Business owners working in the restaurant industry have so much to juggle. Restaurateurs must make their food business stand out in a saturated market and ensure customers are well-fed and satisfied. Menu pricing is an integral part of that.
Figuring out how to set prices for each menu item in your restaurant can be challenging, as you need to strike the right balance. You want each item to turn a profit (preferably a generous one!) while still appealing to new customers. It can take time to figure out where to start.
The good news is we’re here to help. This handy guide to restaurant menu pricing can help you balance costs and profits, ensuring your customers are happy — and your bottom line is, too.
Menu pricing should be essential to your menu engineering practice as a restaurant owner. You need your prices to cover your expenses, but you also want to consider the customer reaction to your menu prices. If your competition’s pricing is lower than yours, you might lose out on customers.
With that said, you don’t want to dilute your restaurant’s profit margins, so it’s important not to set your prices too low. Some customers even equate lower prices with lower quality, meaning you could miss out on income by under-pricing your dishes.
Setting your prices too high or too low can lead to fewer customers, causing your net profits to drop. The wrong pricing strategy can also cause financial losses through food waste. If nobody is dining with you, your ingredients will go to waste.
Finding the best pricing structure can be tricky, but getting it right is vital.
Many restaurateurs use one of two popular menu pricing methods. One focuses on the ideal food cost percentage, while the other looks at the ideal gross profit margin. Let’s take a look.
Your food cost percentage compares your cost of goods sold (COGS) to your sales. The COGS is the total cost of ingredients used to make your menu items in a given period. The money you made in sales during that same period is your total sales.
To calculate your overall food cost percentage, divide your total COGS by your total sales and multiply the result by 100. If your COGS was $5,000 for last month, and you sold $15,000 worth of food in that time frame, divide 5,000 by 15,000 to get 0.3333. Multiply this by 100 for a food cost percentage of about 33%.
Choosing an ideal food cost percentage for your business can help you set your menu pricing. Most restaurants aim for a food cost percentage of about 28-35% — but remember this might vary depending on your restaurant type. A food truck will likely have a lower food cost percentage than an upscale restaurant chain.
You can use your ideal food cost percentage to set your menu pricing by determining the raw food costs of each menu item. You can then use this equation to calculate the menu price for each item: Menu Price = Raw Food Cost / Ideal Food Cost Percentage.
For example, if it costs you about $2 to make a burrito and your ideal food cost percentage is 30%, you should charge $6.66. To make the food price look more appealing to customers, you can round it up to the nearest ten cents or dollar (e.g., $6.70 or $7).
Alternatively, you can use your restaurant’s gross profit margin to formulate your menu pricing.
Start by determining your ideal gross profit margin. Most restaurants aim for a gross profit margin of about 70%, but do what’s right for you. Determine the ideal price for each food item with this pricing formula:
Raw Food Cost / [(100 - Ideal Gross Profit Margin) / 100]
For example, if it costs $2 to make a burrito and your ideal gross profit margin is 70%: 2 / [(100 - 70) / 100] = 2 / 0.3 = 6.66.
Once again, you can charge about $6.66 for your burrito or go for a markup to take you to the nearest dollar.
Whether you choose one of the above menu pricing strategies or prefer to work out your menu costs in another way, here are six bonus tips to help you boost your bottom line.
Checking competitor pricing structures is a fantastic way to understand how much you want to charge. If a restaurant like yours serves food for more money and gets customers in, you can likely do the same.
If your competitors have lower prices than you, you might need to find ways to cut costs and reduce your pricing for the more expensive menu items. Otherwise, potential customers may pass you over and go to your competitors instead.
Thinking about your restaurant type can help when pricing menu items. Fine-dining restaurants will have a different target market from casual restaurants. You don’t just need to tailor the ambiance of your restaurant to your target market; you also need to sell food at different price points.
If customers expect low-cost food from a casual-dining restaurant, you’ll want your menu pricing structure to meet those expectations. Think of ways to reduce your outgoing costs and keep your profit margins sound.
On the other hand, customers are often willing to pay more for a high-end experience, so if you run a fine-dining restaurant, you’ll be able to set higher prices. However, the high-quality ingredients and well-trained waiting staff will be more expensive too, so your net profits might be about the same.
When working out your COGS, you might want to consider the operating costs and labor costs associated with preparing each product. This will give you an idea of the total cost to prepare each menu item, not just the cost of the raw materials.
If a dish takes a long time to prepare, you might want to charge a higher price to account for the additional bills and overheads incurred to make it. You’ll also want to account for fluctuations in energy bills and food prices.
If your labor costs are too high, consider setting up self-service. KioskBuddy is a self-service app that lets you turn your tablet into a self-ordering device. Customers place and pay for their own orders, meaning you might need fewer front-of-house staffers in a given shift.
Factor your total expenses into your budget, and set your menu prices accordingly.
A point-of-sale (POS) system to process customer payments can help you track food sales and see what dishes aren’t performing well. You can eliminate poor performers from your menu or consider setting them at a lower price to see if this encourages customers to order them.
You could consider slightly reducing your portion sizes to improve your profit margins instead of increasing your selling price. This is an excellent idea if you notice unfinished food returning to your kitchen after a customer has eaten.
Reducing your portion sizes but keeping your menu prices the same could make a massive difference in the amount of inventory you need to purchase, saving you money in the long run.
The right menu design can make a huge difference in encouraging customers to buy your most profitable dishes. Do a little research into introductory menu psychology and restructure your menu accordingly.
Try drawing attention to high-profit menu items by placing them in boxes, organizing them in a column structure, or using different fonts. If they catch the diner’s eye, they might be more likely to order them.
Research has also suggested that removing the currency symbol from your price can lead to bigger or more expensive customer orders.
Small changes like this can make a big difference in your overall profitability.
Setting the correct menu prices is what keeps your business afloat, but it’s crucial to ensure that your prices appeal to customers, too. That’s why putting in the hard work when setting your menu pricing is necessary. With the proper pricing methods, you can ensure each menu item reaches your ideal gross profit margin to strengthen your bottom line.
Want to set up self-service kiosks in your restaurant business? Start your 30-day free trial of KioskBuddy today.