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Implementing or revamping a restaurant menu pricing strategy can be as daunting as it is critical.
It's especially important these days as operators must use prices to protect margins from rising costs while balancing customer sentiment and their appetite to spend more.
The exercise requires restaurants to do a bit of soul searching around target market, customer base, brand, concept or cuisine demand, and competitive landscape.
More important than the soul searching are the numbers. Your pricing strategy is a numbers game based on understanding overall restaurant costs, conducting recipe costing, calculating final plate / dish costs, and then setting a menu price to maximize margin.
Keep reading to learn how to implement restaurant menu pricing strategy that's rooted in profitability.
Determine your target menu prices
Here’s a five-step process to calculate your targeted menu price.
Step 1: Understand your restaurant prime costs
Understanding your costs — particularly your restaurant prime costs — is essential to setting any menu pricing targets.
Your prime costs are the combination of your cost of goods sold and your labor costs. The combination of the two is also known as your controllable restaurant costs. These are the costs that you can actively influence from day-to-day, week-to-week, and so on.
Step 2: Conduct recipe costing
You can get your prime costs calculated and stop there. You’d still be better off than not knowing them, but you should push forward with learning your restaurant's recipe costs.
Calculating your recipe costs starts with standardizing your recipes. From there, you have to consistently adjust for changing prices by capturing product price fluctuations. It’s one thing to know that your food costs increase, but wouldn’t it be more actionable for you to know exactly what ingredients are contributing to the increase?
Step 3: Calculate plate cost
How to cost a plate of food should be the obvious next question after your recipe costing. Your plate costs are simply the combination of all your recipes costs and raw ingredients that go into your dish, broken down by portion size.
Calculating these costs is really where you can pull levers to control your profitability.
Step 4: Determine your targeted food cost percentage
Targeted food cost can also be known as the maximum allowable food cost percentage (MFC). This is the forecasted food cost percentage that you cannot go over if you want to remain profitable.
To calculate it, you’ll use this formula:
MFC = 100 – ((Labor costs + monthly overheads + profit goal) / total sales))
While all restaurants should identify the MFC that’s right for their operation, many MFCs across the industry fall between 28 and 35. For our example, let’s assume your MFC is 32%.
Step 5: Determine your targeted menu price
The final step is a simple calculation. Take your plate cost and divide it by your targeted food cost to get a targeted menu price for your item.
For example, say that your food cost is $2.20 and your targeted food cost percentage is 32%. This means your targeted menu price should be at least $6.88. Here’s the menu pricing formula to show how we got there:
($2.20 / 0.32) = $6.88
Menu optimization strategies
Restaurant menus have the potential to sell your items for you. Restaurant menu engineering and psychology are a great place to start and incorporate menu pricing strategies.
Menu psychology and menu pricing strategy
Here are a few ways to use menu psychology and menu pricing strategy to improve your restaurant’s profitability.
Analyze your menu and how well each item performed over the course of the past month, quarter, or year. Look at profitability and popularity.
Ask your staff which items should be featured: leverage your serving staff, host/hostess, chefs, cooks, marketers, customer service or support staff, and others to learn what items are most worthy of featuring.
Review the latest research on pricing when choosing things like including currency symbols, using whole numbers, font size, and more.
When it comes to establishing a pricing strategy for your restaurant, you can think of it as a balancing act. You want to price your menu to offset operational costs across the business — not just limited to the kitchen — but you also need to consider your customers' expectations and do some research into how similar menu items are priced in the market.
5 steps to creating a knockout restaurant menu pricing strategy
Step 1: Cost out your menu
The first step in creating a menu pricing strategy for your restaurant is costing out your menu.
If you want to keep the money coming in and thrive in an industry well known for thin margins, knowing the food cost percentage for each of your menu items is a good place to start. To do this, you need the following:
- Your menu
- In-depth sales reports from your restaurant POS system
- A food cost calculator
Food cost formula
Here’s a complete guide on food cost formulas and calculating food cost percentage.
