Menu pricing is a delicate dance. It requires accurate data on food costs, total sales, overhead costs, labor costs, and all the many costs in between. You need to know what your competitors are charging and gauge the boundaries of what guests will pay for the dining experience. Just when you've found the ideal menu item price, the cost of eggs skyrockets and you're back to square one.
When you go out to eat, you're not just paying for the food. There are a lot of prime costs associated with that plate. To make up for these prime costs, most restaurants add a "markup" to their menu prices. The size of this markup varies depending on the restaurant concept, among other factors. It's typically around 200-300% of the total food costs.
While this might sound high to some guests, there aren't too many restaurants with double-digit profit margins. A typical restaurant profit margin is somewhere between 7-10%. If you want to make a ton of money, becoming an independent restaurant owner is probably not your best bet.
Volatile food costs (among other direct costs) require a solid menu pricing strategy. Most restaurants calculate menu pricing based on either food cost percentage or gross profit margin. Both methods work since they're simply the inverse of each other. In fact, our free menu engineering worksheet helps you calculate both your food cost percentage and gross profit margin for menu items, making it easy to identify menu items that may need to be priced higher, lower, or removed altogether.
If you already have your rough food costs (or know how to calculate them), then the menu engineering worksheet is the way to go. You just plug in the numbers alongside your current menu prices and item sales and it does all the number crunching for you. However, if you like to run the numbers yourself or want a better understanding of how it all works, here's our guide to both pricing methods, plus a few tips on how to adapt menu prices and sell high profit margin menu items.
Food cost percentage pricing strategy
1. Set ideal food cost percentage
Food cost percentage is the ratio of total dollar amount it takes to procure food to the revenue that's generated when a guest orders the item. It is calculated by the following formula:
Ideal food cost percentage sits somewhere between 28-35%, depending on your restaurant concept. If your food cost percentage is higher than 35%, you might want start by lowering your food cost as step one towards a more profitable restaurant.
For fine dining establishments, or other restaurant concepts with inherently high food costs, lowering food costs might not be an option. In which case, consider the gross profit margin menu pricing strategy.
2. Calculate the raw food cost
This is the total cost of the items you need to make a dish. If a pasta dish requires broccoli rabe, sun-dried tomatoes, walnuts, butter, pasta, and parmesan, add the cost of each item to get the total raw food cost. Get granular and identify the portion size of each ingredient that a dish requires. From there, you can calculate the price per pound, ounce, gram, etc.
3. Do the math
Divide your raw food cost by your ideal food cost percentage. The formula looks like this:
Ex. $10 Ă· 30% = $33
For example, if the raw food cost for the broccoli rabe pasta is $10 and your restaurant operates with a 30% ideal food cost percentage, the minimum menu price for this dish should be $33 to make a profit from this dish. For the guest, that means a markup of $23.
Pros and cons of food cost percentage pricing strategy
It's relatively simple to calculate food cost percentage and determine restaurant menu prices that are profitable and sustainable. Since you should probably be calculating portion sizes and food costs anyway, this method doesn't require too much additional work.
However, food costs are subject to change. From egg prices to coffee beans, they're only becoming more volatile. If you choose this restaurant pricing strategy, make sure you're updating your food costs regularly and tweaking your menu prices as you see fit.
This calculation works best for restaurants with low food cost. It may yield menu prices that are too expensive for your concept, clientele, or geographic area. You'll still need to take a holistic approach and consider how much your guests are willing to pay, what peer restaurants are charging, as well as factoring in the overhead costs of running your business.
Gross profit margin pricing strategy
Another way to price menu items requires identifying a gross profit margin, determining the cost of the raw materials, and then plugging those numbers into a formula.
1. Identify gross profit margin
A typical gross profit margin hovers around 70% (not to be confused with the net profit margin, which usually hovers around the single digits). You decide your gross profit margin—it can vary based on your financial goals and how flexible you can be with prices and cost of goods sold (COGS).
