May 1, 2018

Food Pricing 101: How to Set Menu Prices to Maximize Profit and Value

Food Pricing 101: How to Set Menu Prices to Maximize Profit and Value

Food cost percentage has long been considered the bottom line when it comes to food pricing strategies at restaurants.

If you’ve ever worked in a restaurant, you’re probably familiar with how the formula goes. What you pay for the ingredients divided by what you sell the food for is your food cost percentage. And while there are some varying ideas about what an ideal food cost percentage actually is, experts generally agree that it should be somewhere between 25 and 35 percent.

But there’s so much more to it than that.

If that’s where you’re stopping your pricing efforts, you could be losing out on major potential profits. Putting just a little bit more effort into properly pricing everything on your menu could pay off in huge gains to your bottom line.

Here are all the things you need to know about setting food prices:

1. Instead of your food cost percentage, figure out your gross profit margin

The biggest problem with using the food cost percentage as the only factor in how much you should be charging for menu items? It only shows a tiny piece of what actually goes into the cost of creating that menu item.

Yes, the cost of ingredients is an important factor to consider when you’re deciding how to price your menu. But it’s only one factor. Instead of stopping there, take your calculations a step further and think about your gross profit margin.

Not sure what that means? Here’s an example:

Say you have a penne pasta dish on your menu that you sell for $10. The ingredients to create that dish cost $3. That’s a 30 percent food cost, which is pretty good.

You also have a ravioli dish on your menu. It sells for $15, with ingredients costing $6.50. That means the ravioli has a food cost of 46 percent. That seems high.

But there’s more you need to take into account. Let’s say the ravioli come pre-made from a distributor. All that’s required to make the dish is heating it up. Meanwhile, the penne dish comes with lots of sautéed vegetables in a homemade sauce. It takes your prep chef a considerable amount of time to chop the veggies and make the sauce. The cost of that dish just went up because of all the labor that’s involved.

See how the food cost percentage may not be telling the full story?

Calculating the actual cost of each item on your menu will take some more legwork than a simple equation. Once you have actual costs for each of your menu items, you also need to look at the cumulative gross profit margin for your entire menu in addition to each item individually — an item that has a smaller profit margin may very well be balanced out by one or several items with much higher profit margins. You can’t panic just because steak and other expensive meats almost always have lower profit margins — you just need to make sure you have high-margin items, like salads and pastas, that can make up for it.

2. Now, start pricing your menu

Once you have a good, clear picture of the cost of each menu item, it’s time to price everything so you can make a healthy profit over those costs.

Start by separating all of your menu items into categories that reflect their cost versus profit margin.

So now that you know how every menu item is contributing to your overall success, it’s time to make the changes that will maximize profit for you, and value for your guests.

Are there any items on your menu that have been listed at the same price for a while? If so, and especially if they’re stars or plows, maybe it’s time to consider raising their price a little bit. For a favorite menu item, diners are unlikely to mind a price increase of a dollar or two. Alternatively, look for creative ways you can increase profit margins without increasing prices. For example, let’s say you have a fried fish taco dish on your menu that uses expensive mahi mahi. Would your diners stop enjoying the dish if you swapped that out for a less expensive fish, like cod or halibut? Since it’s fried, probably not. You can reduce the cost to produce the dish, without reducing its price on your menu, resulting in a net higher profit for you.

Another easy way to maximize profit is to carefully control portions. You want your diners to feel like they’re getting a good value for their money, but if everyone is taking leftovers home, it might be a sign you can cut down a little on portion sizes. Write out recipes and make sure your kitchen staff follow them to ensure portion sizes stay predictable and consistent.

One huge challenge that many restaurants face is handling fluctuating food costs. An ingredient that cost $15 last week may cost $30 this week. To some degree, this is unavoidable. Things happen that are out of anyone's control, like “Acts of God.” However, the most common reason for price fluctuations is because of seasonality. One way to address this issue though is to make sure that you’re buying ingredients that are in season.

Let’s face it, lemons will never be grown in countries like Canada. But, it’s important to at least know when they’re in season in areas that are able to grow them, like California. When it comes to lemons, for example, the worst time to introduce a new lemon-heavy dish on your menu would be through the months of November to February because they’re not in season.

Think about the produce market like the stock market. If you buy a bond, it’s more of a safe bet. This would be the equivalent of a supplier buying produce through a direct from source contract. You’re guaranteed to have steady, minimal fluctuations in price. Whereas, if you procure supplies from jobbers or people who only buy from places like the food terminal, that’s like purchasing penny stocks. Any little change can affect prices dramatically.

The important thing to understand here is that you should work with suppliers who purchase products in year-round direct from source contracts.

Lastly, consider your customers when pricing your items. For an example, let’s say you have a burger that you want to price at $10. If your customers tend to be budget hunters, you should list the burger as $9.95 or $9.99. If your customers are into luxury, just list the burger as $10, as prices without cents appeal to customers who are looking for an upper scale experience.

3. Design your menu to bring in the most sales

Once you’ve sorted out pricing, there are some best practices you can employ when it comes to actually designing your menu.

For example, you shouldn’t use dollar signs when listing your prices. One Cornell University study showed that guests interpret prices as being more fair if they’re just listed as numbers without dollar signs or any other currency markers.

You should definitely use good quality, professional photos in your menu. Show guests what they’re getting with their orders, including optional upgrades like premium sides or toppings to make upsells easier.

Finally, when writing your menu, use descriptive language that makes your food sound as appetizing as it looks and tastes. This is the guest’s first impression of their meal, after all. Make it a good one.

Chris Arnett
Senior Marketing Manager

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