You're ready to start your packaged food business and now you have a lot of little details to deal with. Today we're going to talk about pricing. You want to make sure that you actually price your product for profitability. There are four mistakes that I see packaged food business entrepreneurs make when they price their product, which can lead to an expensive hobby and not a profitable food business.
Mistake number one is not understanding what cost of goods sold is, or what's included or how to calculate it correctly. Cost of goods sold is commonly referred to as COGS. This includes your food ingredients - everything it takes to make the actual product all the way down to the salt added. It also includes your packaging - anything you need to hold the product. The next component is active time making the product and the last is active time packaging the product. These are all costs that you want to ensure you're covering when you're pricing your product so you're making a profit and not just breaking even.
Mistake number two is you aren't including accurate labor in your cost of goods sold. At the start of your business you might not be writing yourself a check for the labor that you've put into the business. But as you grow, you might want to pay someone to work on that product. But you want to factor that cost into your COGS now so that as your business grows, you're accounting for that cost as well.
Mistake number three is not understanding all of the overhead expenses that go into your business. A lot of the time, people want to factor in kitchen time or market fees into their cost of goods sold and it doesn't go into that category, but into your overhead. These are costs that aren't included in COGS but are other business expenses. So after you've determined your cost of goods sold and what margins you'd like to charge, you need to factor in the other expenses that go into selling the product.
That brings us to mistake number four, not understanding how to price through distribution and having price parity. When you start out, you generally think of a direct to consumer price. This price will allow you to make a profit and pay for all your overhead. Eventually, you might want to sell your product wholesale to a grocery store and then that cuts into your profit because they'll take a cut of it. And then if you add in a distributor, that also takes another part of your profit. So even in the beginning phases of your business and product, you want to ensure that you're pricing it in a way that is sustainable even in these different situations so that you can offer our product in all three of these different situations at equal prices.
If this sounds a little overwhelming, I totally get it. It can be very confusing, but I want to help you. I have a ton of resources on my website including my business checklist. It's a step by step guide of all the things that you need to do to start that food business.
Also, if you want to join a community of other food business entrepreneurs, I highly encourage you to check out my Facebook group, you can ask to join that group and be among other food business entrepreneurs.