Revisiting your menu pricing? Use these three methods to strategize like an expert
According to Bloomberg, restaurant owners have reported 2-5% increases in menu pricing through June 2021. The reason?
Rising food and wage costs are forcing operators across the country to revisit their margins in an effort to stymie losses and protect their bottom line and their employees. Even Tim Hortons and Burger King have seen beef and mayo prices soar due to supply chain challenges.
For restaurateurs, learning how to raise menu pricing, protect your profit margin, and still keep guests happy is crucial — but it’s also an art form.
Here are three restaurant menu pricing methods that can help you get a handle on your costs.
The food cost percentage method for menu pricing
Food cost percentage is one of the most important metrics in the restaurant world. It’s also known as Cost of Goods Sold (COGS), which reflects the total cost of all the ingredients in a specific recipe or in a specific time period.
Understanding your food cost percentage is key to maximizing your restaurant’s profitability and protecting your profit margins. Calculating it determines how much you need to charge customers in order to cover your expenses and still bring in a suitable amount of revenue.
While average food cost percentage differs by restaurant type (quick service vs. fine dining, for example), experts recommend restaurants aim for an average food cost percentage of 28-32%.
How do you calculate food cost percentage?
To determine your food cost percentage, use this formula:
- Food Costs ÷ Food Sales x 100 = Food Cost Percentage
So, if you spent $3,000 on ingredients and your food sales were $10,000, the calculation would be:
- Food Costs ($3,000) ÷ Food Sales ($10,000) x 100 = Food Cost Percentage of 30%
To use food cost percentage to price your menu items, simply add up the cost of all the ingredients included in a particular recipe, divide that total cost by your existing or desired food cost percentage, then round off the price (if necessary). So, if you have a dish that costs $6 to make and your target food cost percentage is 30%, the calculation would be:
- $6.00 ÷ .30 = $20
What is the competition-based pricing strategy?
Just as the name suggests, competition-based menu pricing uses the prices of your competitors as a starting point. The idea is to understand and analyze what market pricing for similar items is like and use that information to make an educated decision regarding your own pricing.
Using this strategy, you can:
- Match your competitors’ pricing
- Undercut your competitors by pricing similar dishes slightly lower and attract customers looking for value
- Go for a slightly higher price and emphasize value over savings
While competitor-based pricing looks like it relies solely on comparison pricing to help you make a decision, the smarter play is to look at the bigger picture. Use competitor pricing in conjunction with factors like your overall marketing strategy (are you value-oriented or aiming for a high-end guest experience?) and food costs to stay on brand and on budget.
What is the good better best pricing strategy?
The good-better-best pricing strategy, also known as the tiered pricing method, gives customers three options for a product at three different prices. Each offering centers on a core product with higher-priced tiers including an additional item or incentive to entice customers to pay that higher price.
An example of this might be:
- Option 1: Hamburger
- Option 2: Hamburger with fries
- Option 3: Hamburger with fries and a drink
Each tier adds value and allows the restaurant owner to increase the price while giving customers more choices, avoiding the ultimatum-like feel that comes with a single option. Airlines and movie theaters use the same concept. The economy, business class, or first-class seating customers purchase to get to their destination includes different perks and packages based on the price of the seat.
You see the same concept with software companies, too. Just need basic features? The basic membership is probably fine. But having two additional tiers with more features and a higher membership cost increases customer choices while also boosting revenue.
Experts say good-better-best restaurant menu pricing works because it empowers customers while also helping operators avoid missed opportunities. Opting for a single price all but guarantees you’ll miss out on revenue because there will always be people who would’ve paid more.
So, if you’re a fine dining restaurant, you could offer:
- Good: An early-bird menu that caters to early birds with a discounted three-course menu only served before 6:30 pm
- Better: Your regular menu with its own strategic pricing
- Best: An exclusive chef’s table experience
What is an example of the tiered pricing method?
To figure out your own good-better-best pricing strategy, follow the “rule of three”:
- Good pricing: Most inexpensive option
- Better pricing: Mid-range item
- Best version: Highest price tag
For example, you can create three versions of the same or similar menu items:
- Good: Cheese pizza
- Better: 2-topping pizza
- Best: Pizza supreme with all the toppings
Or you can bundle an item with other dishes or condiments to increase value and increase your profit margin:
- Good: Cheese pizza
- Better: Cheese pizza and a dozen wings
- Best: Cheese pizza, a dozen wings, and a 2-liter of soda
Bundling can be especially beneficial for restaurant owners because the menu items added at each tier result in a higher price tag but often lower base costs. For instance, wings are traditionally viewed as a value item and the margins on fountain drinks are very appealing. Creating a wings and drink bundle increases the revenue earned with each sale.
Although good-better-best pricing is more apparent in fast food and quick-serve restaurants, it also happens in high-end establishments.
- Good: Filet mignon
- Better: Filet mignon done Oscar style
- Best: Chateaubriand with confit potatoes and bearnaise sauce, carved tableside
To make the most of your good-better-best pricing, remember these tips
- Make your prices different enough to appeal to a wide array of customers and clearly separate each choice
- Consider marketing your options separately as well as together — for instance, cross-promoting your early-bird menu with local theaters that have mid-to-late evening showings
- Price your “better” option to have the biggest profit margin as the middle option is likely to sell the most
- Play around with experience-based offerings or add-ons that offer an increase in perceived value without excessively denting your bottom line, like a “best” option that includes post-dinner access to your attached nightclub or personalized service from the house sommelier
- Remember that the “good” option is not a throwaway — even the cheapest tier should offer good value and represent your brand/concept well
How to communicate restaurant menu pricing increases to your customers
Menu pricing is not a “set it and forget it” endeavor.
It’s important to regularly revisit your menu pricing and consider whether your strategy needs updating or if it’s time to try something totally new. Things like market fluctuations can drastically impact your pricing almost overnight.
By offering a solid mix of lower, middle, and higher-priced menu items, you can protect your inventory and your bottom line even when your expenses shift for reasons outside your control.
If or when you decide to make adjustments to your menu pricing, try to do so incrementally to minimize sticker shock.
In situations where rapid increases are necessary to prevent significant losses to your bottom line, there are ways to navigate the change without upsetting customers — or at least reducing the likelihood you’ll get an avalanche of angry emails and Yelp reviews.
- Be honest, and let customers know that you have to charge more because your suppliers are charging more, and explain why
- Increase the perceived value by upgrading the menu description, thereby making the item seem more appealing, or by adding a low-cost side dish or other “bonus” (i.e., adding a scoop of ice cream to your triple-chocolate brownie)
- Avoid changing the price but compensate by decreasing the portion size or type of ingredients used in the dish
Strategic, effective menu pricing takes patience, practice, and trial and error. It’s important to choose a method that fits into your overall vision and honors your branding, but the pricing also needs to work. If you sell more, you’re onto something. If you don’t, it might be time to start tweaking again.
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