How to Set and Optimize Restaurant Menu Prices
Whether you're running a casual cafe, busy diner, or upscale restaurant, knowing how to price a menu effectively is a must-have skill. Sales are an essential factor in whether or not your establishment turns a profit, so shrewd menu pricing is crucial to success.
Conceptualizing the menu is one of the fun parts of opening a new restaurant. It's certainly a challenge to create a menu that can be competitive while keeping you afloat. 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 correctly, but you also have to proceed carefully, so you don't price yourself out of the local market. Menu prices will drive your restaurant's success, so whether you're building 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 begin optimizing your menu by conducting an audit
- 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 Begin Optimizing Your Menu to Save Money
In a study conducted by Rewards Network, 28% of restaurant owners reduced their menus to meet the demand of delivery-only orders in 2020. By adjusting your menu, you will:
- Order fewer ingredients from suppliers
- Improve meal preparation and cooking time
- Minimize indoor dining turnaround times
- Improve drive-through speed and sales
- Decrease food costs and achieve economies of scale
How to Conduct a Menu Audit
The first step is to conduct a menu audit. List out all your menu items and rank them by sales volume. Then, break down the cost of each dish by calculating every ingredient that goes into it. Once complete, categorize your menu items into one of these four quadrants.
- Cows are popular items but with low-profit margins. These items can bring in consistent business and attract new customers but do not significantly contribute to your bottom line. Incrementally increase your price once per quarter.
- Stars are menu items that are the most popular and the most profitable. These menu items are typically specials and do very well because they have high contribution margins. Keep these menu items as-is.
- Question marks are the opposite of cows. They are highly profitable menu items but aren't very popular. First, try to market the dish more by placing it in a more visible part of your menu, posting on social media, or printing photos of it in your restaurant. If you don't see any results, consider removing the item from your menu.
- Dogs are menu items that are neither popular nor profitable. Remove these items altogether.
Learn more actionable strategies for success in the restaurant industry by downloading our ebook, 6 Laws of a Resilient Restaurant.
How to Calculate According To Ideal Food Cost Percentage
Food cost indicates the menu price of a particular item compared to the cost of the food used to prepare it. 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 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 all your ingredients for your dish, 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's 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 or Loss
As illustrated, the higher your gross profit, the more you have leftover as profit after deducting operating and labor costs. It's essential to make sure you have high-profit menu items and work hard to sell them. Follow these steps to come up with menu prices based on your ideal gross profit margin.
- 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's 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 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 Prices
If you already have menu prices set but are thinking about updating them to represent your desired gross profit margin better, 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 Software
Even if you get the hang of these equations, it can be tough to manually track all of this pricing information, 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 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 required to prepare the dish and profit margin
Bringing in a restaurant management tool will help you become more aware of what's going into the dishes you serve, so you can more accurately price menu items, make wiser financial choices, and increase profit margins.
3 Essential and Effective Menu Pricing Strategies
Beyond knowing your math and implementing a restaurant software tool, you can employ some other effective tactics 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 reasonable menu price.
Check out these strategies for optimizing menu price items and saving money in the process.
1. Competition Pricing Method
This 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 strategy 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 strategy works well if your restaurant has a solid and unique brand presence and is primarily 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 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 excellent reason to raise prices. The demand for your restaurant will naturally increase because you offer food, a brand, and 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 good reason chain restaurants tend to be successful is that they practice portion control religiously. The cooks have a firm handle on exactly how much 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 precisely measured 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. Kitchen staff can use a measuring cup 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 Owners
The 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.