I am assuming that you are making chocolate and looking to sell it to stores for retail?
A couple of things to consider when pricing.
You might not always be selling direct to the retailer, so build at least one (and preferably two) layers of distribution into your model, a broker and a distributor. You can decide whether to keep all this margin or "give" some of it away to the retailer. I have seen many chocolate businesses fail because they did not account for middlemen in the distribution chain and there wasn't any slack in their cost structure so scaling the business was extremely difficult.
Rule of thumb would be that the wholesale cost of the bar, including ALL your profits, should be about one-third of the retail price allowing a 100% markup for the retailer. The spread is what you have to play with to offer distributors, but get to keep until you get to that point.
Also, keep in mind that markup and gross margin are not the same thing.
A 25% markup on $1 gets you to $1.25.
A 25% gross margin on $1 gets you to $1.33. Knowing the difference can be the difference when it comes to being profitable or barely breaking even and struggling.
Would mind expanding on this? Say the wholesale cost of a bar, including profit, is $3.33. Should you then price it to the retailer at $5, building in an allowance of $1.67 for a future distributor/broker? Assuming the retailer prices the bar at double their cost, the retail price will be $10.
Is there a "typical" retailer markup for chocolate? For instance, I've read that a general rule of thumb for clothing retailers is to set the retail price of an item at 2.3-2.5 times what they paid for it. Is there something like that in the chocolate world?
After buying a number of bars and making some myself the pricing thing is somewhat confusing. Probably the best prices I have found is at some of the Whole Foods. I generally convert to pounds in order for comparison. Much of the Lindt, Godiva and other brands generally sell in the low $20 a pound. Usually $4.00 for a 3 to 3.5 oz bar. Generally, the smaller higher quality producers are in the $40-$60 range. Most of these bars are somewhere between 2 and 3 oz. From what I see as far as pricing for beans, roasting, winnowing and grinding is around the $3 a lb range. Transport, customs another $1.50 or $3 depending on size and method. If you ship beans by the container, you may bring this down. You conche, age, temper and mold, maybe another $3 a lb. in costs. If you are doing high end chocolate, you probably have more waste in bean selection, testing and other factors I am unaware of thus far. As a small producer of lets say 25 tons a year you probably need to charge somewhere between $8 and $10 a pound wholesale to make a living working very slim. I assume that would put you your chocolate in the low $20's retail and if you can do something special you can get into the next level of pricing. I have found some of the expensive chocolate bars to be of the medium range as far as quality. I would love to hear from anyone who has traveled this road and adjust what I have discovered.
Thank you Clay, very informative post.
As you mentioned producer needs to add some markup for possible middleman.
What is a (average) usual percentage taken by a middle man?
I've seen anywhere between 10% and 50%. I created a worksheet and shared it so you can model the cost of selling a chocolate bar from the cost of cocoa beans through ingredients and overhead to distribution costs. If you're not making chocolate from the bean you can download and modify the worksheet to reflect your cost structure.
Your right, I'm planning to sell bars to stores like Whole Foods and R Fields very soon. I'm in the process of leasing a place to set up a little factory. Thanks for explaining Gross Margin. At this point I will assume a 100% markup on my wholesale price to retail stores to be safe. This explains why so many small scale chocolate makers have to sell bars for $6-$9.
I urge you to reconsider only a 100% markup from wholesale and build in some distributor margin - at least one tier - into your pricing structure from the beginning. From the start you can keep it, or offer it as an incentive discount for volume commitments. Later on, when you decide you do need help distributing, you have the margin built in and don't have to either raise prices or reduce your margin.
Ok, sounds like a wise decision that can only be beneficial. I will account for a distributor in my pricing structure in excess of the 100% on top of whole sale. Thanks for your advice.
Thanks a lot for bringing up this very important topic. It seems to me that at stores, the highest I see chocolate bars sold for is around $7.99. If I am using very good couverture, I see the bar costing $1.40 in material costs (100grams of very good chocolate and the cost of any inclusions). Am I way off? With packaging and labor also involved, that would bring it up even more. So I wonder how do I bring the costs down? Of course, I understand if you do not wish to share any personal information. Thanks for creating this post
There are several European imports (Bonnat, Valrhona) that sell for $20-35 for 80gr or 100gr bars. Bars of Fortunato #4 (Peruvian beans converted to chocolate in Switzerland) that are melted here in the US easily cost upwards of $12 for a 56gr bar.
Materials cost is a part of it, and European chocolates are very dependent on exchange rates. Up there are labor costs, the cost of packaging, and fixed overhead. Short of moving, you probably can't do much about fixed overhead, so you have to look at the cost of the chocolate itself, and find ways to reduce labor and packaging costs.
Thank you for the reply. the European bars you mentioned would be a very tough sale here in Chicago. Obviously, the couverture is going to be the most costly element in a chocolate bar. Do you have any recommendations for couvertures or favorite couvertures that are high quality yet reasonable in price?
Yes, the higher the price the smaller the audience. It's worth it - on occasion - to purchase one of the Bonnat Porcelana or vintaged Valrhona bars, and it's also important to remember that even at those prices, high end chocolate are still among the most affordable luxury goods on the planet. Think about, for about $20 bucks I can go into a store and get some of the best chocolate anywhere. Can't do that for any alcoholic beverage I can think of ...
My personal opinion is that most people who think about melting chocolate into bars are stuck in the single-origin mindset, which translates into one bar = one chocolate. People may not consider domestic producers like Guittard as quality producers, but they are. Now - you may not like the flavor profiles compared to others. That's a different question.
Most people when they say they don't like the flavor profiles look elsewhere. The creative melter will consider blending chocolates to achieve flavor profiles that are unique to their line. Don't like the intensity of a 55%? Add a small amount of 90%. Want to make a dark milk? Go ahead - and blend.
All but one or two of Guittard's couvertures, in bulk, cost under $5/lb. You can do the same with Barry-Callebaut, Kakao Berlin, Belcolade ... all of which are in the $3-4/lb range. Think something's too sweet or too bland? Blend (with something that has a higher cocoa content). It's easier to do this when all the chocolates come from the same manufacturer, but that's a generalization that can easily be overlooked.