Restaurant menu pricing strategies: how to price a restaurant menu items?
You have your concept, suppliers, maybe a building, but now it’s time to revisit your mock-menu. When writing a restaurant business plan, most soon-to-be restaurant owners will create a menu with ideas and a general price structure. That structure could focus on what they’ve seen personally in restaurants or calculated using simple equations.
The trouble is that your restaurant menu isn’t just how you make money. Your menu determines how much money you could make. All the possibilities of profit and success boil down to your menu prices. So, where do you start? Here you’ll find exactly how to approach pricing, how to evaluate your restaurant prime cost, assess your lowest and highest prices, as well as determining which price is right for your restaurant’s concept and future customers.
Most common methods for calculating restaurant menu prices
Unfortunately, running a restaurant demands a lot more math than most people initially consider. The good news is that the many hundreds of years of restaurateurs have established a few reliable systems.
What is a menu pricing model?
The idea is that you simply take your expenses per plate and multiply them by 3 to keep your food costs at 33%. This is not particularly helpful because it only ensures that you don’t make much of a profit if any.
Instead of using the “multiply by 3” approach, you’re going to start with a menu pricing model. These models take into account different pricing strategies that have proven effective for various concepts. Simply put, a menu pricing model is not one-size-fits-all, but they are tried-and-true systems.
Common menu pricing models include:
Prix Fixe, which means that the menu has multiple courses with one fixed price. This menu is common for events, hotels, and some restaurants.
Promotion-based menu, which means that the menu features specific and limited-time items.
Limited menus may focus on farm-to-table or seasonal items meant to keep the prices consistent with what is affordable and fresh at the time.
Cuisine-based menus are most common and organize the menu and prices to fit the cuisine and menu concept.
Although it seems like these are menu structures, they do affect pricing. We’ll get into menu engineering and design in a moment, but consider this: a Prix Fixe menu must produce a profit while accounting for every item served. In contrast, a promotion-based menu allows owners to promote high-profit, low-cost items.
What pricing strategies do your competitors use?
Go to one of your local competitors and look at their menus. Applebee’s and similar fast-casual restaurants mostly use promotion-based menus. For an upscale restaurant with a minimalist menu, you might use a limited menu that allows you to have more control over costs to enhance profits.
The best way to find out what pricing strategies your competitors use is to sit in their restaurant and study their menu.
Which pricing calculations are right for your concept?
After deciding which menu pricing strategies are a good fit, you can start considering the calculations behind the prices you set. It’s reverse-engineering your restaurant for success.
The cost-plus calculation is the most common formula for pricing menu items. This strategy asks owners to calculate the following: Fixed costs for the plate (food cost + wages + overhead) + desired profit margin = menu price. An example for spaghetti could be: Fixed costs = $1.30 (serving cost ground sausage) + $0.60 (fresh ingredients for sauce) + $0.08 (2 oz. spaghetti noodles) + $0.12 (bread for table) + $0.80 (soup/salad option - aiming toward higher cost estimate) = $2.90 food cost per plate x 3 (to estimate labor and overhead) = $8.70 (estimated total cost per plate)
That is where most new restaurant owners stop, and it’s why they don’t make much profit. That price barely covers food, labor, and overhead if everything runs very efficiently, which isn’t likely in your early days.
The next step is to add the desired profit margin. The average profit margin for a fast-casual restaurant is between six and nine percent.
Add profit margin in two steps:
1. High profit margin: $8.70 x 0.09 (profit margin) = $0.78
$8.70 + $0.78 = $9.48
2. Low profit margin: $8.70 x 0.06 (profit margin) = $0.52
$8.70 + $0.52 = $9.22
Generally, you would round to a flat or “easy” figure such as $9.50 or $9.99.
How to set restaurant menu pricing while controlling food cost
This method pulls from the standard approach to pricing a menu, but changes the “x3” element. The idea of multiplying by three is that the food cost percentage should never be above 30 or 33%. However, if you want your ideal food cost at 26%, you would use 0.26 instead of 0.33 when calculating prices.
