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5
First you will need to calculate all of your costs,
both fixed and variable. Fixed costs are costs that do
not change whether you produce one jar of jam or
10,000. These include rent, basic utilities, insurance,
indirect labor and taxes. Variable costs are those that
vary with production: ingredients and packing
materials, direct labor, shipping and sales
commissions.
At a certain production level, the sum of fixed and
variable costs is your total cost.
Total cost of production = Fixed costs + variable costs.
To find your cost per unit, divide the total cost by the
number of units.
Cost per unit = Total cost of production
Number of units produced
To the cost per unit, add the profit you want. This
gives you only an initial wholesale price.
Wholesale price = Cost per unit + profit (markup)
There is more to consider, such as: listing fees,
sampling costs and promotional programs.
The math is simple but gathering the complete
costing information is complicated, however critical
to the success of your business.
Step 3: What’s Your Break
Even Point?
Knowing your customers enables you to judge how
much they will pay for a product like yours. The
next step is to determine how many units you will
have to sell at a certain price to make a profit. You
have to find out your break even point.
The break even point is the point at which you have
sold enough product to cover all of your fixed and
variable costs. Below the break even point, losses
are incurred and above it, profits are realized.
Break even point = Fixed costs
Selling price per unit – unit
variable cost
For example, your company has an annual fixed cost
of production of $12,000. If your jam sells for $6 a
jar, and your variable cost per jar is $4, what is your
break even point?
Break even number of jars = $12,000
$6 - $4
= 12,000
$
2
= 6,000 jars
Step 4: Will Customers Pay
Your Price?
That is the hard question. You will need to establish
both a wholesale and retail price. Remember,
everyone who handles your product before it reaches
the retail shelf marks it up so that they realize their
profit, too. Specialty foods are generally priced
somewhat higher than mass produced and mass
marketed products. Consumers are generally willing
to pay a slight premium for specialty and gourmet
products but you must determine what the market
will bear.
This is where you use your knowledge of your
potential customer. Having a clear picture of your
buyers’ income and spending habits tells you how
price sensitive they are. If you know where they
shop, you can find out if your product is priced right
for those retail outlets. How? Visit the stores to
check prices and availability of similar products.
You can adjust your profit margin if you have to, but
keep in mind the total cost of producing your
product.
Step 5: Where Can You Sell
That Much Product?
One of the last pieces to the marketing puzzle is
determining where to place your product so that
potential customers find it and buy it. This is called
distribution, which is covered in more detail in the
Distribution and Sales section on page 45.