Books on restaurant management will tell you that menu pricing for restaurants is a somewhat vague process. You could figure out how much you are paying for food supplies and simply charge three times as much. You could try to out-do your competition by lowering your prices. Or, you could do some guess-work around your margins and hope that your customers will pay the prices you apply.
The options above, although not unheard of, probably incur too much risk. After all, pricing included, your menu is one of the main reasons that your customers come through your doors. They want to pay for the quality they felt they have received. And no doubt, your prices will influence how your restaurant is perceived by the public.
In fact, prices directly affect your restaurant’s profitability. Therefore, it is important to take the time required to get it as close to perfect as possible. While there is no exact formula to follow, the guidelines in this article will help demystify the process so you can gain the most benefit from your decisions.
Things to Consider Before Pricing
There are a variety of aspects that affect restaurant menu pricing methods. Consider the following influential factors and how they can affect your restaurant before you begin pricing or changing menu prices.
Direct costs. These are the ingredient costs associated with the food item itself. This involves the purchasing of food, portion sizes, food waste from spilling, overcooking or spoiling.
Indirect costs. Indirect costs are those that do not include the actual ingredients that make up a dish, but the aspects of your restaurant that add perceived value or quality. These provide a significant basis upon which to charge higher prices.
Preparation and labor. The labor to prepare a menu item is considered an indirect cost. Menu items that need additional time and effort to prepare merit a higher menu price than something that simply requires heating and plating.
Overhead expenses. Some examples of overhead costs for items can be the décor, product presentation, amenities or marketing efforts. Although slightly less common, these can create added value and validate higher menu item prices.
Volatile food costs. Many raw commodity food items – or basic ingredients with minimal quality variance – may fluctuate as often as daily. For instance, flooding in Texas could wipe out a tomato crop, causing supply to drop and demand to increase. In this case, you have two easy options: raise your prices or work with a seasonal menu. Seasonal menus allow flexibility for buying crops in season or supply to keep costs down.
Competition. Check out your competition on a regular basis. You might even go out to eat at your rival restaurants and take advantage of the opportunity to see what you can improve about your own operation. Also, most restaurants have their menus available online. A simple search can reveal a lot about what is offered in you neighborhood.
Service type. Prices will undoubtedly change depending on whether your restaurant is a fast-casual restaurant or a fine dining restaurant. Be sure that your prices represent the service value your customers receive. For instance, full service restaurants can always charge more for their hamburgers than quick-service joints. This is because full service restaurants are also providing greater ambience, better service and often better ingredients than the quick-service alternative.
Pricing boundaries. Determine your boundaries. Every restaurant situation is different and prices will vary depending on location, preparation and simple supply and demand. Figure out the very least you can charge while still making a reasonable profit in your business then determine the highest price your market will pay for your items. Gather information about demographics and average income levels in order to find out the prices people in your market area will pay.
Common Menu Pricing Methods
Your restaurant’s appearance, menu choices and level of service all determine how items can be priced. Below are some common suggestions for how some restaurant owners choose to proceed:
Ideal Food Cost Pricing Method. This method calls for an owner to consider the actual cost of a menu item then to consider their ideal food cost percentage. Ideal food cost percentage varies but typically lies somewhere between 25 and 30 percent. The two are divided and Voila! You now have a menu item price.
Raw Food Cost of Item ÷ Desired Food Cost Percentage = Price
Using the ideal food costing method, the chicken entrée should be priced at $14.16. First, you need to know the cost of all the ingredients in the recipe for Lemon Rosemary Chicken, from the half cup of lemon juice to the pinch of fresh rosemary to the chicken itself. Next, you need to account for any side items that come with the entrée and factor that into the menu price as well. Every food item on the plate matters. Since $14.16 is not a typical menu item price, you may want to lower it to $13.99; that is, if you cannot think of an inexpensive way to increase the perceived value of the plate enough to raise the price from $14.16 to $14.50.
