Restaurant menu pricing should be straightforward, yet in reality, it's sadly not that simple.
When it comes to establishing pricing strategies for restaurants, think of it as a balancing act: while you do want to price your menu to offset operational costs throughout the business (yes, not just limited to the kitchen) you also need to balance your customer's expectations and how similar menu items are priced in the market.
Along with brushing up on menu engineering, developing an in-depth menu pricing strategy will ensure you're not only making your money back, but also adding a little padding your pockets with increased profits.
The Five Steps To Creating A Winning 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 make money and thrive in an industry notorious for thin margins, knowing the food cost percentage for each menu item is your only chance. To do this, you need the following:
- Your menu
- In-depth sales reports from your restaurant POS system.
- The food cost calculator by Toast.
Gone are the days of costing out your menu manually with a dizzying array of spreadsheets and red pen; the food cost calculator does all the messy work for you 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 both your state and concept type, and
- Giving you the ability to create custom menu items based off your results.
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 with understanding your food costs.
Step 2: Don't Price Your Menu Based On Your Direct Competitors
Comparing yourself to others is bad, especially when running a business.
Your restaurant pricing shouldn't be based on your direct competitors. 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? Better yet: Do you know their restaurant pricing strategy? There are as many pricing strategies for restaurants as their are restaurants.
If you can provide better services and better products then the competition, why bother pricing your menu like theirs? Be your own person, and remember: creating value is more than just price.
Many people get that wrong. They think that value is purely price-driven, when it’s not.Value is created when you deliver those intangibles that add to the perception of quality, such as stellar service, outstanding ambiance, and photo-worthy food presentation.
When you 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 who's got cheaper prices; it’s a game you cannot win in the long run, and one that will ultimately hurt your business.
"You build value by embracing the spirit of hospitality" - Donald Burns
Step 3: Play To Your Strengths
Think of your menu like your greatest hits album, a representation of what it is you do best.
The Rolling Stones recorded 439 songs, but when you go to a Stones concert, do you want to hear those “B side” tracks or the hits?
Your menu needs to play your hits, 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.
Step 4: Ignore Your Competitors, But Study The Market
While you do want to turn a blind eye to your direct competitors' restaurant menu pricing strategies, it's a good idea to do some research, understand the way your market prices menu items, and conduct a competitive pricing analysis.
Heres a helpful 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. 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.
Keep your pulse on the market, including which restaurants are opening and which restaurants are closing, and continue refining your menu every quarter.
Step 5: Maintain Some Balance
The trick to winning the menu pricing strategy game is to balance the high cost menu items with low cost ones.
Finding the right balance for your restaurant menu is not an overnight process. It takes time, testing, and ongoing analysis in order to dial in and get your menu balance just right. You’ll need to:
- Keep your food cost accurate so you know what every item on your menu costs
- Invest in a point of sale system that can generate accurate product mix reports, and,
- Stay patient, focused, and committed to the project.
You'll also need to learn the basic principles of restaurant menu psychology. For instance, did you know that a third of your diners are more likely to order the first item they see on your menu? Science, man.
A new restaurant 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.
How you price menu items and where you place menu items and where is critical to getting that balance just right.
Free Template: How to Read A Restaurant Profit & Loss Statement
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.