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'Economy of Scale', can you apply it to your cake business? - Page 2

post #16 of 25
Quote:
Originally Posted by jason_kraft

Quote:
Originally Posted by AZCouture

It is just as much work for a two tier to serve 12, as it is for 24, and even 50 for that matter. Not a big difference in ingredient cost either. Heck, a 50 serving cake with minimal detailing has the potential to be a LOT less work than a cake to serve 12.


I came to the same conclusion, which is why I put together a sliding scale of per-serving prices, with high prices per serving for small cakes and lower per-serving prices as cakes get larger. The price drop is less than the cost savings in order to maintain increasing margins as you scale up.



AZCouture, I agree. I believe Jason's point is pointing at a way to encourage the customer to buy not necessarily more cake but just enough cake that we maximize the input that goes into the cake. For the example I used, I think finding a way to encourage the client to decide on 24 cupcakes per flavor rather than 12 would maximize what I put into the cake.

Jason could you please expand on the bolded point? I don't quite understand.
post #17 of 25
Here's the sentence from that article that sums it up: "Bespoke suits like expensive couture gowns are great for building a reputation, but they are lousy for business."

I love doing fancy individually designed cakes, but it takes longer to do those than the basic pearls and swirls because of the learning curve/figuring it out curve/planning necessary curve. For a pearls and swirls basic wedding cake (which AZCouture and I have discussed at length icon_wink.gif ) I can whip one out in an hour start to finish, where a more complicated cake could take three times that long. If, for argument's sake, I charge $400 for one three tiered cake, and add $100 for "difficulty," I could be making $1200 gross in three hours from the basic ones, when the more complicated one would make me $500. The fancy designer cake will look great on my facebook page and website, but it's losing me money in the long run.

I've figured out ways to do things faster after doing this for 16 years, and that's the way to make more money in this business. That and cutting your costs, which you should be trying to do all the time anyway. I'm going to be scaling back on how many cakes I make next year, but I want to try to stay at the same profit level. I can do that by reducing costs, cutting out advertising that doesn't give a good return, etc.
post #18 of 25
Quote:
Originally Posted by vgcea

I believe Jason's point is pointing at a way to encourage the customer to buy not necessarily more cake but just enough cake that we maximize the input that goes into the cake.


Actually it is a way to encourage the customer to buy more cake, since the more servings you can make in a baking session, the more efficient you are. This is pretty straightforward when selling single tier cakes with flat costs (e.g. "you can get a 10" instead of an 8" for only $10 more"), but it also works for per-serving prices if your formula takes into account the pricing curve leveling off slightly. Obviously if someone wants 100 servings I'm not going to try to sell them 200, but if you have an excellent product your customers (and their guests) will appreciate leftovers.

Quote:
Quote:

The price drop is less than the cost savings in order to maintain increasing margins as you scale up.


As cakes get larger, your cost per serving drops due to process efficiencies and fixed overhead. If your price per serving drops at the same rate, the entire benefit of this is realized 100% by the customer, but if you don't drop your price per serving at all there will be no incentive to for customers to increase the size of orders so you won't recognize the cost savings at all.

For example, let's say a 50-serving cake (your smallest and least efficient cake) costs you $3/serving and a 100-serving cake costs you $2.50/serving. If your profit margin is 20%, you could price the 50-serving cake at $3.60. But if you price the 100-serving cake the same way ($3) you would probably be underpricing the market (assuming your 50-serving price is on target). What you can do is gradually lower the price between 50 and 100 servings, but not by as much as your cost savings, so your 100 serving price might be, say, $3.30. So with a 50-serving cake you might try to upsell another 10 servings for an additional $30 (50 * $3.60 = $180, 60 * $3.50 = $210)...the customer might think "wow, only $3/serving!" but in reality the price has only been lowered by 10 cents to $3.50/serving. The difference between the cost savings and the lowered price is pure profit.

In practice, you could either manually price out tiers (e.g. 50-60 servings is X, 60-80 is X*0.9, 80-120 is X*0.8, etc.), or you could plot your servings vs. desired price based on the share of profitability you want to keep and use Excel to fit a trend line to the results. For my example above, an approximate fit for the price per serving would be 5.9 divided by the eighth root of the number of servings. In Excel, this would be =5.9/(<servings>^( 1/8 )).

