Step right up! Have a seat at the table and let’s play a little game, shall we? It’s the one that's going on with your menu.
Menu pricing should be straightforward, yet it's not that simple. There are many elements you need to keep in mind when pricing out your menu. Let's explore the dynamics of menu pricing!
What Are Your Real Food Costs?
Too many restaurant operators live in the land of theory. They think that "purchases divided by sales" tells you your real food cost. It sort of does. But it only gives you one side of the equation. It doesn't show you performance metrics to measure what is going on under the surface of your menu. That's where your real restaurant profits are hiding!
Knowing your food costs is not a luxury; it’s a requirement if you want to have a chance at making money in an industry notorious for thin margins. To do this, you need the following:
- A food cost program (this can be as easy as an excel spreadsheet like this one here)
- A restaurant management system (like HotSchedules or CrunchTime)
- An all-in-one point of sale system like Toast
Do you think Apple does not know how much it costs to make an iPhone? Of course they do… down to the penny! If you want to play the menu pricing game, you need to stack the odds in your favor. That starts at ground zero: know your costs.
The Disadvantages of the Commodity Pricing Model
Another major mistake is pricing out your menu with only the competition in mind. How do you know they know what their food costs are? It may seem like their restaurant is always packed, but do you know if they are actually making money?
If you can provide better services and better products then the competition, why bother pricing your menu as low as theirs?
Creating value is more than just price.
Many people get that wrong. They think that value is purely price-driven. New for you: it’s not. Value is created when you deliver those intangibles that add to the perception of quality, such as stellar service, outstanding facilities, professional looking staff, and food presentation.
Throw six chicken wings on a plate, a plastic ramekin of blue cheese dressing, and a few carrots and celery sticks and guess what? You’re price-driven. When you complete with other restaurants in your market on price, then you are a commodity.
You don't want to be in that game. Pricing at the commodity level is a never ending battle of cheaper prices. It’s a game you cannot win in the long run.
"You build value by embracing the spirit of hospitality" - Donald Burns
3 Menu Pricing Strategies
1. Play To Your Strengths
Your menu needs to be a representation of what you do best. Think of your menu like your greatest hits album. The Rolling Stones recorded 439 songs. But when you go to a Stones concert, do you want to hear those “B side” tracks or just the hits?
Your menu needs to play your hits. Those are the items that will allow you to stand out from the crowd and create a brand differential. Having items that separate your restaurant from the others allows you to price your menu differently. Being different is good; it allows you to stand out, create brand differential, and charge a premium for your best items.
2. What the Market Will Bear
Now, its time to do some research and conduct a competitive pricing analysis. Gather menus for your market and write down the pricing of a similar item from your menu.
- Collect data from 5-7 restaurants in your market.
- Pinpoint a high point, a low point, and calculate an average.
- Now based on your restaurant's specific value, how can you price your item with this competitive analysis in mind?
A hamburger in Albuquerque, New Mexico may cost $2-3 less than a hamburger in Santa Fe, 45 miles away, because the market in Santa Fe will bear it. Think about the last time you were at the airport and paid $5 for bottled water and $7 for a yogurt. When you have a captive audience, you can charge what you desire… to a point. Value is about value. If you price gouge your guests and they do not feel it was worth it, you’ll lose them fast.
RELATED ARTICLE: Restaurant Profits: Where Have They All Gone?
3. Menu Balance
The trick to winning the menu pricing game is to balance your menu with high and low cost items. You can once again stack the deck in your favor by taking advantage of menu engineering principles and menu design psychology. Menu placement is critical to getting that balance just right. For example, think of your menu like real estate. There are nice parts of town, but there are also places you wouldn't be caught dead in after midnight. Your menu is the same.
Finding the right balance is not an overnight process. It takes time to really dial in a menu and get the balance right. You’ll need to keep your food cost accurate so you know what every item on your menu costs. You’ll need a point of sale system that can generate accurate product mix reports. You’ll need patience and focus to stay committed to the project. A new menu design will stimulate sales for sure, but a well-engineered menu will increase your profits! Sales without understanding your costs is a recipe for failure in the restaurant industry.
The Cold, Hard Truth...
The cold hard truth is that there is no real one size fits all menu pricing strategy. There are so many variables: your brand, your market conditions, your overhead, your staff, and most importantly your guests.
In the end, your guests will give you feedback if your menu pricing is fair. Listen to them. Look at the data from your food cost program and your product mix reports and make adjustments constantly. Chef Brian Duffy recommends changing your menu at least four times a year.
Keep your pulse on the market, including which restaurants are opening and which restaurants are closing, and continue refining your menu every quarter.
After all, the best way to win the menu pricing game is to get in there and play.