Kustom Cupcakes:

Kustom Cupcakes: in Search of the Optimal Pricing Level By Russel Kingshott, Curtin University

KUSTOM CUPCAKES IS A boutique Perth retailer specialising in the manufacture and sale of a wide range of flavours of cupcakes. These are targeted at a niche segment of cake connoisseurs prepared to pay a little extra for their high-quality offerings. Starting from humble beginnings, the business is now a well-run two-person partnership that has been built up slowly since its inception in 2010. It initially sold its cakes through cafés and similar retailers but now has a dedicated retail premises of its own. The owners are very passionate about their operation and devote most of their time and energy to planning and running various aspects of the business. Cakes are not baked on the retail premise but delivered daily to the store for decorating, display and customer sales. By decorating each batch of cakes daily they are able to ensure the freshness that is expected by their customers. Similarly, all ingredients are of the highest quality. Both cakes and icing contain real butter and are given a 'personal touch' by being individually decorated by the proprietor. Kustom also caters to weddings and corporate functions.

To serve the needs of the retail sales operation they also employ six staff, predominantly dedicated to serving customers and helping with the general management of the shop. Kustom Cupcakes prides itself on being a full-service retailer totally dedicated to providing customers with all they expect from a high-quality cupcake. For example, ingredients permitting, they often decorate particular varieties immediately upon request by customers when their favourites are not available in-store. Servicing the customer also extends to their long operating hours. Opening hours are Sunday to Wednesday 8 am to 6 pm and Thursday to Saturday 8 am to 8 pm. They are closed on Mondays but this time is used to manage various aspects of the business such as ordering supplies, purchasing ingredients and baking.

The physical store is not large, being approximately 100 square metres divided equally between the front (customer) and rear (preparation) areas of their operation. The store-front comprises a cash register, large serving counters, fridges and an espresso coffee machine. Despite the small number of staff serving customers, this area can get congested with customers and when this happens there is often a wait to be served. There are no facilities to eat or drink on the premises so Kustom operates as a takeaway service. The rear of the store has a number of work benches, storage fridges and the general office. It is located in a small retail strip with four other shops in the well-established suburb of Lathlain, which is in very close proximity to the Perth CBD. Despite the good location the rent on the premises is relatively low, which helps to keep operating costs down.

Kustom also has a website, , that is used for sales as well as providing information about their offerings. Orders of more than six cakes, and of course bookings for weddings or corporate events, can be placed online. Lead times range from 48 hours for small orders to two weeks for larger or specialised orders. Prices are only available on application for online and phone orders. Their website serves as the principal means of communicating with customers and will also direct them to the various social media they employ.

Overall, advertising costs are relatively low because Kustom does very little mainstream promotions, preferring instead to rely upon word of mouth, online presence and social media, as well as a highly visible location to attract and maintain its customer base. The store is located on a major thoroughfare with easy access to vehicular and pedestrian traffic and ample rear parking for customers.

In terms of their offerings, each cupcake is either individually packaged or boxed into configurations of six, 12 or 20. To reduce costs the boxes are made of white cardboard and remain largely functional in nature. While the boxes contain no printed materials a business card is attached to each box to help communicate with the customer. Prices are not used in any of their communication efforts so the card helps remind customers of their purchase and directs them to their webpage. They do, however, have a very clear pricing policy and this is based upon a graduated approach whereby customers pay less the more purchases they make. At time of publication prices for individual cakes were $3.50, decreasing to $2.50 each if a box of 24 was purchased. Half a dozen cakes cost $20 but the discount increased if 12 cakes were purchased. A box of 12 normally cost $35. In addition, Kustom has a loyalty scheme that equates to about a 10 per cent redemption rate for loyal customers. For example, if you buy 10 boxes of six cakes you receive a free box of six on your next visit. In addition to their regular flavours Kustom Cupcakes has theme-related cakes such as Halloween and the Melbourne Cup. These are a little more expensive and usually retail at around $40 per box of six cupcakes but the exact price is largely dependent upon the popularity of the theme.

Cupcake sales are not their only source of revenue. Kustom Cupcakes also conduct a range of cake decorating courses that are very popular and always fully booked, largely attributable to the many cake baking shows on both free-to-air and pay television. Pre-bookings and payment are essential to guarantee attendance. Classes are normally held on weekends in groups of eight to 10 and personally conducted by the two owners. Customers are shown how to make the best-quality cake mixture and icing, as well as being taught a variety of techniques to successfully decorate each cupcake. Customers decorate their own cakes with a range of flavours, styles and colours on 24 pre-baked vanilla flavoured cupcakes. A typical course lasts for three to four hours and costs $120 per person. These are held on pre-assigned days of the week. Discounts for group bookings are currently not part of their pricing strategy. However, groups of eight can select their own days and times. Customers get to take their decorated cakes home (this is included in the overall course price). An added benefit of attending the course is that Kustom will email customers their latest specials and theme cakes. This direct communication helps them build customer loyalty and keep promotional costs down.

In terms of competition there are many retailers that specialise in cake decorating in Perth and these, like Kustom Cupcakes, are normally fully booked. However, at this stage there are few competitors selling cupcakes in the immediate metropolitan area and even fewer that sell cupcakes and hold cake decorating courses. Kustom Cupcakes are thus in a uniquely competitive position within the Perth marketplace, but like any market as it begins to mature there will be increased levels of competition.

1. Although this is a relatively new retail business in the Perth market, Kustom has set the standards for quality cupcakes. Based on their track record, consumer demand for their offerings is likely to remain high and will potentially expand. Briefly discuss any potential factors likely to have an impact on their approach to pricing if Kustom Cupcakes continues to grow.