorite customer (close friend, family, regular customer, large order, etc.).

 

For example, I have some smallish resealable food safe bags (https://www.uline.com/BL_5561/Resealable-Polypropylene-Bags?keywords=Resealable+Polypropylene+Bags) that I can write a presonalized message on (Sharpies are your friend) and tuck a treat into that I add to my favorite customer's purchases. These treats are usually something that I do not offer for sale, they are made with the same Valrhona chocolate that I use for all my bon bons, but the treats can be reimagined "mistakes", chocolate covered pretzels, chocolate bark, small mendiants. I try to make this treat the equivalent of eating 1 to 1.5 bon bons. One lagniappe per applicable customer no matter the order size.

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1 hour ago, Jim D. said:

I kept the prices at about $1 per piece, plus a dollar or so for packaging, so a box of 6 bonbons was priced (and still is) at 

...

But then came the fourth wakeup:  In doing an inventory of boxes, I discovered a mislabeled carton, which meant that I needed to reorder the largest size of box. These are expensive boxes, and the minimum order is 500 of them.

 

 

How expensive are these boxes?  If they're more than $1, charge accordingly ;) Especially since you're not making a ton on the chocolate itself.  If you charge $2 per piece, maybe the box cost becomes negligible.  How low does the price go if you get 1000, or 3000?  Yes, it's an investment and takes storage space, but if you plan to stay in business for 3-5 more years it might pay off to do a larger run.

 

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Posted (edited)
1 hour ago, curls said:

@Jim D. Staunton's customer base is starting to be interested in quality and the prices are going up -- that is if the acclaim that The Shack, https://www.theshackva.com/sample-menu, is getting is drawing in locals as well as out of towners.

 

For pricing, I would go with raising the pricing to $1.50/piece now (vs. staggering your price increase). If you can, sweeten the deal for your favorite customers by giving them a little something extra (lagniappe) with their purchase. You decide the criteria for being a favorite customer (close friend, family, regular customer, large order, etc.).

 

You are certainly right about the changing landscape in Staunton (oldtimers are alarmed at how fast this is happening--getting too "artsy"). It's acquiring a bit of an Asheville, N.C., vibe with a resident Shakespeare theater and numerous music festivals, not to mention the glass blowing place with which you are familiar). Some of those people are making up my newer customer list. Yes, The Shack gets customers (and reviews) from D.C.; it can be difficult to get a table now. Zynodoa, a restaurant with "inspired Southern cuisine," is also drawing crowds, has a new chef who worked at one of Thomas Keller's places (my chocolates are on the menu there).

 

I am really intrigued by your lagniappe idea. I already give the "trimmings" from slabs cut on the guitar to some of my closest friends, and though I was embarrassed to offer this at first, I discovered they love it, I guess it's the idea of a freebie (a manager at Zynodoa now looks for the trimmings packet to arrive). And I do sometimes have leftover or slightly damaged bonbons that could be packaged as you suggest.


Edited by Jim D. (log)
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16 minutes ago, pastrygirl said:

 

How expensive are these boxes?  If they're more than $1, charge accordingly ;) Especially since you're not making a ton on the chocolate itself.  If you charge $2 per piece, maybe the box cost becomes negligible.  How low does the price go if you get 1000, or 3000?  Yes, it's an investment and takes storage space, but if you plan to stay in business for 3-5 more years it might pay off to do a larger run.

 

The boxes are expensive. In the initial order of the 30-piece size they were $2.40 each!  That was for 500 (they are large--10" x 10" x 1.5"). Of course they would have been substantially lower in price if I had ordered more. But I have just my basement for storage and had to spend a lot of time this week determining where the next order of 500 will go. The catch is that the place I ordered them was the only one I could find after much searching that would manufacture such a small order. Their prices were on the low side, but it turns out (surprise!) that you get what you pay for. I am finding severely damaged boxes in the cartons, and they had terrible customer service (they kept telling me the order was coming any day, then it became obvious they were moving my order to the back of the queue in favor of larger Christmas orders). So I am switching to another place I have since found that will do small runs, but it's going to cost even more. And I must confess that whereas I love the boxes I have, no customer would be willing to pay $2.40 for the box. Just to demonstrate how people are around here (probably other places as well), many regular customers return the empty boxes for reuse.

