Steps to Master Menu Pricing Basics
Pricing menu items can sometimes feel like walking a tightrope: trying to balance food costs with quantity all while teetering on a thin profit margin.By taking the following sure-footed steps, you will be able to create prices that appeal to your target demographic while maximizing your profits.
#1: Determine Food Cost Percentage
Determining your food cost percentage helps you understand your profits at a glance, so it’s the best place to begin. Food cost percentages are food costs calculated as percentages of your gross sales. Use this formula to determine your food cost percentage: Food Costs ÷ Food Sales x 100 = Food cost %
For example, if at the end of a time period, you used $3,000 of inventory (food costs), with a total of $10,000 in food sales, your food cost percentage would be 30%:
Food Costs ($3,000) ÷ Food Sales ($10,000) x 100 = 30%
Your goal should be to have a food cost percentage between 25-30%, which is the average for well-performing restaurants, with fine dining establishments reaching up to 35% If your percentage is high, try lowering it by negotiating better prices with distributors, using seasonal ingredients, controlling portions, and re-designing your menu to maximize profits.
#2: Use Food Cost Percentage To Price Menu
While there are various pricing strategies, using the food cost percentage formula is a good start because you are gauging profitability based on hard costs, which also helps determine if adjustments should be made to improve your percentage.
- Tally up the costs of all the ingredients that make up each menu item individually
- Divide that cost by your existing food cost percentage, or your desired food cost percentage
- Round off the price
For example: $5.00 (Food Cost for Chicken Piccata over Pasta) ÷ 30% (Food Cost Percentage) = $16.99 (rounded up from $16.66).
In this case, the food cost percentage is on target, the decision to round up or down can be influenced by factors discussed below.
#3: Know Your Target Demographic and Pricing Boundaries
Now that you have a general idea of how your menu items should be priced, there are other factors to consider.
Target Demographic. Your prices should align with your brand, and your customers’ expectations based on marketing, level of service, type of restaurant, and the quality of your food. For instance, quick service and fast casual restaurants tend to have lower prices than sit-down establishments since they require restaurateurs to spend less on service.
#5: Consider Indirect Costs
While food cost percentages help guide your pricing decisions, it’s important to also add indirect costs into the equation. These are costs outside of ingredients that add to the value of your menu items such as overhead expenses, labor, etc.
For instance, a dish that requires advanced techniques or longer prep time should reflect a higher price. You want to make sure that the prices you establish match the service and culinary levels necessary to create and serve the dish.
#6: Understand Competitors’ Prices
It’s important to be aware of the prices that your competitors are charging for similar menu items. This is part of the competition pricing method which offers three choices:
- Price your item the same as your competitor’s price
- Price your item a bit lower than your competitor to lure in customers hungry for a better deal.
- Price your item a bit higher to lure in customers hungry for better quality
While it is always a good idea to know what your competitor’s prices are, it is more important to do what is right for your restaurant. Be sure you don’t price yourself out of a profit or underprice at the expense of quality in an attempt to attract your competitors’ customers.
#7: Strike The Perfect Balance
Have a good range of lower-to-higher priced menu items. This will help balance out unavoidable market fluctuations that are due to circumstances out of your control yet affect your inventory and bottom line.
Another way to add some stability to your menu is to have less expensive items that can be bought in bulk such as pasta, potatoes, etc.
Be sure to use appropriately-sized plates that match your portion size and include those lesser-priced items to balance out higher priced ingredients.
These seven methods will help you master the menu pricing basics and give you more control over your bottom line.