The gross profit margin formula used in restaurants is:
2. Determine total cost of raw materials
Calculate the total cost of the food required to make a dish. This step is the same as the second step in the food cost percentage strategy.
3. Do the math
If we use the example of the broccoli rabe pasta, this formula would yield a menu price of $33—the same outcome as food cost percentage strategy.
Tweaking this formula with a higher gross profit margin can help you determine the higher menu prices you need to be a more profitable restaurant. You can also plug in your existing menu prices into this formula to calculate your baseline gross profit margin and pinpoint which menu items are most profitable.
Pros and cons of gross profit margin pricing strategy
Depending on your ideal gross profit margin, this strategy can yield higher prices that will help take into account your restaurant's prime costs. This method can help you identify which menu items drive the most profit, so you can focus your energy on selling that particular menu item.
5 Tips for determining your restaurant's ideal menu item price
Once you have calculated restaurant pricing based on ideal gross profit margin or food cost percentage (or simply plugged your numbers into our menu engineering worksheet), here are some other factors to consider before settling on a menu price. Keep in mind these other factors are subject to seasonal fluctuation, this year's food trends, and the geographic location of your restaurant.
1. Look at your competition
Running a successful restaurant requires knowing your competition—because your guests certainly do. Keeping track of restaurant menu prices at neighboring restaurants and those in your general area can help you either be right in line with competition, offer lower prices, or offer a premium experience.
2. Factor in overhead expenses
There will be indirect costs: labor costs, utilities, renovation and repair costs, marketing, rent, permits, ensuring you can walk out with a livable salary at the end of the day. Start by writing a list of your expenses, divide by overall monthly sales, and multiply by 100 to get your overhead as a percentage of sales. Better yet, if you regularly create restaurant P&L statements, you can pull the information directly from your P&L.
An overhead of 35% is typical for restaurants. Some of these costs will be fixed, so you won't have much wiggle room. But identifying areas where you can reduce overhead costs, like renegotiating your lease or scheduling staff more efficiently, is key to running a profitable business.
3. Consider demand
Guest demand should drive what's on your menu, but you can also take it into account as you price menu items. This is especially relevant for restaurants located near sports arenas and concert venues. Because these areas create a lot of demand, restaurants can charge higher prices.
The same logic applies if you're offering an experience that guests can't get anywhere else. If you're the only place that sells Korean corn dogs and they recently went viral on social media, you may want to that into account when determining your selling price. However, it's still important to price menu items that will keep guests coming back.
4. Know your target market
As with all aspects of running a restaurant, you need to price your menu with your guests in mind. That means understanding their appetite for higher prices and preference for deals and loyalty programs.
If you're using premium ingredients, upscale tableware, and exclusive alcoholic beverages to create an experience guests are willing to shell out the big bucks for, you can charge higher prices. If you're running a no-frills, take-out only burger joints, a $15 price tag is going to be a tough sell.
5. Create a valuable dining experience
You can only do so much about the price of vanilla and broccolini. What you can control is creating a menu that helps you maximize profits and a dining experience that gives guests good value for money. That means training your staff to deliver excellent service, every time. Regularly revisit your restaurant menu design so you're showcasing profitable items and making your guests excited about what you offer.
From the music, to the lighting, to specials and events, there are so many low-cost ways to make a restaurant greater than the sum of its parts.
Remain profitable with smart menu pricing and markups
The restaurant industry isn't easy. Operating expenses can easily overwhelm total sales, leaving many restaurants trapped in a loop of unprofitability. Accessible reporting and ready made insights from your restaurant point-of-sale are essential for tracking total food sales. Food inventory management software that integrates into your POS can help you track cost per menu item, reduce waste, and make more informed ordering decisions.
Sacrificing food quality isn't an option. Plus, you can only do so much to control your menu costs. Creating a strategy to update your menu pricing strategy on a regular basis can help every restaurant owner ensure the work they love stays profitable.