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Great memory @Jim D., wasn’t expecting you to remember that I go to Staunton for their glass festival. Interesting information about Zynodoa, I’ll try to check it out next time. Excellent that they are offering your chocolates!

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I believe, from my perspective, that you are torn about this (if I am completely wrong, then ignore me haha).  But it sounds like you are in the middle of deciding whether to take this on full-time as a business or not.  You mentioned that you are wanting to go from hobbyist to a business, but it appears you are not treating it like that for several reasons.

 

1.  You never mentioned your break-even point.  I have a few basic worksheets I used a while back to run different numbers to get a feel for my business startup.  I am going to attach them, but anyone can change them around and add and take things away as they see fit.  The two Word document numbers will need to be used in the Excel file (anything in blue in the Excel file is to be changed by you while anything in black is static and should not have any inputs).  There are probably better documents out there, but I liked this one for its simplicity (we used them during Entrepreneurship courses).  This will take into account your fixed and variable costs.  I left numbers in there in case you want to see how it works.  

 

2.  You mentioned being forced to buy 500 pieces from a box distributor even though they are terrible.  Damaged product and poor customer service should be a quick divorce from them.  You are the customer and in this day and age of online distributors, there are too many better options out there.  I know it takes forever to find what you are looking for exactly because there are so many options, but oftentimes, these places have sales reps in your region.  One of my good friends uses Nashville Wraps and after he called them, they were meeting with him the next day (I am not promoting them, just using them as an example).  Sometimes we forget that WE are the customers at times too, which means we deserve our vendors' best.  I imagine you would be mortified to send out mislabeled product, damaged goods, and provide poor customer service.

 

3.  You are looking too much at your pricing as a cost-based model.  For chocolatiers (and honestly most products and services), that is often a mistake unless it's a commodity good.  You are not selling corn or wheat.  Chocolates are, for most intents and purposes, a luxury good.  If you have a good product (which I imagine you do from everything I see on here), people will value it and buy it (value-based pricing).  When it comes to chocolates, if they are priced too low, I assume the producer is either selling millions of units (very unlikely) or cheaping out on the ingredients or process.  I know I would be very skeptical of a chocolate at a $1-1.25 price point.  I cannot help but feel even $1.50 is too low for your time and effort.  Most professional chocolatiers are typically at the $2/piece average price point it seems.  That makes sense, and I would be inclined to follow that similar lead (competition-based pricing).  And of course, you can discount up to $1.50/piece as the piece per box or order increases.  There is a reason chocolatiers enjoy margins most other food-based businesses will never come close to hitting.  Typically low overhead and minimal equipment compared to a restaurant are an attractive arrangement.  I think you will be pleasantly surprised what the market in your area will bear.  The worst thing you can do is be wishy washy about your prices by increasing them a little at a time.  At the very least, set it at $2 and then run discounts or promotions to help offset it if you feel uncomfortable with $2/piece.  That higher price point means you can withstand some ingredient price increases without it completely wiping out your margin, forcing you to raise prices as the market shifts up and down.

 

I hope I have not offended you in case you already know all this.  Just my perspective outside, looking inward.  I think what you are doing is exciting and it also helps me refocus on things I forget in my own fledgling business.  Hope you are well.

Sweet Merry Berry Startup Costs.doc Sweet Merry Berry Income Streams.doc Sweet Merry Berry Cash Flows.xlsx

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@Merry Berry, Far from being offended, I am very appreciative of all the effort you put into responding to my questions and concerns. I will certainly check out the attachments.

