Maintaining a healthy profit margin is one of the biggest challenges in the restaurant business, particularly when food costs are high. Menu pricing is as much an art as it is a science, since it can impact how customers view your prices (and your restaurant) and whether they’ll return to dine with you again.
At Select Funding, we partner with restaurants to provide them with the working capital they need to meet their profit and growth goals. Any restaurant owner knows that menu pricing has an effect on their gross profit margin, so we’ve created this guide to restaurant pricing with an example menu to help you arrive at the right pricing for your restaurant.
On a basic level, restaurants make money the same way any business achieves that goal: they sell more than they spend. Specifically, they spend less on overhead expenses, including payroll, rent, food costs, and so on, then their customers pay to dine in their establishments. The average profit margin in restaurants is between 3% and 5%, although of course some restaurants earn more than that.
If we break it down into specific categories, here are some of the ways that restaurants can increase their profits:
Ultimately, your menu is going to attract customers to your restaurant and your prices will play a key role in determining how they feel about their dining experience and whether they will return.
Plate costing is essential in every restaurant because it’s part of what helps restaurant owners maintain a healthy profit margin for their businesses. To cost a plate, you’ll need to calculate the cost of each item that goes into a dish and total the costs to arrive at a food cost per plate.
Before you calculate your costs, it’s necessary to standardize your recipes. You can’t arrive at an accurate cost per plate if one of your chefs is using two ounces of tomato in a recipe and another is using three ounces.
To illustrate the method, let’s look at a relatively simple dish: a bacon cheeseburger. The ingredients used might include the following:
For this illustration, we’ve included only the major ingredients. However, you may want to build the cost of things like mayonnaise and mustard into your plate cost.
After you list the ingredients, you’ll need to calculate the cost for each one. For example, if you paid $900 for 80 pounds of ground beef, you would need to first calculate a cost per ounce and then, multiply it out to arrive at a cost for your burger. 80 pounds equals 1,280 ounces, so you would divide $900 by 1.280 to arrive at a cost of $0.70 per ounce. For a four-ounce burger, the cost for ground beef would be $2.80.
You would continue the calculations in this way for every component of the menu item to arrive at a total cost for the item. The total price calculation might look like this:
Your total cost of food for your bacon cheeseburger would thus be $4.56 and you would build your menu price off of that amount.
After you have calculated your food cost for each dish on your menu, you’ll need to set menu prices based on those costs and your ideal food cost percentage, which is based on the percentage of your total sales that are spent on food. In most restaurants, the ideal food cost percentage is somewhere between 25% and 35% of sales.
You should keep in mind that your ideal food cost percentage has a direct impact on your profits because you’ll need to pay your overhead expenses out of the money you make. In other words, the amount of your prices that doesn’t go to food costs will be spent on things like rent, taxes, payroll, and cleaning.
Looking at the example above, let’s say that your ideal food cost percentage was 30%. You would set the price for your bacon cheeseburger as follows.
Raw food cost of item / ideal food cost percentage, or $4.56/30%
This would mean that the menu price of your burger must be at least $15.50 to arrive at your ideal profit margin. Given that there’s also a psychology to menu prices, you may want to charge $15.99 or an even $16, depending on your restaurant and what you think will be most enticing to your customers.
Here’s a sample menu using a 30% ideal food cost percentage, showing both the calculated food cost, the price at the ideal food cost percentage, and the ultimate price that appears on the menu.
|
Menu Item |
Food Cost |
Price at Ideal Food Cost % |
Menu Price |
|
Jalapeño Poppers |
$1.50 |
$5.00 |
$5.00 |
|
Onion Rings |
$0.75 |
$2.50 |
$2.50 |
|
Caesar Salad |
$3.00 |
$10.00 |
$10.00 |
|
Bacon Cheeseburger |
$4.56 |
$15.20 |
$15.50 |
|
Fish Tacos |
$3.75 |
$12.50 |
$12.50 |
|
Brownie Sundae |
$2.60 |
$8.67 |
$9.00 |
Of course, depending on the costs of your other menu items, you might decide to scale these up a bit. You could sell those onion rings for $3.00 instead of $2.50 if you wanted to build a little extra profit into your menu.
The simple menu pricing method we’ve described in the previous section is known as cost-plus pricing because it uses the cost of food as a jumping off point. Here are a few other menu pricing strategies to try.
Charm pricing is the reason you see so many items priced at amounts ending in .99. The human brain doesn’t view a price of $29.99 as being almost thirty dollars; instead, the most common interpretation is that it’s twenty-something dollars. Psychologically speaking, pricing this way leads to a perception of affordability that wouldn’t be there if you rounded up.
To use relative pricing, you’ll play higher-priced items next to lower-priced items. The trick is to make sure that the lower-priced item is a profit powerhouse. Customers may be more likely to go for the low-cost item but you’ll be the winner because you’ll be collecting a higher percentage of profit on what they order.
Does putting a dollar sign in front of your prices remind people of how much money they’re spending? Some people believe it does, so one menu option to try–and something that’s often implemented by high-end restaurants–is omitting the dollar sign. When a menu item is listed as 25 instead of $25, people may be more willing to pay the price.
Bundle pricing may be most often associated with fast food restaurants but it can be effective at casual dining restaurants, as well. An example would be listing a burger at its regular menu price and then saying that diners can add two sides for an additional $4.00. You could also allow them to add a drink or a dessert. Bundle pricing is common on kids’ menus, too, where kids may get an entree, a side, and a drink for a set price.
Portion pricing is a strategy that will allow you to cater to diners in groups or with varying appetites. A simple example would be including prices for both a half portion and a full portion on your menu. You could also serve a dish for two or four diners.
Arriving at the right menu prices is necessary because it can spell the difference between success and failure for your restaurant. We hope this guide will help you think about how to set prices in your restaurant to meet your financial goals.
Do you need a cash infusion to take your restaurant business to the next level? Select Funding is here to help! Click here to learn about our restaurant financing options and begin the application process today.