Pricing your restaurant’s menu can be an intimidating task. A good pricing strategy, after all, should balance customer expectations and their willingness to spend money. On top of that, your menu pricing should protect your bottom line, which is becoming harder to do because of rising costs.
Many factors come into play when implementing a menu pricing strategy. The most basic, of course, is food cost. The lower your food cost, the more price-competitive your menu can be, resulting in more sales and profits.
With food costs rising, can you implement a menu pricing strategy that will meet customer demands and protect your bottom line? This guide will help you understand the mechanics of menu pricing and help you implement a menu pricing strategy that works for your restaurant business.
Menu Pricing: Factors to Consider
If you’re just starting out in the restaurant business, you need to consider these three main factors to come up with the best menu pricing strategy for your restaurant.
- Food Cost Percentage
Food cost percentage is the portion of sales spent on food. Most restaurants have a food cost percentage of 25-35%. If a particular dish sells, 25-35% of the revenue it generates goes to its costs. The lower the food cost percentage, the higher the profit you can make from your sales.
Food cost percentage is affected by food costs. That’s why it’s important to keep your food costs under control. Unfortunately, food costs fluctuate frequently, affecting your food cost percentage. Strive to keep your menu prices at 3-3.5 times your food costs to stay profitable.
- Raw Food Cost
Raw food cost refers to the cost of the ingredients used to make a dish. For example, if you serve a tomato, cheese, and pepperoni pizza, you sum up the costs of the dough, tomato sauce, cheese, and pepperoni. Their total cost is your raw food cost or, simply put, cost of goods sold (COGS).
Determining your raw food cost will help you calculate a realistic food cost percentage for your menu.
- Gross Profit Margin
Gross profit margin is the percentage of your profit from every dish. If you have a 30% gross profit margin for pepperoni pizza, it means you earn 30 cents on the dollar for pepperoni pizza. The rest goes to raw food costs and other expenses.
To find out the ideal price of a menu item, say the raw food cost of your pepperoni pizza is $3.75, and its price on your menu is $15.
Your calculation should look like this:
Gross Profit Margin (in percentage terms) =
(Menu Price – Raw Food Cost) / Menu Price * 100
or
Gross Profit Margin = ($15 – $3.75) / $15) * 100 = 75%
Therefore, if you sell your pepperoni pizza at $15, your gross profit margin will 75%.
If you’re not sure how much to price a menu item, this formula can help you:
Raw Food Cost / Food Cost Percentage
Say your ideal food cost percentage for pepperoni pizza is 25%.
In that scenario, your computation would be $3.75 / 0.25. That makes your ideal price for the pizza $15.
Top Four Menu Pricing Strategies
Performing these calculations isn’t the only way to determine the right prices for your menu items. It only shows how much you can earn and spend if you price your menu a certain way. It doesn’t take into account your customers’ expectations yet.
Here are the menu pricing strategies you may consider to reconcile your profitability and your customers’ expectations:
1. Menu Engineering
Menu engineering optimizes your restaurant’s menu based on relevant statistics and customer feedback. It categorizes your menu items into profitable ones and less profitable ones. In addition, it factors in your menu’s prices, layout, design, and formatting.
The goal of menu engineering is to make your low-cost and profitable dishes more visible and appealing. Although it’s nice to highlight your bestsellers, they’re not always the most profitable items. Lower-cost menu items can give you a higher gross profit margin.
You can sell your low-cost dishes more by creating a time-sensitive menu, like happy hour cocktails. Discount the prices of your happy hour offers, like nachos, nuts, fish and chips, buffalo wings, and beverages. Using this menu engineering technique can fill your slow hours and allow you to drive sales in between usual meal times.
As for your menu’s design, layout, and format, the prices of the food themselves can also affect them. If you have non-integer prices, like $15.70, $13.50, etc., those figures can make your menu look unappealing. On the other hand, whole numbers, like $16 and $14, can make your menu more approachable, attracting more orders.