Once you have this formula, you can plug any number of servings into Excel and you'll instantly have a price with as much decimal precision as you want, although you'll probably want to quote the final price rounded to the nearest dollar instead of telling the customer their cake costs $3.536577 per serving.

From a microeconomics perspective this matches the left side of the long run average total cost curve. If you expand enough you will eventually hit diminishing returns, but most custom cake shops won't reach that kind of volume, and by the time you reach that point you'll probably be able to afford to hire your own full-time financial analyst.
http://www.investopedia.com/exam-guide/cfa-level-1/microeconomics/marginal-average-total-cost-curve.asp
post #19 of 25
Thanks for breaking it down like that Jason. Just when I think I have this pricing thing down, I find something new to learn. I'm going to look into incorporating this and the suggestion Costumeczar brought up about working faster. I'm beginning to understand why some fancy shmancy cake decorators still provide simpler, less customized cakes for the clients on a budget. Using Costumeczar's example, three of those can be knocked out for more profit than one super complicated design within the same time period.
post #20 of 25
As i sit here waiting for my tasting appointment clients to show up, another example comes to mind. Doing tastings all at once, on one day or at an open house kind of setup is a lot more economical than doing them one at a time throughout the week. One setup, one cleanup, everything done in one shot. If you do them individually here and there you have to stop what you're working on, set up each time, clean up each time, and it ruins the flow of your schedule.
post #21 of 25
Deep thoughts this week:

1. How can you not get rich selling $500 cakes [suits]?

1.5. Insist on making them perfect.
[and take 40 hours on each cake....and don't pay yourself a wage.....and feel sorry for all the brides that can't 'afford' a 'nice' cake for their wedding that has 200 guests.....and the pitiful mother who 'needs' a 3-tier/fondant/Disney/cake with hand made fondant figures of Snow White, 7 dwarves, the Evil Queen, the apple, the Crow, the Prince, the horse, and lots and lots and lots of sugar jewels in a faux mining cave, with a recording of Heigh Ho coming from inside the cake for $95 because she doesn't have enough money.....
AND/OR [i:3516fb376c]insist[/i:3516fb376c] on refunding the entire $95 for the Snow White cake PLUS a free 2nd and 3rd birthday cake for the little darling because Snow White's hair was dark brown instead of jet black]
-------------
AZ~~I love you for posting this gem of a thread!
post #22 of 25
Quote:
Originally Posted by Apti

Deep thoughts this week:

1. How can you not get rich selling $500 cakes [suits]?

1.5. Insist on making them perfect.
[and take 40 hours on each cake....and don't pay yourself a wage.....and feel sorry for all the brides that can't 'afford' a 'nice' cake for their wedding that has 200 guests.....and the pitiful mother who 'needs' a 3-tier/fondant/Disney/cake with hand made fondant figures of Snow White, 7 dwarves, the Evil Queen, the apple, the Crow, the Prince, the horse, and lots and lots and lots of sugar jewels in a faux mining cave, with a recording of Heigh Ho coming from inside the cake for $95 because she doesn't have enough money.....
AND/OR insist on refunding the entire $95 for the Snow White cake PLUS a free 2nd and 3rd birthday cake for the little darling because Snow White's hair was dark brown instead of jet black]
-------------
AZ~~I love you for posting this gem of a thread!



http://www.youtube.com/watch?v=t7IXZ0yUqY4
Bwahahahaha! Apti, you have a special spot in my heart icon_lol.gificon_cry.gif
post #23 of 25
Plus one $500 cake a week will earn a gross income of what, $26000 annually? Let me retire to Tahiti on that...not.
post #24 of 25
Bumping this thread.
post #25 of 25
Wow, thanks for sharing! Being trying to find an article like this to read. =)
To be honest, the cake decorating industry is saturated. (depends on which country you are in)
Achieving economies of scale definitely puts you in front of your competitor I guess =)
Check out our creations @
Website : http://mydearbakes.wordpress.com/
Facebook : http://www.facebook.com/mydearbakeslittlebakery
Se ya there! =)
Reply
Check out our creations @
Website : http://mydearbakes.wordpress.com/
Facebook : http://www.facebook.com/mydearbakeslittlebakery
Se ya there! =)
Reply
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