There are lots of operational costs to incur when running a restaurant, but it’s a well-made menu that keeps you afloat, and, hopefully, profitable. In order to ensure that your restaurant will remain profitable enough to thrive, you’ve got to price your menu right.
A restaurant’s menu is what drives sales, so it’s important to calculate the pricing of each menu item strategically. There are a few different methods that can help you calculate an appropriate price per menu item, so read further to get the entire gist.
Consider Menu Psychology
Before you get into the nitty gritty numbers, think about whether your physical menu is designed in a profitable way. If you’re scratching your head right now, let us explain.
Professional menu designers understand that there is such a thing as “menu psychology,” which suggests that the physical layout of the menu and its elements of design can greatly influence sales. Here are some important menu psychology strategies that, along with well-made menu prices, can help boost profits:
- Use photos
- Place your most profitable items at the top or center of the menu
- Include prices, but don’t include dollar signs
Do a Financial Analysis
In order to successfully think up effective menu prices, you’ll need to have a thorough understanding of your business’ finances. The first step towards creating menu prices is understanding the amount of money you’ll need to make based on the costs you’ll incur — this is otherwise known as your restaurant’s gross profit margin.
As a restaurant owner, you’re going to spend on more than just food ingredients. Some of your costs will include:
- Employee wages
- Property costs
- Inventory, such as serving utensils and dinnerware, paper napkins, cleaning supplies, etc.
- Electricity and other utilities
- Advertising
Understanding how much these items will regularly cost helps you to decide on a number needed in sales. Combine these costs with the costs of your food ingredients to decide on an ideal gross profit margin for your restaurant. A general formula for this would be:
Ideal Gross Profit Margin = (Menu Price – Raw Food Cost) / Menu Price
Calculate the Cost of Each Menu Item
For a menu to be profitable, its prices have to outweigh its costs. Therefore, you’ll have to figure out the raw cost of each menu item, or your cost of goods sold (COGS).
Calculating the cost of each food item is something you should do when creating standard recipes. Each menu item you make should have a standardized recipe with exact portions and measurements to ensure that your calculations are always accurate.
So, if you’re attempting to figure out the raw cost of a cheeseburger, you should know the cost of the bun, lettuce, tomato, cheese, and burger patty. This, plus the cost of labor, will be roughly the raw cost. Figuring out the raw cost of each menu item is where you should start regardless of which method you choose to use to price your menu.
Come Up With an Ideal Food Cost Percentage
Once you’ve calculated the cost of each menu item, you can then start to figure out what menu price would make the most sense. You’ll want to consider your profit margin goals, costs, and market when pricing the menu.
A food cost percentage is calculated by dividing the amount of money you’ve invested in ingredients by the sales you’ve earned. The percentage is the ratio between what you spend on menu items and what you make back. Most restaurants operate with a 28-35% food cost percentage.
Before settling on prices, consider your restaurant’s local market and the audience you’re hoping to attract. When pricing, consider:
- The economic status of the local population
- Seasonal trends and how they might affect your sales
- Local competitors (will you price similarly, more, or less than competitors?)
Finally, settle on a price for your menu items by using this formula:
Price = Raw Food Cost of Item / Ideal Food Cost Percentage
Set Your Prices, and Reassess Later
Once you’ve calculated the ideal menu prices needed to get you where you want to be financially, your work isn’t completely done. Especially if you’ve just opened a brand new restaurant, you’ll want to keep a close eye on sales and costs to ensure that you’re making enough money off your menu to stay afloat. You may need to reassess your menu prices in the future due to seasonal trends, increased cost of ingredients, consumer behaviors, and more.
Megan Prevost is a marketing content writer for MustHaveMenus. Her work has appeared in App Institute, FanSided, FSR, Modern Restaurant Management, PMQ, RestoBiz, Small Business Currents, and The Daily Fandom.
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