Conceptualizing the menu is one of the fun parts of opening a new restaurant. But how can you determine what to charge so you can make sure you turn a profit? Portion control and food cost are two factors that will help you price your menu properly, but you also have to proceed carefully so you don’t price yourself out of the local market. It’s certainly a challenge to create a menu that can be competitive while keeping you afloat. Menu prices will drive your restaurant’s success, so whether you’re creating or updating your menu, consider these tips to price your menu for maximum profits.
Here’s what we’ll cover in this article:
- How to calculate menu prices based on the ideal food cost percentage
- How to calculate menu prices based on ideal gross profit margin
- Essential strategies to price your menu items competitively
How to Calculate According To Ideal Food Cost PercentageFood cost indicates the menu price of a certain item in comparison to the cost of the food used to prepare it. Basically, how much you pay for food decides how much you should charge your customers for it. Follow the steps below to create a base price for each menu item as determined by your ideal food cost percentage.
- Designate your ideal food cost percentage. Your food cost percentage should be in the neighborhood of 25-35%. So, if you pay $1 for food, you should charge the customer a minimum of $2.85 for it. Many restaurants work to lower their food costs which will turn more of their sales into a profit.
- Figure out the raw food cost of each menu item. Raw food cost is comparable to the cost of goods sold (COGS). For example, if you’re serving a spaghetti bolognese, add up the total cost of the pasta, meat, cheese, garlic, herbs, and spices used to make the dish.
- Calculate each menu item price. You can round up the numbers to make the math cleaner, but use this equation: Price = Raw Food Cost of Food Item / Ideal Food Cost Percentage. Example: Imagine your ideal food cost percentage is 28%, and your raw food cost is $5. The complete equation looks like this: $6.00 (Raw Food Cost of Item) / 28% (Ideal Food Cost Percentage). The menu price from this equation comes to $21.43.
Calculate According To Ideal Gross Profit Margin
An alternate way to choose menu prices is by using your desired gross profit margin for each item. This method helps you to better predict your net profit, also known as your bottom line. The equation here shows you how to find your net profit:
Gross Profit – (Labor Cost + Operating Costs) = Net Profit/Loss
- Determine your ideal gross profit margin. Gross profit margin is a percentage that shows the profit made from sales. A 50% gross profit margin on a menu item means that you earn 50 cents on the dollar for that specific item. The rest of the money goes toward the cost of the ingredients, labor, and other expenses.
- Calculate each menu item price. This equation will help you find your price based on your chosen ideal gross profit margin: Ideal Gross Profit Margin = (Menu Price – Raw Food Cost) / Menu Price. Example: An item that sells for $10, and that costs $4, would generate gross profits of $6 (selling price – cost of goods) and a gross profit margin of 60% ($6 / $10).
Calculate the Gross Profit Margin Of Existing Menu PricesIf you already have menu prices set, but are thinking about updating them to better represent your desired gross profit margin, use the same equation as illustrated below.
- Choose a menu item.
- Insert the price of the menu item into the equation. Gross Profit Margin = (Menu Price – Raw Cost)/Menu Price
Example: Your menu price for a pork chop entree is $28.00 and your raw food cost is $8. ($28.00 – $8.00) / $28.00 = 71% gross profit margin. In this example, the restaurant earns 71 cents on the dollar for every pork chop entree sold, which is pretty decent.
Bring In Restaurant Management SoftwareEven if you get the hang of these equations, it can be tough to keep track of all of this pricing information manually – especially as menu items change. Software-based restaurant management systems make it easier to keep track of profit margins and the effects of changes in costs, ingredients, and selling price.
By maintaining a database of your menu item’s current ingredients and their individual costs, these restaurant management tools allow business owners to:
- Specify a selling price for a menu item; the tool will then calculate the cost of goods needed to prepare the dish and profit margin
- Identify the desired cost of goods (e.g. 20%) for a particular menu item; the tool with then calculate the selling price necessary to meet that goal
- Change ingredient amounts or substitute ingredients as needed; the tool will then calculate a new cost of goods needed to prepare the dish and profit margin
3 Essential and Effective Menu Pricing StrategiesBeyond knowing your math and implementing a restaurant software tool, there are some other effective tactics you can employ to boost profits.
Items with low food cost percentages and high gross profit margins will yield more money in your pockets. However, depending on what type of restaurant you’re running, the demand for the menu item, and your competitor’s price, you can determine a more fitting menu price.
Check out these strategies for optimizing menu price items and saving money in the process.
1. Competition Pricing MethodThis method goes off the prices of your city’s competition or in the general market you’re serving as a baseline to determine your price. You can utilize the following competition-driven methods:
- Price your menu items lower than your competitor’s. This is a good choice if you operate a casual establishment or if its customer base is looking for a cost-effective alternative.
- Price your menu items the same as your competitor’s. This is a great strategy if your restaurant has a strong and unique brand presence, and is mostly competing on that.
- Price your menu items higher than your competitor’s. If you run a high-end, upscale restaurant that attracts a demographic of customers looking for a high-quality meal and ambiance, setting a higher price gives off the right impression.
2. Demand-Driven Pricing Method
If you’re experiencing a higher demand for your restaurant and specific menu offerings, you might be in an excellent position to raise prices. Let’s say your food is just that good, and you can truly get away with it – after all, people are standing in line for hours just to grab a seat and try your food! Or, if you have an enticing brand and ambiance that people are excited about, this is another great reason to raise prices. The demand for your restaurant will naturally increase because you offer food, a brand, and/or an ambiance that guests cannot experience elsewhere.
For example, if you make the best New York-style pizza in a town with limited options for this specific offering, you might be (literally) rolling in the dough. Or, if you run an establishment near or inside of places like amusement parks, zoos, sports stadiums, or airports, you can raise your prices since diners have fewer options for food. Therefore, the demand is high.
3. Practice Portion Control
Once you’ve priced your menu items, you need to make sure you get the most bang for your buck. A huge reason chain restaurants tend to be successful is that they practice portion control religiously. The cooks working at these restaurants have a firm handle on exactly how much of each ingredient to include in each dish. Shrimp fried rice might have an allotment of eight shrimp per dish, so every shrimp fried rice that leaves the kitchen will have exactly eight shrimp in it – no more, no less.
Everything needs to be measured precisely if you’re going to implement portion control in your kitchen. Dry and fresh ingredients should all be weighed, while ingredients such as shredded cheese can be kept in pre-measured containers. A measuring cup can be used to portion out vegetable medleys, mashed potatoes, mac and cheese, and more. An alternate way to implement portion control is to purchase pre-portioned items, such as chicken breasts, pizza dough, and burger patties.
While these items may be more expensive to purchase up-front, you’ll save money on labor and food waste in the long run.
Pricing A Menu Is A Must-Have Skill For Restaurant OwnersThe price of your menu items must reflect the type of restaurant you’re running and your target demographic. Prices need to be cohesive with your brand, food options, and formality level. There’s a reason why ordering a filet mignon at a French bistro is expensive, and why ordering a burger and fries through a drive-thru is not. Guests will appreciate it if your prices match the value, service, and environment your specific restaurants provide, and will be more likely to return.
Want MarketMan to do all this for you? Request a demo of MarketMan and see how restaurant inventory management software can help your price your menu items on the fly.
And be sure to download our free guide, The Ultimate Guide to Lowering Food Cost in Your Restaurant, full of tips to help you boost your bottom line!
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