How Much Should You Price Your Food Product

The key to a successful business is to price your food product correctly. It impacts almost every aspect of your business.

Generally, pricing your products correctly can determine how many products you sell, creating a basis for a successful business. Nonetheless, you may easily get stuck at pricing strategy when launching a new product but you shouldn’t let it hinder you from launching.

So, we are here to help you decide on how much should you price your food product.

How much should you price your food product?

In essence, there are a few factors you should consider when deciding how much to price your food product. Namely:

  • Raw materials cost
  • Packaging cost
  • Shipping cost
  • Utility cost
  • Labor cost per hour/day
  • Wastage
  • Profits margin

So let’s say you’re selling peanut butter. How much should you sell per jar?

Now, take out your calculator, and let’s get counting.


Food Product Raw Materials Cost

Moving on, raw material cost is the cost of the raw materials that go directly into the production of the product.

The raw materials for peanut butter are obviously raw peanuts. 

The prices of raw peanuts per kg:

Normal unsalted shelled peanuts, RM8 / kg

Natural organic shelled peanuts, RM13.8 / kg

300g of raw peanuts can produce a jar of peanut butter.

Certainly, the raw materials that we will use are normal peanuts. RM8 per kg of normal peanuts can produce 3 jars of peanut butter

Hence, to calculate the cost of raw materials per jar:

Price per kg of raw peanuts/number of products that can be produced per kg of peanuts = cost of raw materials per jar

Thus, RM8 / 3  = RM2.6

However, we should also take the time to produce the products into consideration which will be roughly 4 hours to produce 10 jars of peanut butter. 

So, the cost of the raw materials to produce 10 jars of peanut butter in 4 hours will be RM26.


Packaging Cost of Food Product

Fundamentally, the packaging is the process of creating and designing the container and wrapper of your product. Basically, it serves as a cover and protection for your food product as well as a tool of sales promotion.

Therefore, good product packaging is important to attract customers and increase sales. First of all, you have to decide what kind of container you want for your packaging. The container can be glass or plastic but make sure is food-grade, bpa free and eco-friendly.

Furthermore, the price of container can vary depending on the material. It can be as cheap as RM2. Thus, you can use cheap container but ensure that it is airtight and leakproof. Let’s say in your case, you want to sell your peanut butter in a glass jar and the price for a single jar is RM2.

Secondly, you need to consider the label design and printing. There is no standard cost for label design. Basically, the price can be as low as RM50 and up to a few thousand depending on your requirements. Hence, for your product, let’s say the price for label design is RM50.

Fundamentally, the cost to print your label design depends on the materials and quantities. So to reduce cost, use economic materials such as Simili sticker especially if you are printing in low quantities which can cost RM0.50 per piece (also depending on the size).


Shipping Cost

When you sell your product online, you need to add on the shipping cost. Shipping cost in Malaysia usually cost about RM8 for standard size.

Make sure to include the cost of shipping materials such as cardboard box and bubble wrap. Cardboard box and bubble wrap act as protection from damage during the shipping process. So, let’s say it’s RM8 for the shipping fee plus RM2 for shipping materials, total RM10 for shipping.

Just an extra tip, you can include the shipping cost in your product selling price. That way, you can offer free shipping to your customers.


Utilities Cost

Utitlies expense is the cost incurred by using utitilies such as electricity and water during the production. Let’s say the utitilies cost is RM20 per month for your peanut butter production.


How Much Should You Price Your Food Product

Labour cost per hour/day

It is the amount of salaries paid to employees.

For example, the basic salary per month is RM1,500. Assuming that you’re a workaholic, you work for 30 days a month for 8 hours a day.

Daily rate

Hourly rate

4 hours rate

Salary / days = daily rate

RM1,500 / 30 days = RM50

Daily rate / Hours worked per day = hourly rate

RM50 / 8 hours = RM6.25

Hourly rate x 4 hours = 4 hours rate

RM6.25 x 4 hours = RM25


Wastage

Above all, returned products or wastage of products is inevitable. Statistically, an average of 1 out of 10 products is returned because they expired or were damaged.

Consequently, the wastage cost depends on the number of products returned. For instance, if only 1 jar of peanut butter is returned, the wastage cost will be RM2.6.


How Much Should You Price Your Food Product

Profit Margin of your Food Product

Basically, profits margin lets you know how much profit your business gains for each sale.

Firstly, let’s say you want to set the profit margin at 35% and the cost for a peanut butter jar is RM10.

35% of RM10 equals RM3.5.

Certainly, you would think to gain profit, the markup price should be RM3.5 right? Well, you’re wrong.

Here’s why.

Cost = RM10

Markup = RM3.5

Selling price = RM12

Then, we want to calculate the percentage of our profit margins based on the details above.

Markup / Selling price = Percentage of your profit margin x 100

Thus, RM3.5 / RM12 = 0.2917 x 100 = 29.2%.

So, the percentage of your profit margin if you set the selling price to RM12 is only 29.2%. But you want the profit margin to be 35% so this means it’s not the correct selling price.

Moreover, the key here is that the profit margin is based on the selling price, NOT the cost price.  Therefore, it is extremely important for you to set the correct selling price to get your desired profit margin.

So,what do you do to get a profit margin of 35%?

Selling price = cost / (1 – 0.35)

                     = cost / 0.65

Thus, RM10 / (1 – 0.35)

RM10 / 0.65

= RM15.4

So, your selling price should be RM15.4 to get a profit margin of 35%

Your markup price is therefore RM15.4 – RM10 = RM5.4.

Cost = RM10

Markup = RM5.4

Selling price = RM15.4

Hence, based on the new details above, let’s calculate the percentage of the profit margin.

Markup / Selling price = Percentage of your profit margin x 100

RM5.4 / RM15.4 = RM0.35 x 100 = 35%

So there you have it.


How Much Should You Price Your Food Product

Decide on the Retail Price

Lastly, to decide on the retail price of your product, you need to know the accumulated cost:

Raw materials cost + packaging cost + shipping cost + utilities + labour cost + wastage cost = accumulated cost

So, RM26 + RM52.5 + RM10 + RM20 + RM25 + RM2.6 = RM136.1

Then, to get the retail price for 35% profit margin:

Accumulated cost / 1 – 0.35) = retail price for 10 jars of peanut butter

Thus, for 10 jars =  RM136.1  / 0.65 = RM 209.4

So for 1 jar = RM 82.46 / 10 = RM 20.9

Therefore, your retail price of your product should be RM 21.

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