Setting your prices

How do you decide what to charge for the things that you sell? That coffee, sandwich, loaf, box of chocolates or pizza, how do you decide if you are charging £1, £10 or £1000?

If the answer to that question is, I have a look around at what other people are charging and charge that, or I try and guess what I think my customers might pay, then you need to stop that right now. You are, and I say this with love, plucking a figure out of your ass. It is absolutely worth knowing what your peers are charging and there is usually a ceiling to what the market will bear but neither of these things should be your jumping off point and they certainly shouldn't be your only consideration.

The first task here is to know your cost of goods on the product you are selling. How much do the raw ingredients that you use to make your product cost you? So if it's a flat white, what does the coffee cost and what does the milk cost? If it's a bacon sandwich; what does the bacon, the butter and the bread cost you? But won't that be really fiddly to work out? I hear you ask. Yes, it will be a bit time consuming to begin with but if you don't go through this process how do you know you're making any money on any given product? You could be making a loss. But you don't understand, we make everything from scratch, this will take ages! At Stones will sell a breakfast sandwich which includes homemade brown sauce which we make from scratch and includes 9 ingredients, and then there are another 6 components to the sandwich including horseradish creme fraiche, I understand. It can be a time consuming process but it is also essential if you want to ensure that you are actually making a profit on what you are selling.

Step two, so let's assume that you are costing up a bacon sandwich and you have worked out that the ingredients costs (cost of goods) are £1.25. Now what? If you charge anything over £1.25 you'll be quids in, right? No, wrong. You need to factor in your other costs; your staff, if you have them, your rent, rates, power etc. But how on earth do I know how much of these costs to attribute to that one bacon sandwich? There are different ways to approach this but I would suggest you use percentages. Think of your business as having three main types of cost, your cost of goods, your team and your operational costs. Once each of those areas is accounted for, what's left is your profit. You should have a percentage target for each of those areas, including profit. So, for example it might be that your targets are, 25% cost of goods, 40% staff costs, 20% operational costs and 15% profit. If you currently are working on cost of goods at 30%, staff at 45% and operational costs at 25% your profit will be 0%, and you probably don't need me to tell you that's a problem.

Let's assume that you are working to the targets in the first example and your cost of goods percentage is 25%. You are going to use maths to work out that if the ingredients costs on that bacon sandwich are £1.25 then you need to charge your customer £5 plus vat, if you are vat registered, bringing the price to £6.

The exact percentage split will depend on your business, and I can help you work out what those percentages are now, and what actions steps you need to take if they are not currently where you need them to be.

Don't run away screaming if this all sounds overwhelming. It might feel daunting if you are not a spreadsheet and bookkeeping type of a person but it is very much something you can learn. It is not something, however, that you can just ignore. Unless you are already making more than enough money, and if you are, feel free to continue with your system of making up your prices, then you need to get a handle on charging correctly.

There are all kinds of next level things, to do with menu or product range engineering, that can move your pricing strategy up a notch, and again, these are things I can help you with. But let's not run before we can walk. Start with costing up everything you currently sell and go from there.

If you would like some help and guidance implementing any of this, check out my 'Work with me' page and book a free call to have a chat about how I could help you. Lastly, wherever you currently are with this, don't feel bad about it, no one teaches us this stuff so it's ok if you don't know it. But now is the time to take action.