However, since factors like indirect costs, price volatility and competition are important to consider, this may not be the most reliable pricing method. Applying a price markup to all items in one fell swoop like this may inaccurately and unreasonably over – or under – price some of your items. It is important to always pay close attention to the market and see what the customers in your area are willing to pay.
Items like fryer oil, condiments or salt and pepper can affect your overall food cost. You should account for a variance of about 4% to keep from losing money on these indirect costs. For instance, if you are shooting for a food cost percentage of 32%, you should actually try to hit 28% to account for those extra costs. » Learn More About Restaurant Cost of Goods
Competition Pricing Method. The restaurant owner using this method assigns prices to items based on the general market price or the prices assigned by the competition. Usually, the owner will do one of three things: price the item to be the same as the competing prices; price it slightly lower to get those looking for a bargain; price it higher to attract those looking for higher quality. This means that a restaurant has to work within a certain price, including labor and preparation, that can potentially put a strain on the chef.
Beware of Price Gouging. Food service operations in ballparks or stadiums tend to charge people more for their food and goods since guests do not have the option to leave and get food somewhere else. However, some places take this too far by charging more than what is considered reasonable. Be careful of those upper limits and be fair to your customers. For instance, if the owner prices the Lemon Rosemary Chicken at $14.00 because that is just under the current competition’s prices, and the ideal food cost percentage is 30%, then the chef needs to make sure the kitchen is producing this item at no more than $4.20. This can be complicated.
Demand-Driven Pricing Method. This concept is based on the economics of supply and demand. Restaurants in airports, or concession stands at sports stadiums, can get away with charging more for their food items because it is the only source of food in the vicinity. The demand for food is greater than the supply, so people are willing to pay more for it. Restaurants that offer specialty menu items or a unique and exciting ambience can get away with charging more since it reflects both the food and the experience. Study your market and your customer base before pricing your menu items. You will most likely know what prices are simply too high, and the last thing you want to do is drive your customers away. Make your prices competitive and reasonable, and make sure you are offering the value appropriate for higher cost items.
Evaluate Current Profitability. When you know which menu items are the highest grossing items (meaning they result in the most profit before any other expenses are considered) then you know which items to promote. In the chart below, you can see by looking at the last column that the king crab legs are the most profitable item on this seafood menu. Even though the food cost is greater for the crab legs, the gross profit is higher as well. To many operators, it is the gross profit that matters most. To maximize your profit, you might consider raising the price of the other fish entrées slightly, or simply train your serving team to upsell the crab legs.
|Fish||Food Cost||Selling Price||Food Cost||Gross Profit|
Raising menu prices is a delicate issue. Many restaurant owners are unsure as to how to handle it because it might negatively affect the consumer’s perception of the restaurant. Try the following suggestions to increase your restaurant’s profitability:
Promote your value. Marketing your brand and your best products can communicate your value to potential customers. Use coupons, advertisements and other marketing strategies to start making more money.
Make your profitable items stand out. Filler items are those that take up space on your menu pages but do not offer much in the way of gross profitability. Make sure you make your highest grossing items stand out on the menu.
Add appeal to basic menu items. You can make your menu items more flexible and add value by creating an attractive name, an intriguing sauce or a dressing or special theme to the food. For instance, taking a normal hamburger and drizzling it in a spicy honey barbecue sauce might add some appeal, which in turn would give the public more incentive to try it and the owner a reason to slightly increase the price.
Change prices in small increments. Small increments are less noticeable when you need to increase prices and these amounts of revenue can add up to a large gain in profit. Additionally, items ending in odd numbers such as .95 or .99 are less off-putting than whole numbers.
Use specials to intrigue guest interest. Full-service restaurants are able to create occasional specials that guests can order from the menu. Although specials can be created from the food you already have in your inventory, they should not be concocted from week-old leftovers. Menu specials are a great way to create new and exciting items that will entice your customers. If the special goes over well, you can certainly consider adding it to your menu to start making a consistent profit from it.