Having your own restaurant can be an exciting and rewarding adventure. However, menu prices can be the downfall of many businesses. Typically the number one factor in deciding where to eat out, menu prices can be the determinant between success and failure.
As a restaurant business owner, there are many different approaches to figuring out how to price the items on a menu. From simply taking the food cost and multiplying it by 3 to estimating how much you think it’s worth, like tying your shoes, there are many different ways to approach it.
Before jumping into writing in prices, consider the following factors when determining the ‘perfect’ price for your menu items.
Factors That Affect Pricing
Direct Costs: The things that go into the dishes.
The most obvious factor that influences the pricing of items on a menu are the ingredients. What we would consider direct costs, restaurant owners need to factor in every aspect of the ingredients that go into their dishes such as the following:
- Portion: As a rule of thumb, portions should be consistent. By doing so, you will know exactly how much, dollar wise, you are spending each time on ingredients.
- Seasonal: Are the ingredients seasonal? Remember that seasonal food (ie: lobster) will create a fluctuation in your costs since their pricing is variable at different times of the year. If your dishes include seasonal ingredients, consider offsetting them by including items that are readily available year around so that you can create a base cost to factor from.
Indirect Costs: The things that aren’t food.
Second to the ingredients, are the ‘intangible’ factors. These would include items like the cost to prepare the food.
When factoring in the indirect costs of an item on your menu, consider the following factors:
- Time: Every dish takes X amount of time to prepare. Just how a mechanic will charge you more for jobs that take longer to complete, the same is the case with food.
- Serving: While most dishes must be prepared for each individual customers preference, such as steak, some items can be made to serve more than one group which may lower the cost. The best example of this is soup.
- Overhead: While not a huge factor in the individual menu prices, a restaurants decor and setting may be a justification for charging higher prices.
- Service: Whether you are a fast food restaurant or a fine dining restaurant, customers will come to expect a certain level of service and subsequently an expected level of pricing. A fast food restaurant would be doing themselves a dis-service of pricing themselves like a fine dining restaurant and vice versa.
- Competition: Agood business owner will always look at their competition to see how their pricing compares. A good strategy is to use your competition as an indicator of how your own menu will fare. Don’t be afraid to even dine at your competitors to see what ingredients they use as well as to test out the quality of their menu items.
Restaurant Menu Pricing Methods
Now that you have considered the above factors for pricing your menu, the next step is to determine the method by which you will come up with your menu pricing.
1. Cost Plus Pricing or Ideal Food Cost Model
The first method, and one of the more popular methods is to use a cost plus pricing or ideal food cost model. Using the actual cost of a menu item (direct + indirect costs), the restaurant owner will then determine what their ideal food cost percentage would be.
Example:
- Dish A cost $4.00 to prepare (direct + indirect costs)
- Owner of restaurant A determines ideal food cost percentage = 30%
- Result: Minimum menu price = $4.00 / 30% = $13.33
2. Ideal Food Cost Model + Competition Factor
Using a combination of the fore mentioned ideal food cost model and competition pricing, a restaurant can come up with menu item prices that will allow them to be both competitive and profitable.
Example:
- Dish A cost $4.00 to prepare (direct + indirect costs)
- Owner of restaurant A determines ideal food cost percentage = 30%
- Minimum menu price = $4.00 / 30% = $13.33
- Result: Dish B must be priced between $13.33 and $16.00
3. The “What I Think It’s Worth” Model
The 3rd method that we will mention here, and perhaps the most dangerous method is the “my way” method. As the title suggests, the “my way” method involves creating menu item prices based on what you think it’s worth. Whether it’s from things you have seen or your opinion of how much you think someone may be willing to pay for something, we suggest avoiding this method as it comes with too much uncertainty and may also overlook key factors such as food and labor costs.
How To Increase Profitability
Once you have figured out the magic number for each of the items on your menu, the next question on your mind may be how to increase profitability.
Here are some tips that you can consider trying:
- Demand: Depending on where your business is located, you may be able to charge a ‘premium’ in what can be considered a classic example of supply and demand. An example of this is with restaurant/coffee shops located within an airport. Note: This tip/strategy will not work for all as not every business is in this specific situation.
- Gradual Price Increase: If you are looking to raise prices on your menu items, raise them in small steps. In most instances, customers will not notice it and will assume that nothing has changed.
- Upselling: Upselling is a classic strategy that most businesses implement on a day to day basis. For a restaurant establishment, make sure that all your servers and employees are trained to make the appropriate item suggestions to go with a customers order.
- Enhance “Normal”: If you look at the most popular restaurant chains, one key factor is that ‘normal’ isn’t really normal. For example, a cheeseburger can be made ‘special’ by adding a special house dressing or adding an extra ingredient making it more appealing an enticing. Think: Cheeseburger vs. Hickory Smoked Bacon Cheeseburger
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Do you own your own restaurant? If so, which method do you use to price your menu items? If we didn’t mention a method that you use, please let us know in the comments below.
