Pricing for Chocolates

[chocoera]

uh. yeah. no question about it!

[Marmish]

uh. yeah. no question about it!

I already put in my personal day request.

[lebowits]

For any who are interested. I've begun an experiment in "price elasticity" if I remember the term correctly from my college economics classes. After doing a bit more research, I came to the conclusion that I was pricing myself a bit higher than the local market. So after fiddling with the numbers, I came to what seems to be a similar "tiered" pricing structure that is more in line with the few local competitors who are doing similar work to mine. Interestingly, my weekly sales have stayed roughly the same in whole dollars. I'm selling more chocolates, and a few more of the higher priced boxes as opposed to the smaller boxes, but the revenue is relatively constant.

I've also started selling in "quantity" to a local restaurant at a "wholesale" price which still provides me a reasonable profit margin since I don't have to package the pieces for them. I hope to have another restaurant offering my chocolates in the next week.

Now, I just hope all the exposure, samples, business cards, etc. pay off in orders for the holidays!

So the first results are in and are rather inconclusive. The first weekend of my new pricing, total revenue was roughly the same as before. Sold more stuff, but at a lower price. Not a bad result, but not great either.

Last weekend, I'm not sure what really happened, but my revenue was up 50% from previous weeks. This could be that I'm beginning to gather a following of sorts, or that people are now used to seeing me at the market. This weekend will be interesting as the weather is supposed to be cold and wet which will probably drive people away. I've got my fingers crossed.

[Lior]

I will keep my fingers crossed for you! If only I could send you part of our warm sunny weather! It would be good for the two of us!!

[xxchef]

I wanted to support and encourage you on your decision to sell wholesale. I know a lot of people don’t “get it”, but I do. Our 8-year old business (not primarily chocolates, but they’re a part of it) is about 98% wholesale and has been from the start, by design. I didn’t notice you discussing your reasoning for adopting a wholesale business model but I can think of a handful of good ones without even trying. In our case it stems primarily from a combination of our extreme rural location and disinclination to interact regularly and up close with the public (go ahead, call me a grumpy old hermit, I can take it). Anyway, I speak with some authority in saying that choosing a wholesale core for a small business can be rewarding and profitable.

On to pricing specifics…

My background is restaurant culinary so I am inclined to look at our food product sales here in terms of “food-cost” as generally expressed as a percent of the sales price. I.E. if the ingredients for a product costs me $1.00 and I want to be running a 30% food cost (FC) I need to charge $3.33 for it. Of course FC is only a portion of your total costs (labor, packaging, overhead, etc).

Another common way to look at pricing is by examining the “margin” (profit) of each product. There an old expression “you can’t put percentages in the bank”, but you sure can put margin/profit/dollars there. If you are selling a box of chocolates for $20 and all of your expenses come to $11, your margin is $9.00.

Which would you rather sell a $30 box of chocolates with a 30% food cost that nets you $8.00, or a $20 box with a 40% food cost that nets you $11.00? Well, unless you are getting some other compensation based on either FC% or total sales $$$, you’ll almost certainly want to make that extra $3 per box.

The next consideration is your sales mix. Chances are that over your whole range of products there will be some that cost more to make than others. There will be some that take significantly more labor to make than others. There may be some that have more expensive packaging, are more perishable etc, etc. You will also (as you have mentioned in your posts) want some type of incremental pricing with smaller boxes of chocolates costing more per-piece, than larger boxes. For the sake of your sanity and to avoid a lot of confused customers, you will probably not want to have as many tiers of pricing as all of these variables might suggest you might need. The way around this is through forecasting your sales mix and balancing your entire product line to cost-out where you want it NOT each item. In other words, it’s OK that if you want to be running that 30% FC if some of your items (especially slower sellers) are at 40%, or so, as long as there are some 25% FC fast-sellers to make up for it down the road.

Our decision here was to base our pricing on a margin percent, averaged over the whole product line. In other words we said (something like), “At the end of the year, we want to have had half of every dollar we made in revenue we made be retained as profit”. Toward this end we cost out each and every recipe, calculated all of our related expenses for each product, made some projections on what we thought our mix of sales would be (both on a product-to-product basis and on a retail vs wholesale one) and came up with a pricing scheme that would give us the return we were looking for. Yes, some of our items don’t come anywhere close to giving us that margin but others do a bit better. We review our costs, mix and pricing at least once a year and pretty much have it down to a couple of hours with a spreadsheet now.

The one last important pricing component to consider is your market. You may find that after doing all your calculations and forecasting, that your target prices are out of line with comparable/competing products in your market. If your target prices are too high you need to investigate either cutting your costs or cutting your profit to stay competitive. If your pricing seems too low you’re in great shape to decide if you want to 1) play the price war game and undercut your competition (be aware of the risks of appearing “cheap”), or 2) raise your target price a bit, and make a little more money at the end of each week.

