How to Price A Menu
Menu pricing is the engine behind your company's success, as sales are your restaurant's sole source of revenue. Pricing for food directly impacts how much money you have for literally everything in your business, including equipment, utilities, employees, furniture, ingredients, and more. With that in mind, determining your menu prices involves a careful consideration of markup, profit margins, food costs, and menu psychology. Once you've determined your prices, you can use our menu design guide to create the best menu for your business. Keep reading to learn more about how to effectively price your menu for maximized profits.
How Does Menu Pricing Influence Gross Profit Margins?
Simply put, the gross profit margin percentage refers to the money you have left over after covering your business expenses. To maintain healthy profit margins, you'll want to divide each dollar you make into three main areas: food and beverages, salaries, and wages, and occupancy costs like rent, insurance, and taxes. This roughly breaks down to 30% food and beverage costs, 30% labor costs, and 20% occupancy costs, which leaves 20% pure profit.
How to Calculate Gross Profit Margins
Follow these easy steps to calculate your gross profit margins on a particular dish:
1. Subtract the unit cost (ingredients + overhead) from the menu price.
2. Then, divide the resulting number by the menu price. This is your gross profit margin percentage.
Example: Say that the menu cost of fish and chips is $16, while the unit cost is $10. So, you'd subtract $10 from $16, which is $6. Then, you'd divide $6 by $16, which is a gross profit margin of 37.5%.
Maintaining positive gross profit margins gives you the money you need to cover the costs associated with making and selling your restaurant's meals. Determining reasonable and accurate gross profit margins up front will save you trouble in the long run and will also help keep your costs under control.
How Different Foods Affect Gross Profit Margins
Here are a few examples of how selected ingredients impact your gross profit margins:
- Steak and other expensive meats usually cost around 50% of their menu prices, which definitely cuts into your profit margins.
- Pasta and salads only cost around 15% of their menu prices, so they'll help increase your margins.
- Appetizers and desserts cost very little, so they're a great choice when you're looking to improve your profit margins.
- Menu costs for alcohol can range anywhere between 30-50%, so you'll have to consider them on a case-by-case basis.
Surprisingly, full-service restaurants typically earn the greatest gross profit margins when total bills are between $15 and $24.99. This yields an average of 3.5% pure profit. Checks below $15 yield 3%, while bills that are more than $25 only yield 1.8% profit.
How Does Markup Factor into Menu Pricing?
Understanding what markup is and how it factors into restaurant pricing is essential to creating a properly priced menu. Essentially, restaurant markup is the amount of money added to the unit cost in order to cover overhead costs. In other words, pricing markup is when a business produces or purchases goods at a certain price and then sells those products at a higher price to make a profit. All goods and services are subject to markup.
How to Calculate Food Markup
Before determining the specific markup number for each menu item, you'll need to calculate your gross profit margin as a number (rather than a percentage). To do so, simply subtract the unit cost of the dish from its menu price.
Example: The unit cost of your fish and chips meal is $10, while the menu price is $16. Subtracting $10 from $16 gives you a gross profit margin of $6.
At this point, you're ready to calculate your markup percentage. Simply divide your gross profit margin by your unit cost to determine this number. Knowing your markup percentage is essential to pricing every dish on your menu because it allows you to account for ingredient and overhead costs.
Example: The gross profit margin of your fish and chips dish is $6, so you'd divide that by the unit cost of $10 to come up with a 60% markup percentage.
It's important to understand that growing your restaurant or breaking even is virtually impossible without marking up the price of each dish on your restaurant's menu. Pricing of food must cover ingredients, wages, utilities, and rent, so you'll need to calculate carefully. Additionally, choosing and maintaining a realistic markup percentage is crucial to determining whether or not your business prospers or fails.
Calculating Food Cost to Price Your Menu Items
Accurately calculating food costs for each dish on your menu is also essential to pricing food for maximum profit. One of the most important things to remember is that buying ingredients in bulk isn't necessarily the best choice. If you're in a hurry to use up food before it spoils, you'll end up giving customers larger portions. Once you've run out of those ingredients, though, you'll be forced to go back to your normal portions, which is likely to disappoint customers. To keep portion sizes consistent, consider using scales, measuring cups, and other devices that allow you to properly portion your signature dishes.
How to Calculate Food Cost in Your Restaurant
If you're not sure how to calculate average restaurant food costs for your business, follow the steps below:
1. Calculate the total cost of the ingredients required to make your dish. Remember to include seasonings, cooking oils, and garnishes.
2. Divide that number by the menu price of the dish. The resulting number is your food cost percentage.
Example: The menu cost of your fish and chips meal in the earlier example is $16, while the total ingredient cost is $5. Dividing $5 by $16 leaves you with a food cost percentage of around 31%.
Interestingly, some of the most successful restaurants have food costs as high as 45-50%. However, they're still able to turn a profit because their menu items are all producing sizable profits.
The best foodservice businesses are also aware that ingredient prices will vary due to poor growing seasons or natural disasters. As such, they ensure their menu prices allow for a small cushion. Additionally, they change their menu items (rather than their prices) seasonally to account for what's in season in their region. By keeping the dish's protein and price the same but swapping out fresh sides, you'll provide welcome variety that will entice customers into purchasing these menu standbys again and again.
The Psychology Behind Menu Pricing
While precise calculations on markup, profit margins, and food cost are very important, you'll also want to factor in menu psychology as you price your meals. Here are a few factors to keep in mind when pricing a menu:
- Customers have a limit on what they're willing to pay for food, even if they aren't conscious of it.
- Accordingly, you should consider your area's average cost of living as you price your menu. Can your patrons afford a $30 entree, or should you be closer to the $15-20 range?
- To determine what guests are willing to pay, try checking out the prices on your competitors' menus. How much are their most and least expensive dishes?
Effective Menu Pricing Strategies
One of the most effective menu pricing strategies is the "good, better, best" method. To employ this strategy, place three varieties of a dish next to each other on your menu. You'll find that most customers will choose the "better" (or mid-range priced) menu items. However, you should still include your "best" items, because there are also plenty of patrons who will select these high-dollar dishes. Keep in mind that the "better" and "best" dishes won't look nearly as appealing or delicious if the "good" options didn't exist.
Each dish's location on your menu is also important. Consider placing your best selling or more expensive dishes towards the top of their menu category. Alternatively, you can use relative pricing (placing a $35 meal next to a $25 meal) to make the costly dish seem less expensive in comparison.
Always avoid using currency indicators like dollar signs. Although it may seem counter-intuitive, you should also never choose prices that end with ".99." Instead, round up to the closest whole dollar amount. Similarly, avoid price columns or "..." price trails, as they clutter up your menu and draw attention to costs.
Finally, consider splitting your menu items into four different categories: stars, puzzles, plow horses, and dogs. Each of these categories has specific characteristics and require a certain action to maximize profits:
- Stars are your high profit items that sell very well. You should strive to show these items off using the strategies mentioned above.
- Puzzles are high profit items that don't sell as often as stars. Try to figure out how to market these dishes more effectively.
- Plow horses are low-cost items that don't really turn much of a profit. However, because they sell well, you should keep them on your menu.
- Dogs are both low profit and low sales. Sell whatever you have left and take them off your menu entirely.
Whether you run a busy diner, casual cafe, or upscale bistro, knowing how to price a menu for a restaurant is a must-have skill. By considering food markup, profit margins, food cost, and menu psychology, you'll be able to easily assign prices to each of your dishes. Sales are the most important factor when it comes to whether or not your business turns a profit, and shrewd restaurant menu pricing is key to success.