Pricing your menu items is a difficult task that requires a great deal of strategic consideration. The goal in setting menu prices should be to set yourself up to achieve your financial goals, not to simply make your costs as low and margins as high as possible. Pricing a restaurant menu is about finding the right balance between adhering to guests’ expectations and your own financial needs.
Let’s get down to business, starting with the meatiest part of the process.
Needed Gross Profit
A lot of menu pricing guides suggest pricing items based on a food cost percentage benchmark. Food cost percentage is a metric that is calculated by dividing the menu price of a dish by the cost of the ingredients required to make it. Depending on your restaurant’s service style, the industry benchmarks for food cost percentage will vary. Although food cost percentage is an interesting metric, it does not provide any insight into how your menu prices influence your ability to cover all the other costs of running a business.
Pricing based on Needed Gross Profit allows you to set the menu prices with the larger financial picture in mind. If you are already in the habit of creating a P&L statement regularly, that's a great place to start. If you have not created P&L statements in the past, you can use this free template to get started.
Look at your old P&L statements and focus on the Costs portion. Calculate how much you spend not only on food, but on all of your operational and occupancy expenses. Then, set a reasonable ideal profit goal that you hope to achieve in the coming year.
To calculate needed gross profit, use the following equation:
Total operating costs - food costs + ideal profit = Total needed gross profit
Needed Gross Profit Per Guest
Now that you've calculated your annual needed gross profit, you can calculate how much money you need to make on each guest that walks through the door to cover costs and meet your profit goals. In order to do this, you need to know how many guests visit your restaurant in a year. If you have not kept tabs on this in the past, start now. Even if you only have a month's worth of data, it's acceptable to multiply that by 12 to get a (very) rough estimate of how many customers you serve in a year.
To calculate how much you need to make on each guest, simply divide the total needed gross profit by your total customer count for the previous year.
Total needed gross profit / Previous year customer count = Total needed gross profit per customer
This number shows you the gross profit you need per customer to meet this year's financial goals if your serve the same number of customers in the coming year. If you serve more customers than the previous year or make a larger gross profit per customer and you’re able to control food costs, you will be on pace to exceed your goals for the year.
Okay, now let's talk about actually pricing your menu. Say you discover that the total needed gross profit per customer required to meet your goals is $10. This does not mean that you need to sell each menu item for at least $10 or that every customer needs to spend at least $10. Instead, you need to make $10 per customer on average. Instead of pricing your items solely based on total needed gross profit there are a number of other things to consider.
Do you operate a full service restaurant, a QSR, or a cafe? If you operate a full service restaurant is it a casual or a fine dining establishment? Depending on the service type, your guests likely have different expectations and preferences. Guests likely feel comfortable paying more for a dish at a full service restaurant than at quick service establishments because they are getting a high level of service and potentially higher-quality ingredients.
Take a look at how other restaurants in your area have priced their menus. Make sure that you focus on restaurants with a similar customer base and service type. This will help you to get the most accurate sense of the ‘fair market value’ for your various menu items. If you charge more for a dish than a similar restaurant in your area, you need to have a good reason to do so. Maybe you use higher quality ingredients or offer larger portions. You can likely view most restaurant menus online, but it is always a good idea to visit local competition regularly to see how they are running their operations and to discover new ideas that you can implement at your own restaurant.
This is a big one. Your guests have expectations about your restaurant based on your service type, other restaurants in your area, and the perceived quality and uniqueness of your restaurant's ambiance, food, and service. This works both ways. Pricing menu items too high can make guests feel that the experience and the cuisine is not worth the sticker price. Pricing dishes too low can influence guests’ perception of your restaurant and food in a negative way. If you price items lower than your guests expect, they may feel that quality is being sacrificed. The key is to understand guest expectations and to find middle ground between what they feel is too cheap or too expensive.
Cost of Goods Sold
In order to price your menu in a way that allows you to keep the lights on, you need to first know how much it costs to create each dish. How much are you paying for each of the ingredients that go into each of your dishes? Calculating the cost of creating each dish requires a clear knowledge of what you pay the food distributor for each ingredient. You should already be in the habit of tracking food costs regularly, paying particular attention to goods that tend to fluctuate in price the most often. Food prices have been on the rise basically across the board in the past year. If you want to make an informed decision about when and how to edit your menu prices, be aware of rising and fluctuating food costs.
Standardize the Recipes
It is also a good idea to have standardized recipes for each of your menu items. The recipes should clearly identify the exact amount of each ingredient that should be used in creating each dish. This will not only allow you to provide a consistent guest experience, but it will also make calculating the cost of creating your dishes less of a guessing game. Say you offer a salmon dish that is prepared using lemon and dill, and it comes with a side of asparagus and rice. The item cost of that dish can be calculated by looking at the amount of each ingredient you use according to your standardized recipe and the amount that you pay for each ingredient when you purchase it from your vendor.
Putting it All Together
Armed with these key data points, you’re ready to start setting menu prices. Before you make your hamburger dish $12, consider what your competitors are charging for their hamburger dishes, what guests expect when they visit your restaurant, and how much it costs you to make the dish. If a competitor charges $8 for their hamburger, how can you justify the price difference. Is your hamburger larger? Do you offer more toppings or higher quality meat? Do guests expect to spend more at your restaurant than they do when they visit the competitor? If the answer to all of these questions is no, it is likely not a good idea to price your burger at a higher cost.
Instead, look at your menu as a whole. What items can you charge more for? What dishes are particularly popular or unique? Rather than increasing prices across the board, focus on adjusting the menu price for these items.
You also need to consider everything that customers order at your restaurant when thinking about needed gross profit. If you need to make $10 per customer, it does not have to come from one dish, but from the combination of everything the customer orders including beverages, entrees, appetizers, and desserts.
Finally, if you don’t feel that you can achieve your needed gross profit per customer by increasing menu item costs, focus on getting more customers. Consider offering an online ordering system for your restaurant to open up an additional revenue channel. You could also run a marketing campaign to get new guests through the door and start a restaurant loyalty program to encourage repeat visits. By increasing the number of orders, the number of new guests, or the number of return visits, you can increase your yearly customer count and decrease the gross profit you need per customer to meet your financial goals.
It’s important that you find what works best for your restaurant. There isn’t simply a right answer or a magical formula. The purpose of all of this is to set your restaurant on track to meet your financial goals for the year. Whether you do that by offering new services, adjusting your menu prices, attracting new guests, or a combination of all three, the most important takeaway is that you try different things until you find the recipes that delight your guests and meet your yearly financial goals.