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How to Price A Menu

How to Price A Menu

Menu pricing is the engine behind your company's success. Your restaurant menu prices directly decide how much money you have for literally everything in your business — equipment, utilities, employees, furniture, ingredients, and much, much more. This makes the prices of food critical, as sales are your restaurant's sole source of revenue. With that in mind, determining your prices includes dozens of factors, precise calculation, and careful planning to be successful. Once you've determined your prices, you can use our free menu maker to create a template for your business.

Markup

For menu pricing to be effective, it must include markup. Typical markup for the prices of food hovers around 300%. While that may sound extremely high, keep in mind that this markup is the only source of revenue for a restaurant, meaning that all of its operation costs have to come from customer orders. The reason your restaurant menu prices are so important is because without this markup, growth — or breaking even — is essentially impossible.

While this is not a comprehensive list, your pricing must cover these basic factors:

  • Rent
  • Food
  • Wages
  • Utilities
  • Furniture
  • Decoration
  • Cleaning supplies

Determining how much profit you want to make on each item will play a huge role in how much you charge your customers. While this can provide you with an opportunity to be greedy, the best restaurants operate on thinner margins to keep overall prices low, allowing themselves to grow gradually so they can adapt to changes one at a time instead of explosively expanding all at once.

Additionally, it's worth noting that every region has an unspoken limit on what they can charge customers. Locations where the cost of living is higher will be able to charge more, and restaurants in lower-income areas will have to charge less. This is another reason it doesn't pay to be greedy — your customers may not realize it, but they have a ceiling on what they're willing to pay for food. If it's too much, they simply won't buy.

Cash Flow

On average, full service restaurants will dedicate 32 cents of every dollar to food costs, 33 cents to wages, and 6 cents to rent. That leaves 29 cents to reinvest, whether you want to make new purchases, expand, hire more staff, or raise the pay of your best employees. The average percentage breakdown of most restaurants equates to 30% of income going to labor costs, 30% going to food and alcohol costs, 20% to rent, insurance, and other products, and 20% is pure profit.

In terms of high-profit products, full service restaurants usually earn the most when bills total between $15 and $24.99, which yields an average of 3.5% profit. Checks below $15 yield 3%, and checks above $25 yield 1.8%. So while every restaurant wants customers to spend more money, the golden range in terms of percentage only rests in a $10 difference.

Consumer Psychology

Menu psychology may not be a recognized field of study right now, but the results of its experiments can still help with menu pricing. Utilizing these studied techniques can help you swing the odds in your favor when listing foods and drinks, especially when it comes to boosting your profits. From subtle nuances in wording to a menu's full layout, you can't rely on these ideas alone to turn a profit — but they're great for getting you a little extra from every sale.

Pitfalls

With so many entrepreneurs and restaurants in the world, it's no wonder there are plenty of myths about the business. This misinformation can range from price slashing techniques to cutting corners and even accounting tricks. While some of these may sound like common sense, good deals, or intelligent choices, you have to consider the implications of this kind of advice before taking it for truth.

For example, just because you can buy something in bulk — or for a lower initial price — doesn't make it a better budgetary choice than buying what you need. Bulk quantities of meat that sit in your refrigerator will spoil if they're not sold quickly enough. This situation leaves you to make one of two choices: let the food spoil or increase portions. Letting food spoil is simply wasted money. Increasing portions will likely result in the same since you would either have to increase prices, which customers won't like, or give them more food for less profit. And while customers may be happy with a temporary increase in portions, you'll likely upset or confuse them by switching back to your previous portions, making them feel like you're suddenly short-changing them on their favorite dishes. Situations like this are a lose-lose no matter how you cut it, and too many mistakes can cost your business its future.

Calculating Price

Finally, you have the information you need to figure out your perfect menu pricing. The actual math can only be done by you or someone familiar with your accounting numbers. The numbers themselves will vary widely depending on the shippers and products you use, not to mention the quantity of food you keep on hand, general upkeep, wages, and location. Once you've collected the costs of your monthly expenses, you can break down how much you need to make in a year, month, week, or even day, if you want to get intensely specific.

Conveniently, for those in the world to whom math doesn't come easily, there is a free calculator that you can use for a faster, easier method of determining prices. Although even with this calculator, you'll still need all of your cost information up front. So long as your expenses are in order, figuring out the prices of your menu should be a cinch. And if you come up with strange prices as a result — like $3.22 — don't be afraid to round up to the nearest dollar or cent amount for simplicity.

Conclusion

It may seem daunting, tedious, and complicated, but establishing your menu prices is the deciding factor in your income, cash flow, and success. Figuring out the exact prices of food will bring you the money that you need to succeed. From iced tea to filet mignon, nailing your price points is your start to move from the red to the black.

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