Price = raw food cost / ideal food cost percentage
Price = $2.90 / .26
Price = $11.15
How to price a menu with the gross profit margin formula
This formula allows you to set your ideal profit margin and then price the menu around that percentage. Gross Profit Margin is the following formula: (Menu price - Raw cost) / Menu price
Using the same figures from the spaghetti calculator before, we could use the formula as:
70% the ideal gross profit margin = (menu price - raw cost) / menu price
70% = (menu price - $2.90) / menu price
70% = (9.99 - 2.90) / menu price
70% = 7.09 / 9.99
70% = 0.709
Vital factors to consider when making a successful restaurant food pricing strategy
Restaurant owners must give a lot of thought to each of these elements because it can mean the difference between frequent visitors and desirable profits or falling flat in your first year.
Demand and demand-driven pricing approaches — Take your most frequently ordered items and reassess the cost. The higher demand for an item or product, the more you can charge. Learning how to price a restaurant menu is step one. Step two involves using your technology, such as a POS system, to track what items customers order most often and how to price them for the highest possible profits.
Poster POS allows managers and owners to easily see their most popular dishes and adapt pricing in the system for demand-driven menu pricing.
Size and portion control — How many times have you gone to a restaurant and couldn’t finish your plate? You might pay $20 a plate, but you’re getting two meals out of it! Size and portion control can work in two ways. You can restrict portion control so that your guests know they’re getting exactly what they pay for, or you can work with large portions, so your guests feel like they’re getting a great value even though they’re paying more.
Balance between high and low-cost items — Pricing menu items gives the rare opportunity to provide a little something for everyone. Consider a “value” section on your menu. Virtually every restaurant except for fine dining establishments should make a clear restaurant menu pricing guide that lays out their dishes from most to least expensive. Then consider how you will layer or divide those items on your menu to create a balance between high and low-cost menu items.
Market trends and tendencies — A menu pricing formula isn’t the single solution for menus because it doesn’t account for trends or tendencies. In 2015, otherwise known as the year of the avocado, menus hiked up prices or offered add-on charges simply for a few slices of avocado. It was a trend that caused many owners and chains to change their menu prices!
Tips on menu engineering and design to increase profit margins
Restaurant menu pricing is part-mathematics and part-design manipulation. That’s right. You’re going to manipulate diner behavior with frequently used marketing tactics to create high-profit margins. Use these tips to gauge your pricing approach and drive success.
Tip #1: Daily specials
This one is technically “off-menu.” Have a separate menu, insert, or board where you post daily specials. Typically these specials use inventory items that are on their last leg. You’re still offering good and fresh food, but you’re working to make the most out of your inventory.
Tip #2: Use white space to sell high gross profit margin items on your menu
The idea is to leave a lot of blank space around the items that generate the most profit. Don’t fear white space. It directs the customer’s eye, improves reader comprehension, and even helps people decide what to order faster. Faster order times mean faster table turns and, ultimately, bigger sales figures.
Tip #3: Regularly review and analyze your menu against your operations data
No one likes to hear it, but you won’t create one super successful menu and then call it a day. You should review your menu and performance metrics monthly, quarterly, and annually. With a quality iPad restaurant point of sale system with full reports or charts showing:
Which products are most profitable
Which products are ordered most often
Which items aren’t selling
The cost, price, and markup for each item on your menu
This is one of the best restaurant menu pricing tricks you can use to control food costs and profits. Use the following steps as you evaluate these reports:
Monthly reviews can set promotions, daily specials and plan for upcoming discounts to regulars.
Quarterly reviews can call for price changes and promotions.
Annual reviews would be a good time to redesign menus and eliminate poor-performing or low-profit items.
Implementing restaurant menu pricing methods
When you start diving into how to price menu items, it seems too simple because, well, it is. Before you open your doors, you can consider your menu pricing by focusing on the ideal gross profit margin or ideal food cost percentage. You won’t know if that plan is successful until after your first few months.
Restaurant pricing is math-based, but it isn’t fool-proof. Many restaurants regularly update their menu, change prices, or use promotional menus to control costs and improve profit margins. Ultimately, your menu must represent what your customers love the most and match that to what your team can do the best!
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