Part II: Evaluating your prices

Once you've raised your prices and determined the effect the increase in commodity prices had on your ingredient costs, the next question becomes even more critical. Have you increased your prices enough?

It's unlikely that in response to the soaring commodity prices you have raised all of your retail prices by the same percentage. Most bakers apply different percentage increases to varying groups of products. Consequently, it is necessary to compute the “average” increase for your entire product line. Calculating a simple average of all items wouldn't be accurate because some groups of products sell better than others. So, bakers need to determine a “weighted” average.

Accountants can use a number of methods to compute this weighted average. These three methods offer different degrees of accuracy:

1. Compare the average ticket size for a current week this year with the average ticket size for the same week last year.
2. Carefully monitor exactly what is sold for a current week, and recompute the sales for those products using last year's prices.
3. Compute the total value of all products produced using production reports (rather than actual amounts sold) in a current week with the current prices, and then recompute the value using last year's prices.

Method 1 is straightforward as long as your cash registers give you customer counts. Simply divide your retail sales for the week by the number of customers for the week. Then, do it again for the same week from last year. Take the result of these two average ticket sizes, and divide the 2008 average by the 2007 average. That should give you an amount like 1.127. This number is analogous to the number you computed for the increase in ingredient costs as outlined earlier, but this number is about your price increase. To express the number as a percentage, just subtract 1 from it and multiply the result by 100. In the example of 1.127, the percentage would be 12.7 percent.

One of the problems with method 1 is that you likely have lost a significant number of customers due to the economy and your increase in prices. These “lost” customers also likely have something in common that makes a direct comparison of this year's average ticket size with last year's potentially invalid. It really depends on your bakery. Method 1 might be good for a donut shop, but not very good for a full-line retail bakery. It doesn't work for Deerfields full-line bakery as the percentage turned out to be different for each of its three locations.

Method 2 should be fairly self-explanatory as it is similar to the work done on the ingredient price comparison outlined earlier in this article. Here are a few hints:

• Group the product categories that have the same price, such as sweet rolls, donuts and breads, etc.
• If possible, use the reports generated by your point of sale (POS) software.
• Apply last year's prices to each group of products to compute the 2007 sales amount on the items actually sold in 2008.

If you have too many custom cakes to individually reprice using last year's prices, then use the average ticket size (for cake sales only) for this year and 2007. Multiply the 2008 sales of custom cakes by the ratio of the 2007 average cake ticket to the 2008 average cake ticket to get the total “repriced” sales for the 2007.

Method 2 is appropriate for a small retail bakery with only one location. Method 3 may be more appropriate for a multi-unit retailer (MUR), who may find it easier to use production reports exclusively or a combination of production reports and POS reports. Again, it depends upon your bakery.

The goal is to use a method that is reasonably accurate and not too time consuming. This doesn't have to be an exact science. Remember, three or four monthly P&L statements will eventually confirm the results computed and indicate whether or not your business is profitable. However, under the current state of soaring commodity prices, bakers need to react quickly. A one-month P&L statement is not reliable unless your accountant is accurately using the accrual method of accounting.

Let's assume for this discussion that you computed the weighted average increase in ingredient costs last month to be 17.4 percent. And, this month, you have increased prices by a weighted average of 12.7 percent over last year. Have you increased your prices sufficiently to cover the cost of the increase in commodity prices?

A superficial answer would be “no” because the 17.4 percent is higher than the 12.7 percent. You also may think you need to increase your prices by 17.4 minus 12.7 or 4.7 percent to bring your business “in line” with last year's results. These conclusions may be incorrect because when you increase your prices, you are increasing not only the portion of the price “ear-marked” for the ingredient cost, but also the amount ear-marked for labor, overhead and profit by the very same percentage.