This is the blog post you need to calculate your food product cost and make sure you’re making money, too. I’ll walk everything included in your cost of goods sold and how to calculate it. Then we’ll walk through how to price your product in different sales channels like grocery stores or distributors.
Oh, and examples. Because nothing with numbers makes any sense without examples. To track the costs of producing each food item, you may also find it beneficial to download our free food cost and pricing spreadsheet. Here we go.
What’s included in your cost of goods sold?
Simply put: Anything you do or use to produce a finished product goes into your final product cost. Some people include all the overhead of a business in your cogs, but I won’t here because many of you are just starting out. Here’s a short list of what absolutely needs to be included:
- Your ingredients (plus shipping)
- Your packaging – plus shipping (jars, bags, boxes, labels, string, etc)
- Your labor (even if you produce in your own house – more on that later)
Why include shipping?
It’s part of getting that ingredient to your kitchen. Here’s an example of how much shipping makes a difference. You order a 50# bag of flour for $50 – $1/pound. But, it costs you $25 to ship the flour. Your $1/pound flour skyrockets to $1.50/pound.
That ultimately increases your product cost. That’s why manufacturers order enough raw materials to get free shipping or spread shipping across more items by increasing the order size.
Why include your own labor?
If you’re making products in your house, you have to include labor because, if you don’t, you’ll lose most of your gross margin when you you move to a shared-kitchen or co-packer. For example, if it takes you an hour to make 12 jars of jam, and you “charge yourself” $15/hour, you’ve got $1.25 just in labor cost.
Pro Tip: Keep track of changes in your cost of goods sold (COGS) using this spreadsheet. When your ingredients, packaging, and labor increase (or decrease, if you’re lucky). your total product cost changes, too. In some cases, you’ll swallow the increase. In other cases, you’ll have to increase your prices. And don’t be afraid to increase your prices.
Let’s look at an example, now. I’ll use Michael’s Lemon Blueberry Jam as an example:
Michael’s Lemon Blueberry Jam – Ingredient cost
(Note: I’m using fictitious numbers)
The total cost of ingredients is $2.79/recipe. This recipe makes 12 jars of jam. That means your ingredient cost is $0.23/jar. Now, let’s look at packaging.
I’m packaging my Lemon Blueberry Jam in a glass jar with a silver lid and a label. Let’s look at each component.
- 2,400 jars
- $1,896.00 + $300 in shipping
- Total cost = $2,196.00 / 2,400 jars
- Cost/jar = $0.91
- 2,400 lids
- $300 delivered
- Total cost = $300 / 2,400 lids
- Cost/lid = $0.13
- 5,000 labels
- $250 printing
- $75 in plates
- Total cost = $325 / 5,000 labels
- Cost/label = $0.07 (rounded)
TOTAL: $1.11/jar in packaging costs.
So far, our total product cost is $1.34/jar — and we haven’t even added labor yet! Pretty crazy, huh? Let’s look at labor:
Labor costs: Let’s take the example above, but increase your production capacity.
- 250 jars
- Produced in 4 hours
- 1 person at $15/hour
- Total labor: $60
- Labor/unit: $0.24
Total Product Cost: $1.48/jar
Let’s review. If you held a jar of Michael’s Lemon Blueberry Jam in your hand, it would cost you $1.48. That includes ingredients, packaging, and labor.
Now, you’ve got the fun part — pricing your product through distribution. That means broker (even if you don’t have one), distributor, retailer, and finally, the end consumer – the price on the shelf.
Related Reading: 25-Step Plan to Making Your Food Company a Reality
How much do you think your $1.48 jar of jam is going to be on the shelf? Let’s find out.
The food industry works on margin, not markup. You can read about the difference here. Before you send your jar of jam through distribution, you’re going to want a 40-60% margin. Here’s how to calculate your margin:
Price to distributors = COGS / (1 – margin %)
Here’s how your price changes with different margins:
- 40% margin: $2.47
- 50% margin: $2.96
- 60% margin: $3.70
That’s a difference of $1.23, depending on which margin you choose. You want a high margin so you have room to fit a broker’s free of 5-7% into your cost structure. Plus, you want to have room for promotions when you start using larger distributors.
For simplicity’s sake, we’ll say you’re going to have a 50% margin. That means you’ll sell your jam to a distributor for $2.96/jar. Now, let’s look at what your distributor would sell your jam to their retail accounts for….
Distributors usually take another 30% margin.
- Price to retailer = $2.96/ (1 – margin %)
- Price to retailer = $2.96/(1-0.3)
- Price to retailer = $2.96/0.7
- Price to retailer = $4.23/jar
This means a couple things. This is the price a distributor sells your jam for to a retailer. And, more importantly, this is the price you sell your jam to a retailer. Don’t give them a special price. Give them the price your distributor would give them. Now, this cost goes up, if the distributor has to factor in