Niche bakeries are becoming more popular though the last few years. These types of bakeries specialize in a certain type of baked goods and showcase them for their customers as well as having other types of more common baked goods available. This is the type of business that I would create. My niche bakery would specialize in individual cupcakes and pies as well as baking larger cakes and pies to order. Local customers will consist of area residents, business owners and students that can easily walk over to the bakeries location while on lunch break or after school and work to purchase what they want, and with the Internet available, I can expand my consumer base and ship my goods all over the United States. Customers can place their orders online, and I will be able to ship the product to their door.
The area in which I reside does not have a type of bakery like this. We currently have a Wal-Mart and a Kroger’s Grocery if we want to purchase baked goods. While they are both good and they are also cheap considering their product, my bakery would offer a fresh home baked quality of product that could offer them some competition. I would say in this area, my niche bakery would be a monopoly market as that it would be the only one in this location. I would be able to set the prices for my product but would still need to keep in mind that if the price is too high, my potential customers will go back to purchasing their goods from the grocery chain bakeries.
Looking at a broader area as with the Internet, I could say that I am in a monopolistic competition. Each niche bakery that sells baked goods such as this have relatively the same pricing, no one business sets the price for the other businesses. It is still a smaller industry but there are others in which I must compete for business. So advertising and a well made website will figure prominently in showcasing the goods I am selling in the best possible light.
Elasticity of demand in a bakery is very important to know. If the price of ingredients goes up, the bakery owner must adjust for this increase. The higher the price elasticity of the product the less volume of the product that will be output, if for instance the demand for the product was highly elastic, then it wouldn’t make sense to increase the price of the product. The company would lose business because of this.
Below in figures 1A and 1B is data that has been taken from the Bureau of Economic analysis from three different industries that are related to the niche bakery business. Between the years of 2007 to 2011, there shows a decrease in the earlier years but an increase within the year of 2011of growth in the food service and food and beverage industries. The retail industry has show a sharp increase and decrease in these years.
Taking into consideration the growth in each of the food industries though, I can make the assumption that this is a business that could flourish and grow with the right type of marketing, promotion, and sales products. In looking at this type of business for my area, I have talked to some of the local residents and have found that they were amenable to a new specialty bakery in the area. This impromptu survey showed that the residents in the area expressed an interest in purchasing baked goods that were of homemade quality rather than mass produced market products.
In order to increase revenue in this business, there are several things that would be necessary. Below are charts and tables regarding costs and revenues showing where breakeven points are and where profits can be made. However, one way to increase revenue, is to offer something the bigger superstores in the area are not. Make the product stand out by creating those special items like fruit compote filled cupcakes, special flavors not normally offered by the larger stores like Orange flavored cupcakes. Even offering some gluten free and vegan types of baked goods can bring in increased revenue. Another way to increase revenue is to offer free samples; welcome customers in with a smile and offer them a free sample of some of the products available.
By doing this, the customer can get an idea and a taste of the product and if they like it they may turn into a return customer and bring others with them. Also, offering a loyalty program can help to keep repeat customers coming in. Using a stamp card that offers a free product after so many purchases is one such loyalty program that other bakeries have used in the past that have worked. And in a small town region such as the one I live in, being a part of the community can go a long way to getting the name of my business out there and creating a customer base that can increase my revenue. People are more apt to purchase products from someone they know in order to help support businesses in the community.
Determining the profit maximizing quantity shows the incremental changes in profit for a company’s product. In calculating the profit maximizing quantity I will need the sales and expense reports for my proposed business. From this is can gather the profits at each level of sales. These numbers can then be calculated to show the marginal profit for each incremental change in profit. The marginal profit is defined as the change in profit for each additional unit sold. We can then use this information to determine the maximizing quantity. This is the amount that can be sold before the marginal profit starts to recede into the negative. By doing this I can figure out how much of a discount I could give on my products if they were bought in a bulk batch. For example if someone wanted a several dozens of cupcakes or miniature pies for a party.
Marginal Costs and Marginal Revenue
Marginal costs and revenues are used to find out how much it will cost to product additional units of goods for a company. I could use this as a way to figure out my total costs I would need to produce a product in my bakery. For instance below in Figure 1C I have created a chart to calculate the total revenue, marginal revenue, marginal cost and profit of different quantities of one type of cupcake. For this data I used a fictional total cost of 0.91 cents. This is what I figured it would cost to make just one cupcake. From there I was able to calculate each of the columns using the formulas in Figure 1D.
Figures 1E shows the startup costs and the estimated monthly costs of running a niche bakery of this kind. Figure 1F and 1G show the total fixed costs, total variable costs, the total cost and total revenue as well as the profits to be made in a table and a graph. The chart and graph also show the breakeven point. This is the point where that the production of a certain quantity of cupcakes will allow me to break even and then after that be able to show a profit. The breakeven point for the quantity of cupcakes is 6.5 cupcakes which means a profit will start showing at 7 cupcakes with a profit of 31 cents.
Pricing and Non-pricing Strategies
Pricing strategies that I could use for my bakery would be to offer lower prices on my website to customers that I will be shipping my product to, in location I can keep my prices competitive with other bakeries that are in larger cities. As a way of keeping waste to a minimum I can offer goods that are left over to the next day at half the original price. This was something I saw as a child at a local doughnut shop. The proprietor offered the day old goods at a fraction of a price. He was still making a profit, but also there was less unnecessary waste because people would buy these up quickly. For non-pricing strategies I would rely on advertising of my product as one that is made with quality ingredients. As well as letting the customer base know that each of the goods available are made from scratch.
I do not believe that a barrier can be created or increased because the bakery business has been in the market for a number of years. Also, because it is a niche bakery, it is a branch off the traditional type of bakery.
Some ways to introduce product differentiation would be to make my product with seasonal items and local produce. Where I live we have raspberry and strawberry farms as well as apple, and other fruits. It would be easy to have the produce shipped to the store when it was in season from the local farms, or even picked up to create fillings, jellies, and other sundry items that I could sell in my bakery to the local residents.
Cost minimization would be hard to do in this instance, because I want to retain a quality product from good quality ingredients. I could minimize cost by purchasing my ingredients in bulk. This would give me a lower price per unit of measure. I could also purchase lower end products. However, if I were to purchase lower end products like margarine instead of real butter, this would be a significant drop in cost; however it would also be a significant drop in quality. I believe minimizing cost may not be feasible given the quality of the product.
Creating a business is a large endeavor not to be thought on lightly. There are many avenues to pursue in order to figure out and find the data needed to find out if the business a person wants to create is the right one for their location and meets the needs of their community. If they do create a business, there are different ways to figure out how to keep revenue coming in and finding ways to create more revenue. Each of the sections of this proposal allowed me to take a better look at the type of business I would consider opening.
Bureau of Economic Analysis. (2012). Retrieved from
Gaines, M. (2012). Guide to the Bakery Business. Retrieved from http://smallbusiness.chron.com/guide bakery-business-2400.html
Isidro, I. (2009). Starting a Bakery: Success in the Niche Food Business. Retrieved from http://www.powerhomebiz.com/blog/2009/10/starting-a-bakery-success-in-the-niche-food-business/ Kimmons, R. (2012). Pricing Vs. Nonpricing Strategies. Retrieved from http://smallbusiness.chron.com/pricing-vs-nonpricing-strategies-14166.html moffatt, M. (2012). Marginal Revenue and Marginal Cost Practice Question. Retrieved fro http://economics.about.com/od/coststructure/ss/revenue_costs.htm