Edited October 17, 2009 by xxchef (log)

[prairiegirl]

I would challenge you to run your financial calculations exclusively on chocolate...and artisan chocolate at that. The beauty of your model is that you have a variety of products ...as you said you win (profit) on some, and barely make it on others. Reminds me of Walmart! Working with high end chocolate is expensive, using organic or high quality ingrediant is expensive, and above all else it is a labour intensive job. I have played with the numbers and ran the cost/profit projections and wholesaling is not woth the trouble.

Also if you live in a depressed economy area where the recession is in full bloom, rents, and other overhead are lower which may make your business model attractive.

Wholesaling..twice the work for half the profit.

Debra

BBA

[xxchef]

I would challenge you to run your financial calculations exclusively on chocolate...and artisan chocolate at that. The beauty of your model is that you have a variety of products. ..Reminds me of Walmart!...

Well it would be just plain silly to enter into a business that makes exclusively one line of product that you can't make money with. That's why, once we had decided to concentrate on selling wholesale, it was incumbent upon us to include a range of products that would contribute to our success. That’s simply good business. I’m going to take your “Reminds me of Walmart!” comment as a compliment on our profitability, because I just don’t understand how offering the variety our customers want is a bad thing.

…Also if you live in a depressed economy area where the recession is in full bloom, rents, and other overhead are lower which may make your business model attractive.

What I said was that I lived in an “extreme rural location”, nothing about the local economy (which happens to be weathering the current downturn pretty well, thank-you!), but you are missing the point.

By focusing on wholesale business one can take advantage of inexpensive real estate whereever your location. I see from your eGullet profile that you are in the process of opening a retail store (congrats!). For you to expect your venture to succeed you need a prime location for your store to ensure high traffic and good visibility. You will pay a premium in any market for such a location. A wholesaler can work out of a warehouse in the worst part of town (or as in my case a ranch 200 miles from the nearest metropolitan area). This can bring rent/overhead to an embarrassingly low point so as to be almost an insignificant factor.

While a wholesaler can concentrate all his efforts and funds on building and maintaining a functional, safe and efficient workshop environment, a retailer needs to divide his energies and resources between the working areas and the “front-of-the-house” considerations. Ditto goes for staffing.

Wholesaling..twice the work for half the profit.

There is something else I haven’t touched on regarding wholesale business that I meant to mention earlier. I love the fact that my wholesale customers are (as a whole) regular and predictable. I know that every Saturday, week in and week out I will have a stack of emailed orders sitting in my in-box. I can usually predict within in a few dozen pieces what my base customers are going to order depending on the season etc. That makes for a very organized and sweet work flow. While many retail stores count on repeat business for success I think that substantial, regular weekly orders from retail customers is rare. My YTD annual average sale, across all categories, is $271. My primary wholesale customer base (those who order regularly) is only about 40 accounts. Servicing 40 accounts is a TON faster and easier than what it would take to get that much revenue in retail sales so I don't see it as "twice the work" at all. Also, for the record, our wholesale pricing is actually about two-thirds of our retail price (not half!).

[alexandra]

Hi Fellow Chocolatiers, Confectioners, and Pastry Chefs -

I 'd like to introduce myself. I am new to Egullet ( new to selling my goods too! ) Just now finishing up my classes to become a professional chocolatier and opening my business selling wholesale firs, eventually opening up a chocolate shop selling a few bakes goods.

I've met RobertM recently through the people at Cargill. He's suggested I join your forums ( thank you BOB! ) and so I've been reading your posts for a couple of weeks now. Very inspirational and educational! I'm really excited to be joining your forums.

Question :

I'm just learning about pricing and need to start figuring this out quickly as I already have some people who have agreed to test market some baked products for me. Any suggestions? I am a bit overwhelmed right now. For example do I include my packaging in my costs of goods and then look to double that as my wholesale price? Any thoughts on this will be VERY helpful . Thanks!!

[Edward J]

Hang on there a sec...

"Wholesale" has a few advantages. True, it's not perfect, but it has it's advantages.

1)It's a contract and it's sold. Say you get a job for a wedding, 200 boxes of 2 pcs. You know your costs, you know your labour, and when it's done, it's sold--no sitting around getting old waiting for someone, it's sold.

2) If you have a shop like I do, you know you have to have labour at-the-ready to serve. Yes We're a Mom & Pop, but it's still labour filling up display cases and waiting on customers. With wholesale you don't have this wastage, and you can schedule your labour to the greatest effect.

Now, other people buying my stuff and marking it up another 40% or 50% to sell in thier stores is NOT my idea of doing business, and have so far avoided doing it.

But I will offer prices better than walk-in prices for weddings, showers, parties, catering, etc.--as long as it's ot for retail. I can also customize my products (i.e match the wedding colour scheme...) and charge for this service--but only on volume.

It's something to think about....