One of the most important aspects of running a successful restaurant business is how to price a restaurant menu.
Sales are your main priority since that is what keeps the doors open and will mean success or failure on any particular day, month, or year. But, because food costs change based on what items we’re considering, time of the year, what is in season, and so on, they can have a major effect on other areas of your business like equipment, labor, utility costs, and ingredients.
We’ve already seen how to create a successful menu, how to price a restaurant menu is as important as anything else to maximize your profit margins.
Menu Prices / Food Cost Ratio
Here a bit more math will be used. No matter if your restaurant is brand new and you’re creating your menu, or you want to update your current menu prices, follow these steps below to create base price points for every item according to what your ideal food-to-cost ratio is to turn a profit.
1. Determine your ideal food cost ratio. Simply put, this is the percentage of every sale that you in turn spend on food. Most restaurants operate on a percentage of 25-35%, but often they will try to reduce this number to increase the profit margins on every sale.
2. Determine cost of goods per dish of raw food. Let’s say you have a grilled balsamic chicken and vegetable salad with quinoa and other vegetables. Add up the cost of every item in this dish to determine what exactly it costs to make the dish every time. That is the cost of raw foods for this dish. Do that for every item on the menu. BY doing this it will teach you how to price a restaurant menu.
3. Determine your prices. This simple equation should be utilized, (raw food cost / ideal food cost = price). Change prices as needed to round numbers, usually by rounding up where required, or just to a number that is clean. If something totals $17.37, round it to $17.50.
An example: your ideal food cost is 30%. $5.00 (raw food cost) / 30% (cost %) = 0.166667. Move the decimal points two places to the right = $16.67, then round up $16.99 or $17.00
Determine Profit Margins Of Your Current Restaurant Menu’s Pricing
If you’re not creating a new menu, but want to determine the profit margins per item on your current menu, here is how to price a restaurant menus with the same equation as above.
1. Choose an item (to start choose one, the process will be the same for every item on the menu).
2. Use a formula tweaked from above: (price on menu – food cost = profit margin).
Looking at the menu example from above: Chicken Salad food cost is $5. ($17 – $5)/ $17 = 0.705 (move decimal points two places) = profit margin is 70% or $0.70 on the dollar.
The profit margin on items will determine how well your business does. That is because it must then be used in another formula against other costs of business including labor, utilities, and other miscellaneous costs:
Profit/Loss = Gross Profits – (operating costs + labor)
So, the higher your profit margin per item, the better off your business will be doing as a whole. Try to shoot for 70% or above for gross profit margins on each menu item. Some will be higher and that is a good thing. Getting the right profit percentage can make or break any restaurant especially in the first year of operation.
Off The Menu Costs
After you have done all this calculating you must add in for waste and employee meals when thinking about how to price a restaurant menu.
- Every restaurant must have an employee meal. The chef should prepare the lowest food cost items in bulk and that is what the staff eats. If you have 20 employees and they just eat what they want, and most are there for two shifts, it will raise your overall food costs by 4 to 7%
- Check your garbage cans: If you see large amounts of the items that are sided with the entrees such as vegetables, French fries or salad reduce the portion of those items.
- Spoilage: All the above numbers are great on paper but if your refrigeration is not at proper temperature and you are throwing out product this also raises your food costs.
Some Ways To Better Price A Restaurant Menu
There are a few different ways you get the most out of your menu’s pricing and the tactics we’ll look at here should be considered no matter what stage of business or type of business your restaurant is. Menu items with low food costs and high profit margins will increase the profitability of your menu, but there is a bit more you can do than just that.
Every good business owner has an idea of what their main competitors are up to. This method on how to price a restaurant menu is no different:
1. Price items lower than your competition. This is great for casual dining experiences, sports bars, or other restaurants. When folks look for quality at a better cost, your name will always come up.
2. Price items the same. You can also go a step further and price similar items at the same price as your main competitors.
3. Price items higher than your competitors. For upscale restaurants whose demographic patrons are more affluent, reducing the price may actually work against you, as psychology has shown that higher prices give people the feeling of greater value, even for the same item. It will also scream high quality for the high price so go above the competition, increase your profit margins, and give people the best of the best.
4. Balance Prices. Consider this when pricing some items that allow you to work on a greater than 70% profit margin. Chicken and pasta are two, along with some others items that make up for the high food cost items such as steak, lamb chops and most seafood. So when pricing those high food cost items consider the balance in your menu so that you don’t price those items at the same margin. A steak, lamb chops and Dover Sole for example, on most menus, if priced with same margin as the pasta and chicken will result in a very high price.
Uniqueness Restaurant Menu Pricing
Also known as “demand-driven pricing”, when figuring out how to price a restaurant menu you can price menu items that are completely unique to your restaurant and/or very popular. If your menu offers items that you cannot get anywhere else in town or even in the same county, you can price accordingly, in a completely unique and higher fashion as patrons don’t have anything else to judge it against.
How to Price a Restaurant Menu Will Depend On Your Type Of Restaurant
In closing, remember that the type of restaurant that you operate will ultimately determine what sort of pricing menu items have. Don’t expect a casual breakfast/lunch spot to have menu items in excess of $20, and don’t expect a high end Italian restaurant to have $10 entrées. Be sure to see other restaurants in the area and do some testing of prices as well. Something may sell well at $18 but not at $20.
Be sure to keep your pricing fluid in the beginning but ironed out and consistent over time. If you think about everything that has been mentioned in this post about how to price a restaurant menu, it will ensure your business becomes and stays successful.