Howdy,
My wife and I are trying to start a drink shack/desserts place. They are hot around here but we have an angle that will work I think. However neither of us knows really anything about starting a business or pricing or whatever. So anyone who has business acumen or has been SUCCESSFUL at starting this type of business or any other, please help with the following if you can.

We've met several times with the small business association/assistance groups and whatever, and are working on our business plan, but they all basically say we need to be able to show profitability before we actually know anything about whether we can be profitable. So please halp with the following questions or provide the right questions if these don't work:

1. How do we set pricing? I have materials/components priced out per "batch" or order of desserts and drinks but our current pricing (we're selling basically to friends and family ATM) is based on "average" cost vs. wholesale vs. retail markups/pricing structures from people we have asked for similar products. We don't really know and our components are higher quality and higher cost. Do we start with overhead/premeses/packaging/insurance costs and work backwards? As in, we have to sell X many orders per day to make Y amount to cover the lease? Or do we start from an established cost/wholesale/retail pricing structure and set the prices and then work out how many we'd have to sell to cover total cost of business? A business lease for a small store around here varies from about $20-$50/square foot. That's just from asking around.

2. When working up a business plan, how do you estimate yearly sales if you haven't sold any yearly sales? do you just guess/estimate/project?

3. what else do I need to ask? I'm too stupid to know what I don't know. Family run, small business. No employees yet.

I don’t know much about that type of business- but don’t set your price based on your cost. Set your price based on what you can charge.

If your cost is $5 per item and the market will only withstand $4 then you’re out of business. If your cost is $1 and the market will pay $10 then you’re good.

Revenue- estimate based on volume. Average selling price x # sold- break it down by day or by week depending on what makes sense.

Cost- variable based on volume, plus fixed overhead. Include a market paycheck for yourself.

Whatever you think the cost is going to be, double it, then double it again then maybe you’re in good shape.

Tough business with low margins.

Where are you? I have a bit of experience in this arena from the legal and practical side. I also have a number of clients or contacts in the restaurant and foodservice industries, from single operator to national chain. It's not easy to do this by forum post or email.

There is a LOT more information needed to help you figure this out.

As for writing the business plan, don't start with estimated number of customers; try to figure out what you can reasonably produce per unit time with the resources you have at startup. That will give you the maximum number of customers you could conceivably serve in a given day. Then take fractions of that number, and run a series of price points to estimate potential revenue at different pricing structures.

Take a look at similar businesses in your area. What are they charging for their product. Unless you are radically different, that will give you the range which you can logically charge for your product.

You see how this works? Use what you know or can logically estimate to back into what you do not know, or need to determine. If your pricing model says you need at least 100 customers per day, and your production model says you can reasonably serve up to 200 customers per day, and your location survey logically tells you that you will have adequate numbers of potential customers to get between 130 and 170 customers available to your establishment when you are open, well that's a pretty good indication that you might be successful.

If, on the other hand, you can only adequately serve 80 people each day, and the pricing indicates that at least 120 are going to be necessary, you've got a problem...

First thing is to calculate your fixed costs. What is the minimum weekly outlay to be in business, regardless of how much you sell. That's lease, insurance, employees (or foregone wage / revenue from your day job), equipment investment, etc.

Then figure out your materials costs for opening inventory; what do you have to spend to have adequate stock on hand, even if you have no customers. In the early days of being open, you may have a lot of waste. Either ruined batches or unsold product.

Figure out your production capacity. Can you make what you need in the time you have with the equipment you have?

For example, there is a reason you don't see smoothie bars anymore in gyms. This is because given the cost of labor, insurance, raw materials on hand, and waste (even if the gym doesn't charge the smoothie bar rent, and it might...) there aren't enough people who buy a smoothie after working out to make it profitable. This is math I have actually done for a client.

Utah, thanks. from our initial trials, people have no problem paying more for our product because it's a niche market and "healthy" people are willing to pay more for higher quality stuff. However we have no real idea how many healthy-minded people will actually buy on a regular basis.

Our price for our initial flagship item is competitive and even better than other similar products (more weight for better cost) so it makes me nervous that we might be pricing it too low. However I feel we need some way to differentiate.

You bring up a lot of great points... and basically I feel (again) like I don't know enough to create this business. Which is how I've felt for 2 years. LOL

keep it coming thanks

One of the main problems is most business models are based on fixed premesis/brick and mortar/lease structures and we kind of want to start in a shack/popup/food truck sort of thing but nobody is doing exactly what we want to do. So no data can help really with that aspect. And utah food truck laws are STUPID.

I don't know anything about your line of business, and I am sure there are many more advanced cost analysis/pricing models than there used to be, but I will point out that many many businesses in the US have prospered over the centuries by reselling at about 2x their cost of goods. A classic "rule of thumb."

Probably not what is considered best practice any more, but as a first approximation, you could do worse.

The corollary being of course, if you don't think you can sell your product at 2x your cost, you are probably not going to make enough money to survive.

quote:

Originally posted by architect:
I don't know anything about your line of business, and I am sure there are many more advanced cost analysis/pricing models than there used to be, but I will point out that many many businesses in the US have prospered over the centuries by reselling at about 2x their cost of goods. A classic "rule of thumb."

Probably not what is considered best practice any more, but as a first approximation, you could do worse.

