Costing your product....

[JerBear]

I know that this is a subject that people may not feel comfortable discussing as some of it might be proprietary but in case you want to help me out I'm trying to figure out a rate for wholesale.

When I sell fresh sausages I've been selling them for $10/lb and working at approximately 30% food cost (some a little more, some a little less). What would a fair wholesale rate be, 30% off retail? 20%

Discuss amongst yourselves...

[BriCan]

The question is (no disrespect) how do you actually cost out your sausage ??

Meat
pork
beef
back fat

Spices
salt
pepper white
pepper black
?
?
?
?

Casings

Total

x 40% on sales not on cost

[JerBear]

Costing is figured to the gram, not counting waste.

[Thewitt]

Pricing and costing are two different, though related items.

You need to understand your costs, total costs, in order to ensure you sell your product for a profit, however if you simply let cost dictate price, you are missing out on the whole art of selling.

Though I'm new to this business, local market conditions are setting my selling prices - both wholesale and retail. Wholesale orders must be large enough to make it worth my while. Retail prices are higher than what you would pay for a bland product purchased in the supermarket, made overseas and brought in frozen...

My specialty sausages are higher priced than the other varieties, but they are high quality and only available from me as well.

Will I have to adjust prices over time to market demand? I'm sure I will. For the time being, I'm getting a very good price in a market with limited options, and I understand my total costs as well as margins. Repeat business and customer recommendations and satisfaction is important as well. The customer must be happy with his purchase, be willing to come back next week, and to recommend your products to his friends and family.

It would be relatively simple to set a fixed markup over actual costs - don't forget to include overhead costs, including paying yourself a salary - but if the market will bear a higher price for a specialty product, don't be afraid to charge it.

-t

[BriCan]

Though I'm new to this business, local market conditions are setting my selling prices - both wholesale and retail. Wholesale orders must be large enough to make it worth my while. Retail prices are higher than what you would pay for a bland product purchased in the supermarket, made overseas and brought in frozen...

I do find the above confusing -- sorry.

The way to price out sausage (fresh or otherwise) is to cost out meat/spices/casings = total (I do not think I have forgotten anything?) then x by 40% on sales (not on cost) this will give wholesale price --- x the wholesale price (meat/spices/casings = total x by 40% on sales) by 40% on sales will give the retail price

[JerBear]

Ok, so just to confirm I'm understanding your process Robert, you knock 40% off retail for wholesale orders? That's what I did for my last catering gig so I guess I was in the ballpark...

[Thewitt]

Though I'm new to this business, local market conditions are setting my selling prices - both wholesale and retail. Wholesale orders must be large enough to make it worth my while. Retail prices are higher than what you would pay for a bland product purchased in the supermarket, made overseas and brought in frozen...

I do find the above confusing -- sorry.

The way to price out sausage (fresh or otherwise) is to cost out meat/spices/casings = total (I do not think I have forgotten anything?) then x by 40% on sales (not on cost) this will give wholesale price --- x the wholesale price (meat/spices/casings = total x by 40% on sales) by 40% on sales will give the retail price

I would say that's a minimum price. I get 50% more than that for most of my sausages, and double that for one variety, because my customers are willing and happy to pay.

Retail prices do not have to be all about a formula, but rather can also reflect what the market will bear as well.

A fair price for a quality product does not limit your profit in all markets.

[RodinBangkok]

This was posted as a question in the commercial section, so I'll give my 2 cents from that perspective, as this may be overkill for the little guy making a bit of sausage out of his home kitchen, in which case its really an emotional call on pricing where you are happy making a bit of sausage on the side and getting some pocket money from it and what you charge it not related to what you should be calculating costs from.

In the above posts all I see being used is the direct material cost for the product, there are other costs that should be taken into account. These costs are usually calculated based on hourly rates for processes or other factors. If you take the process of grinding meat and break it down, you would get a per hour rate. You then plug this rate and the hours it takes to do that process in your BOM, and it is calculated on a per piece or weight of product. Here are some cost account categories as an example only.


direct material cost
Indirect material cost
Variable manufacturing costs
fixed manufacturing costs
Fixed overhead costs
variable overhead costs
General and Administrative costs


Product costing is based on these costs as related to the product (a very oversimplified answer, there are many factors in this calculation)

Product Pricing should split out as to types, retail, wholesale, transfer, and others.

A suggested retail price should be based on market information about the product, and its competitive products and set from market information. The SRP is what may be publicly displayed in advertising or on the product itself. Some retailers will then tell you what your wholesale price needs to be to them based on this SRP. That may included what category the product fits in, for instance if your selling fresh sausage into a deli retailer he may calculate his markup at 75%, and say based on your SRP you need to sell to me at that wholesale price. If your selling fresh and are responsible for floor stock and replacing out of date yourself, then the retail M/U is much less, or should be.

IMHO not based on a simple percentage of the direct material costs as suggested above.

Wholesale price should be quoted to a qualified customer based on volumes, their purchase history and or credit rating and other factors. This is very much a case by case calculation that takes into account a lot of factors that will make it hard to simply pull a number from a table, that is if you want your pricing to be competitive and yet profitable. Again definitely not just a percentage of the direct material costs. Case by case is how we calculate this and only to qualified customers, meaning you can't just call up and have someone tell you the price without going thru a quote process.

There's a lot of factors in pricing product, but what the market will bear is a major one. I'd be leaving a ton of money on the table if I were to price our product solely on direct material cost at a fixed percentage.

Cost accounting is not difficult to understand if you take the time to study the basics, but like anything it can get complicated, but does not need to be. If your going into commercial business I'd suggest you take the time to study about cost accounting, a lot of info on the web and its the best way to have a solid handle on your product costs, and also allows you to setup budgets and variance reports from that info.

Perhaps a lot more than you want to take on but I hope may be useful.

[St-Anthony]

Thewitt is completely right and explained right. The price of your product has to be based on % of profit but it is only one factor. The image that you want to give your product is as important in deciding the price of your product as a simple cost + %. I have learned this lesson the hard way. When I started my operation, I would base my prices on the cheapest prices on the market (Wal-Mart, Maxi, Super C, etc..) I could sell at their prices and make my 30%. Without knowing it, I was sending the message out that I was selling cheap meat. My customer base slowly became composed of people that saw food only as fuel to be bought for the cheapest possible price and my main competitors became No Name products. I was selling top quality products at No Name products price just because I was making 30%! When came time to sell in bulk or the price of meat would jump unexpectedly for short periods of time or any other problem would arise, I had to take it out of my 30% because of the image I had given to my products. It took me a long time to slowly change my image and it is still going on; I still loose customers that tell we that they can get it cheaper at *?* but I am slowly replacing them by customers that recognize the quality and the effort that is put in to my product and don't mind paying for this premium.

So the lesson learned here is sell your product for a fair price taking in consideration your cost + your time + the extra effort that you put in your product compared to others + the quality of your ingredients + a cushion for sudden unexpected circumstances etc. and work at getting the best price that the market is willing to pay for each of your products. Also take the word cheap out of your vocabulary replace it by high quality.