 

A couple of things make my situation different from yours:  You are in Chattanooga (pop. 179,000); I am in Staunton (about 23,000). I imagine you have a more affluent potential clientele, certainly a larger pool from which they can come. Although I lived in Boston for most of my adult life, I grew up here and know it (and potential customer base) well. To make chocolate matters worse, there is one of the largest Hershey's plants in the U.S. just outside Staunton, and to most Stauntonians, that represents chocolate (this one specializes in Reese's Cups, definitely a crowd-pleaser). I interviewed to sell gift boxes for VIP guests at a new hotel in town. The manager agreed the chocolates were attractive and tasted good, but what they were thinking of was...[after a slight pause] more along the lines of Hershey's milk chocolate. And he actually was bold enough to try to negotiate the per-piece price of $1 downward. That's Staunton (and probably most small cities and towns).

 

You are quite right that I am torn about raising the prices. Or, more accurately, I was torn, since this morning I went ahead and announced an increase to $1.50 per piece (I am not willing to go higher, even though I know $2 is the going price at most places). So far the reaction has been orders placed as usual with no comment about the prices or, in several cases, reactions like "hey, quality costs" or "it's about time you took this step." No negative reaction, but of course those who can't or won't afford it just won't order. I am also going to raise wholesale prices--that will take even more courage since these places are used to making huge profits from the chocolates.

 

About the boxing:  Believe me, I spent a summer researching packaging. Many of my bonbons are larger than typical ones, and I like them that way (besides, I am not about to start collecting molds all over again). Their size means I need trays with cavities 1 1/2" square and boxes at least 1 1/2" high. That means custom boxes. Places like Nashville Wraps, U.S. Box, Papermart, A Specialty Box, etc., have nothing that would work. I don't have storage space for large quantities of boxes. That means higher prices per box. Those are simple facts.

 

Since I began as a hobbyist (self-taught, no professional training, but--I should definitely add--eGullet-trained), I never needed to calculate the hidden costs of doing business (electricity, gas, water), nor any allowance for labor or profit. Frankly I have no idea of how to do that with any accuracy (how much money I spend on the kitchen lights used for making chocolates vs. how much I spend to have them on when I am cooking my dinner). I have calculated the cost of every flavor of bonbon I make and of packaging, and I know that combined cost averages around $1 (ingredients like pistachio paste raise that cost rather quickly!). I am simply not bold enough to set my pricing based on the luxury status of my product.

 

Filing taxes as a business requires having made a profit for something like 3 of the past 5 years. With all my expenses, I cannot, in all honesty, state that to be true, and I am not willing to be audited by the IRS.

 

Thanks again for your advice.

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Well sounds like you have thought it through.  I should have known you would have from reading other posts on here from you haha.

 

Staunton might be small, but what is the surrounding area population?  Of course, going further outside your zone might not be desirable, but that would be my first inclination.  20k is a good start, but from looking at the map, it appears your 100 mile radius puts you within quite a bit of population.  But I understand if you are not trying to work that hard as you mentioned earlier.  That would be a tough game of selling all over the map and trying to make chocolates.

 

As far as Hershey's, blech.  I am quick to sample someone my chocolate's (or nearly anyone else's for that matter) tabled with Hershey's.  I know it is "popular", but once you start to educate people on that disgusting burn in the back of the throat Hershey's causes, then they start to notice it and how smooth artisan chocolate can be.  How many people say they "hate" dark chocolate, but change their tune when they try good dark chocolate paired with great flavorings?  I know that is an uphill fight in some ways, but younger people seem to be bigger fans of chocolate other than the same ole same old.  

 

As far as a profit.  Are you not showing a profit at all from year to year?  If so, then what keeps you doing it exactly (I know profit on taxes is not always equal to profit in the real world)?  I do not know your situation, but I would believe you qualify in nearly each category of Hobby vs Business https://www.journalofaccountancy.com/issues/2013/oct/20138370.html  .  If your loss is really close year to year, then that typically passes the smell taste with the IRS, but obviously I would listen to the professional you mentioned before😉

 

Just a few thoughts, but I am sure you have probably thought about them already.  I hope your increase in price is a success!!

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