2. Menu Psychology
Menu psychology is related to menu engineering. But instead of focusing on menu categories, prices, and design, menu psychology aims to influence your customers’ perception of your food and their prices.
Raising your prices isn’t a bad idea here; higher prices can indicate higher quality, after all. For example, if your $5 chocolate shake isn’t selling well, you can enhance its quality by adding more ingredients to it, like whipped cream, premium chocolate syrup, and certain types of nuts.
Its raw food cost will increase, but that will allow you to sell the chocolate shake for, say, $8.
The higher price may catch positive attention, especially if the presentation of the chocolate shake improves, too. Instead of looking like a cheap, generic chocolate shake, it’s now more appetizing and Instagrammable. Your customers may be more eager to try it despite having to pay three more dollars for it.
To make your psychological menu pricing work, ensure that your food’s quality makes its price reasonable. Make the flavors right, the presentation beautiful, and the portion satisfying.
3. Competitive Pricing
Competitive pricing, a.k.a. competitor pricing or competition pricing, is one of the most common menu pricing strategies. As its name suggests, competitive pricing analyzes the prices of your competitors and helps you set you prices in relation to theirs.
Competition pricing challenges you to push your creativity. Can you change your portioning strategy? Improve dish presentation? Relaunch a dish as a weekly special that customers can look forward to?
While being price competitive is important, focusing too much on your competitors can result in an endless battle over who has the cheapest prices. Different restaurants have different food and operational costs. If their food is cheaper, it might mean they have lower food and operational expenses than yours. If you become pressured to match their prices, your gross profit margins may shrink.
Price may not equate value, and customers can get suspicious of overly cheap menu items. So look beyond your competitors and see how you can increase the value of your menu while keeping within the competitive range.
Using an automated inventory management system can help you. It will allow you to add or remove suppliers for an ingredient, and monitor your food costs and inventory levels remotely. This technology can increase your efficiency, lowering your operational costs, which will also help you control your menu prices and food costs.
4. Demand Pricing
Along with competitive pricing, demand pricing is also a common menu pricing strategy. Demand pricing is assigning menu prices based on market perception on what an item is worth. Restaurants may implement this pricing method for seasonal food, and highlight them in their menu.
If you’re a fine dining restaurant, for example, you may capitalize on newly released rosé wines for the summer, and or imported truffles over fall and winter. Scarcity and trendiness may allow you to apply premium pricing on certain items.
You can make up for that by offering lower prices on menu items that go with them, such as cocktail snacks for the wine, or throw in a couple of free side dishes that go well with a truffle-themed menu.
Menu engineering and menu psychology can help you balance customer expectations and profitability when using the demand pricing strategy. Aim to put your in-demand and least popular menu items under the same spotlight. The happy hour technique can make this work, but there are other ways to boost your least popular items’ visibility, too.
Identify your menu items with low popularity, high profit margins; they are called “puzzles” in the menu engineering matrix. If your puzzles are expensive, it might be the reason customers don’t want to order them. In that case, you may lower their prices a little bit to create more demand for them.
If reducing their prices will hurt your profit margin, try cutting portion sizes. It can also boost the items’ appeal because customers may feel “safer” ordering them in smaller amounts.
Use Business Analytics to Achieve the Right Menu Pricing Strategy
Achieving the right menu pricing strategy is a trial-and-error process. You may experiment with different pricing strategies during your soft opening period, for example. You can also ask for insight from your fellow restaurant owners and friends who may be in your market.
Once your restaurant is up and running, customers will expect consistency from your business. Fluctuating prices may confuse them and make your restaurant unpopular. You can avoid pricing uncertainties by using business analytics.
Real-time business analytics allows you to monitor your sales as they happen. You can see the revenue and profit each menu item generates, enabling you to spot which items need a price adjustment. You may no longer make the necessary changes only after reading monthly reports.
With the proper technology and guidance, you can implement a menu pricing strategy that effectively communicates your restaurant’s value, brand, and commitment to its customers and community. Consider investing in a powerful restaurant management software to get started.