A Guide to Menu Costing: The Real Food Cost Killers

By: Donald Burns

6 Minute Read

Nov 06, 2018

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menu costing

How did you go about pricing your restaurant menu?

  • Did you pick pricing out of thin air as to what you think is appropriate?
  • Did you call your friend who runs a restaurant and ask them?
  • Did you look at another restaurant's menu and think to yourself, "That looks fair?"

If you did, it’s okay. The menu costing police aren't coming for you. But they should be.

Menu costing is part marketing (positioning) and part mathematics (knowing your numbers). When these two come together, you have basically a one-two punch that will set your menu up to knock out the competition.

If you only focus on one, you better be willing to get knocked out yourself.

The Real Food Cost Killers

The real food cost killers on your menu are not hiding in the kitchen where you can see them. Food waste and inventory variance are the low-hanging fruit in the battle of food costing and can easily be addressed.

To really call out the killers, you'll have to go to some places you may not have considered before. Here are a few things you need to research when pricing your restaurant's menu.

1) Market Comparison

When you fail to analyze the market, you are one step closer to becoming included in the yearly statistics of restaurants that fail.

The reason many restaurants don't research competitors is because of what psychologists call illusory superiority. It is a cognitive bias many have that explains why some people overestimate their abilities. Basically, you think you are smarter than other restaurants and know how to price out your menu without data to support your decisions.

Try This Exercise

Do your homework! It's not that complicated to gather data from local restaurants that directly compete with you. You can record these in Excel and see where you lie in comparison.

For example: if you're an Italian restaurant, you probably have a lasagna on your menu. Google "Italian restaurants near me," look at your competition's menu, and start comparing your lasagna prices to theirs. Record these numbers in Excel, then look at your price. Are you the highest price, the lowest, or somewhere in the middle?

Wherever you are right now, don't jump to conclusions. Price alone is not what you want to make decisions on. You are aiming for the elusive spot in marketing known as successful positioning.

Not an Excel person? Try out a menu price comparison and food cost calculator tool to see how your top dishes compare to average prices in your area.

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2) Menu Positioning

Positioning your brand in the market requires a knowledge of your market. Specifically, you must understand if your market is demand-driven or price-driven.

Demand-Driven Market

If you are in a smaller market, your restaurant concept might be pretty unique. With a menu that uniquely stands out and few competitors, you should be able to price your menu at a more premium price.

It's the golden rule of supply and demand.

Ergo, if you are the only restaurant nearby selling Chinese food, you're golden when it comes to menu pricing.

Price-Driven Market

Conversely, let's say your menu offerings are fairly common.

Perhaps you sell burgers - so do a lot of other restaurants.

You do the market research of the competition and see that the most expensive burger in your market is $11. Because there is quite a bit of competition, you'll find it difficult to justify a price of $14 for yours. The question here is: What will your market bear?

3) Differentiators

Just because your area's average price for a burger is $11 does not necessarily mean you can't charge $14 for yours - particularly if your burger is specialized (or differentiated) in a way that makes $14 seem reasonable.

Let's continue our conundrum about the price of your lasagna in the example earlier. You find lasagna in your market has an average price point of $14. You want to price yours at $16. Should you do it? Answer these questions to find out.

Do you use better ingredients?

Papa John's made their brand stand out from all the other pizza places by marketing the famous "better ingredients, better pizza" tagline. If you are using the very best product that you can source, you should be paid a premium price for it.

Here is the catch 22: if you want to charge for it, you'll need to market it.

  • Do your guests know you use the most expensive best ingredients?
  • Are you marketing the fact that you use locally grown tomatoes and grow your own basil in the restaurant's herb garden?
  • Do you market testimonials from guests saying that one bite of your lasagna changed their life?

Does your brand fit the bill?

Restaurant segments (fast casual, fine dining, etc.) all carry a price perception with them. It doesn't matter if your lasagna is the best in your market. If you are a quick serve restaurant at a food court, you will not be able to get the same price as a fine dining restaurant with full service, table cloths, and a classier atmosphere. Defining your restaurant brand is key to success.

Have you costed out the portion on the plate?

Here again is where those silent killers come into play. On day one, you sat in the office and created a recipe card for the lasagna. It looks like the food cost is fitting. Then you or your cooks see it on the plate and start making tweaks to the presentation.

After adding a couple extras to the plate, the incremental cost per serving goes up, which leads to inaccurate menu pricing and inventory reporting.

When the theoretical food cost becomes weighed down with costs that you never put into the recipe, your price becomes a killer of profits.

Winning the Menu Costing Game

If you can show why your menu is different, menu costing becomes much easier.

The real food cost killers are not hiding in plain sight. They are lurking in the shadows of bad marketing, pricing by gut (not data), poor positioning of your brand, and not noticing all those "extras" that get put on the plate.

Of course, you know that if you don't even have the fundamentals done (like costing out your menu completely) that you should not even begin to attempt to price out your menu and expect to make money. If you do, then congratulations, you have a hobby and not a business.

Just remember that most restaurants exist to turn a profit.

Yours should too.

To start, try out the Food Cost Calculator to cost out and compare your top five dishes, download our Menu Engineering Bootcamp to learn how to pinpoint the profit-driving recipes on your menu, or request a demo to learn more about Toast's inventory management software.

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