A general food cost formula is:
Food Cost Percentage = (Beginning Inventory + Purchases – Ending Inventory) ÷ Food Sales
Before, you might have spent a bunch of time manually costing out your menu with a red pen and any number of spreadsheets.
A food cost calculator streamlines a lot of the messy work by:
- Calculating the food cost percentage for each menu item
- Determining the cost per pound and/or cup of each ingredient
- Sharing the top five most popular items on restaurant menus in your state and for your concept type
- Giving you the ability to create custom menu items based off your results
By understanding your food costs, you'll make playing the menu pricing game that much easier.
Step 2: Price your menu by looking beyond your competitors
Your business is unique, so even when it comes to something like menu pricing, why compare yourself to others?
Every restaurant has different food costs, on top of different operational costs. Plus, it's hard to really know a restaurant's pricing strategy if you aren't on the ground floor.
An important thing to keep in mind here is that creating value goes beyond price. Value isn't purely driven by price – value's created when you deliver on things that aren't as quantifiable, including service, atmosphere, and food presentation.
Keep that in mind when pricing out your menu. Pricing at the commodity level is a never-ending battle of who has cheaper prices, and it's one that'll detract from your business's true value.
What is a menu pricing model?
Depending on the market or customer-base for your restaurant, you will want to choose the right menu pricing model for your specific audience.
A few restaurant menu pricing models are:
- Promotion-based with feature items heavily favored/featured
- Upscale with minimalist menus, no currency signs, and whole numbers
- Limited menu for farm-to-table or fluctuating supply operations
- Prix Fixe (price fixed) menus
- A menu organized by cuisine
What pricing strategy do restaurants use?
Restaurants use many different pricing strategies, like those outlined above. Choose the pricing strategy that is most relevant to your target audience and pricing structure. Fast casual restaurants may choose a more promotional strategy whereas fine dining restaurants may choose a Prix Fixe menu.
Step 3: Play to your strengths
Think of your menu like your greatest hits album, a representation of what you and your team do best.
Menu items that showcase you and your team's talents allows you to differentiate your brand and stand out from the crowd – and, in turn, price your menu differently.
Being different is a good thing, and it can even lead you to charging a premium for your top items.
Step 4: Study the market
While looking into your competitors' exact menu pricing strategies might not get you too far, you'll still want to do some research to better understand the way the larger market prices menu items. This will help you conduct a competitive pricing analysis.
Here's a quick exercise:
Gather menus from 5-7 restaurants in your market and identify overlaps with your menu.
For comparable menu items, pinpoint a high point, a low point, and calculate an average price.
Now based on your restaurant's specific value, how can you price your item with this competitive analysis in mind?
For example, a hamburger in Albuquerque, New Mexico may cost two to three dollars 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. Depending on location and value, you can charge what makes sense, but only to a point: Value is about value. If you price gouge your guests and they don't feel it was worth it, you’ll lose them fast.
Keep your pulse on the market, including which restaurants are opening and which restaurants are closing, and continue refining your menu every few months.
Step 5: Find balance in your menu
One of the keys to a successful menu pricing strategy is to balance your high-cost menu items with your low-cost ones. But finding balance isn't an overnight process. It takes time, testing, and ongoing analysis to really dial in and get your menu just right.
Here are a few things you can do to help you get there:
- Keep your food costs updated so you know what every item on your menu costs.
- Invest in a point of sale system that can generate accurate product mix reports.
- Stay patient, focused, and committed to the project.
To continue to optimize your menu, you'll also need to learn the principles of menu psychology and menu engineering. This will help you maintain balance but also increase your profits.
How you price menu items, where you place items on your menu, and how you continually update your menu is critical to getting that balance just right.
The truth about menu pricing
The truth is that there's no real one-size-fits-all menu pricing strategy. There are so many variables to consider: your brand, your market conditions, your overhead, your staff, and your guests.
At the end of the day, your guests will be the ones to give you feedback on your menu prices. So listen and give them the space to share.