The corollary being of course, if you don't think you can sell your product at 2x your cost, you are probably not going to make enough money to survive.

Well we're currently selling at about 5X our costs for our "flagship item" and 3-4x for others. So that helps, thanks!

Another thing to consider is what do you want to get in net revenue from the venture. Restaurants / food service, etc. are a lot of work, including outside the times that they are open to the public.

Let's say you wanted income replacement for two adults and a child in a family that lived together and would work the activity. Assuming you are open 6 days per week, and needed to make $100,000 per year total for all three people, you would need to clear, after all expenses, on average $320 per day you were open.

Calculate your net profit margin per unit, then figure how many units you would need to sell to hit that income goal, and then look back at all of your other assumptions and see if there is any chance of this being viable.

Adjust target net revenue up or down as necessary to get where you need to be. Understand that $100,000 from a business you own is not the same as a $100,000 salary from a company. There is no paid time off, there is no medical insurance, there is no employer half of the payroll tax, there is no employer contribution to the 401(k), etc.

Working for yourself is great. I do it. But it has a downside, too.

quote:

Originally posted by 1KPerDay:

quote:

Originally posted by architect:
I don't know anything about your line of business, and I am sure there are many more advanced cost analysis/pricing models than there used to be, but I will point out that many many businesses in the US have prospered over the centuries by reselling at about 2x their cost of goods. A classic "rule of thumb."

Probably not what is considered best practice any more, but as a first approximation, you could do worse.

The corollary being of course, if you don't think you can sell your product at 2x your cost, you are probably not going to make enough money to survive.

Well we're currently selling at about 5X our costs for our "flagship item" and 3-4x for others. So that helps, thanks!

When architect says "2x your cost" he ain't just talking about direct costs. Throw in EVERYTHING you can think of and a bunch you didn't think of. Like depreciation. Like waste. Think like a cold-hearted capitalist who demands a return on investment.

"Understand that $100,000 from a business you own is not the same as a $100,000 salary from a company. There is no paid time off, there is no medical insurance, there is no employer half of the payroll tax, there is no employer contribution to the 401(k), etc."

I have no Food Service experience (except as a LARGE consumer) but PLEASE don't ignore this gem from my FL brother!!!

Thank you, folks!

You do as much research as you can on competitors in your market and elsewhere, you make sure to nail down everything you can from a cost standpoint, then figure out what you need to do in revenue to stay in business, and what you need to do to make the profit that makes it worthwhile. Do not overlook marketing/advertising. That is one of the hardest things I purchase. 50% of it won't work, but there's no way to know ahead of time which 50%, and what worked last time fails the next. If you have confidence in your product, locate near competitors and piggyback off their marketing.

Ultimately, it requires leaps of faith. Not one, but several in succession. Every time you sign a lease or make a large capital purchase is a gut check. And, you will eat sleep and breathe the business 24/7, and handle everything from payroll to IT to janitorial duties. It's the most rewarding pain in the ass you'll ever experience.

There are two sides to your pricing question: demand and cost.

On the Demand side, you'll need average unit price and unit volume projection. For the unit price, you can look at what your potential competitors are charging. You may think your product is unique but chances are, it's likely not. Find a proxy industry or business like Jamba Juice. For the unit volume, look at the place where you're thinking of opening up. There are studies (I forget what they are called) available for free or a low price ( went through this for a project in MBA school that I was considering actually pursuing). In those studies, traffic by hour (cars and walk by), business volume in nearby food facilities. Then you ballpark how much percentage of that traffic you can pull into your location. It's going to be a very very small percentage. You multiply your percentage with the traffic volume and there's your "maximum" unit. You'll also have to bounce your average daily unit volume against your number of seats, turn over rate, percent occupancy plus to go orders to see if the numbers make sense.

On the cost side, you're going to have to figure the average direct costs of a unit - the straw, the ingredients, the cup, lid, etc. Direct costs are direct because they move proportionately with the unit volume, the more units you sell, the higher your direct costs are - more straws, cups, etc.

Then you add your indirect costs. These costs remain the same no matter how many units you sell or not- these include the rent for the year, total electricity for the year, wages for workers (based on the unit volume, you're going to have to hire a certain amount), cost of lawyers and accountants, etc. for your business. You total all the indirect costs for the year then divide that by your project yearly unit volume. That's the indirect costs for each product.

Add the direct and indirect costs for the product and that's the "Standard Cost." Compare your average unit price with your standard cost. If your average unit price is less than your standard cost, you're going to have to sell a whole lot more units or reduce your standard costs. If your unit price is higher than your standard cost, that's your margin.

You multiply that with yearly unit volume and that is what you'll get for the year. Most business plans project this out to 3 to 5 years for new business start ups. You'll have to ask yourself is it worth it. Keep in mind, you'll also have to net out income taxes from the margin. You'll also have to consider whether your margin can support the cash flow to service any loans you're considering to take on.

Good luck and I wish you success!

Not sure where you are from but you might check to see if there is a SCORE chapter near you. It's network of retired business folk who counsel and mentor small business owners on all aspects of starting and operating a business. It doesn't cost you anything, and I think you would find it extremely helpful.

Trust me on this.... you need to email member Ronin1069 with your question. IMO he's the best on the forum on your question.

Best wishes to you.