A restaurant’s success is not measured solely on its popularity but also on its profitability. Even if you were to serve great food and be loved by thousands of customers, your restaurant would not last if you do not earn enough money to sustain it.
A restaurant is as much a business as it is a hobby or passion. If you want to last long in this industry, you have to profit. While there are many ways to bring in customers, volume is not the only metric you should worry about. The key to a steady source of revenue besides quality service is proper pricing.
Why Should You Worry About Menu Pricing?
Menu pricing directly affects both the profitability and popularity of your menu items. While having higher prices would generate more profit per item sold, it might drive some customers away. Conversely, having cheaper items will reduce your profit margins but will attract more customers to buy them.
Striking the perfect balance between quality, quantity, and profitability can be challenging as each restaurant’s situation is unique. Every establishment has its own budget, menu, marketing campaigns, and logistical costs. That’s why it’s best to take all these into consideration before menu pricing.
Before Pricing Your Menu
There are many different factors that can affect how you price your menu items. Before you calculate and adjust your menu prices, make sure to do the following:
- Track your cash flow. Recording every transaction is essential in managing any business. You have to know how your costs relate to your sales in order to determine profitability.
- Work with a target operational budget. Your budget is the basis for all other transactions and should be your guide to realizing your restaurant’s efficiency. Going over or under budget will reflect your restaurant’s performance, profitability, and efficiency.
- Set a proper accounting period. While having an overview of your finances is good, having a granular view of your expenses is key to objectively assess your performance over time. By setting a proper accounting period, you can compare and contrast your sales data at different points in time.
Once you’re done, you can move on to the next step in menu pricing.
Food Costing
Food costing is a restaurant’s way of contextualizing its menu prices. It’s a way to relate costs to sales and is essential in proper menu pricing. In order to do so, it’s important to calculate several food cost formulas. The first of which is food costs per serving.
Example:
Food cost of one cheeseburger
- 8 oz burger patty = $1.75
- 1 sesame seed bun = $0.30
- 1 tbsp. of ketchup = $0.05
- 1 tbsp. of mayonnaise = $0.05
- 1 slice of cheese = $0.35
- 2 slices of tomatoes = $0.50
Cost Per Serving = $1.75 + $0.30 + $0.05 + $0.05 + $0.40 + $0.50 = $3.00
After calculating your cost per serving, you have to calculate your the food cost formula, food cost percentage. This value determines how much of your revenue is spent on your ingredients.
Food cost percentage is calculated with the following values:
- Starting Inventory: total monetary value of your inventory value at the start of your accounting period.
- Expenses: the monetary value of the inventory you purchased throughout the accounting period that is not part of your starting inventory.
- Ending Inventory: monetary value of your inventory at the end of your accounting period
- Total Sales: the monetary value of your sales for the accounting period
Once you know these values, you can calculate your food cost percentage with the following formula:
Example of Food Cost Percentage for One Week:
- Beginning inventory value = $10,000
- Purchases = $5,000
- Ending inventory value = $12,000
- Total food sales = $8,000
Food Cost Percentage = [($10,500 + $5,000) – $12,000] / $10,000 = 0.35 or 35%
Next, you have to calculate your Ideal Food Cost Percentage. Since every restaurant has different costs and expenses, this food cost formula will help you determine how much you should spend on your ingredients.
Ideal food cost percentage is calculated with two values:
- Total Food Costs: how much you spent on ingredients
- Total Sales: total value of items sold
Example of Ideal Food Cost Percentage:
Let’s say a restaurant’s total food cost was $3,500 and had a total sales amounting to $10,000
Ideal Food Cost Percentage = $3,000 / $10,000 = 0.30 or 30%
Comparing our ideal food cost percentage to our example earlier you can see that this restaurant is losing 5% more revenue than they should (35% – 30% = 5%). In other words, they are spending 5% more on inventory than they should be.
With this data, restaurants can take steps to lower their costs. They can do this by either finding cheaper vendors, reducing their portion sizes, or adjusting their menu prices. Most restaurants operate with a food cost percentage of 28-35%. Any more and you should seriously consider adjusting your prices.
How to Price Menu Items
Given all the relevant data points, you can now calculate your menu prices. You want your ideal food cost percentage to be equal to your actual percentage. The ideal item price is calculated using two values: cost per serving, and ideal food cost percentage.
Let’s use our example of one serving of a cheeseburger and say its current menu price is $8.00. How much should a restaurant charge for the cheeseburger in order to lower their food cost percentage to the ideal 30%?
Using the above food cost formula, we can calculate the ideal menu pricing per item:
Ideal Price = $3.00 / 0.30 = $9.00
Comparing the ideal price with its current price, you can see that the restaurant is actually losing profits. This is because they’re selling their cheeseburgers at only $8.00, which means they’re losing out on a potential $1.00 profit.
This might not seem much, but these prices can compound quickly with more customers you serve. If you sell 50 cheeseburgers a day, that $1.00 difference can net you an additional $18,250 in revenue per year!
With several calculations, you can definitely see the power of food cost formulas and how you can relate them to your operations.
How Prices Affect Customers
Price changes will definitely affect the number of customers that will order your menu items. These changes can reflect in two ways:
Outcome #1: Prices Increase, Sales Decrease
Going back to our cheeseburger example, it would make sense that some customers cannot afford to pay the additional dollar for the same meal. In this case, it may be ideal to maintain the previous price of $8.00 and compromise elsewhere.
You can use cheaper ingredients, reduce serving sizes, or buy more ingredients in bulk and tweak the numbers you input into your food cost formulas. That way, you can earn more money while maintaining a price point that your customers can afford.
Outcome #2: Prices Increase, Sales Increase/Stay the Same
This ideal scenario is a good indicator that your customers are willing to pay more for your meals! You’re maximizing your profits while maintaining a level of quality that your customers are happy with.
Of course, you can still increase your profits by lowering your food costs in different ways. If you do so, just be wary not to compromise the quality of your meals as loyal customers are more likely to be picky about quality than price.
Ensuring Restaurant Profitability
The restaurant industry is a consumer-driven market. Managing your food costs and menu prices is important to ensuring the longevity of your business.
Here’s a quick recap of how to calculate your ideal menu prices:
- Determine each item’s food cost per serving
- Calculate your food cost percentage.
- Calculate your ideal food cost percentage.
- Use the different food cost formulas to calculate your ideal menu item price
- Apply menu pricing
- Monitor your sales changes
Of course, every restaurant has its own unique circumstances. While it’s good to work with ideal numbers, creativity and ingenuity go a long way to a successful business. There is no one way to run a restaurant and no one way to price your items. Make sure to use menu engineering concepts to optimize your menu pricing.
If you want to ensure your restaurant’s profitability, it’s important to have the right tools to manage every aspect of your business. From inventory management to automated sales reporting, having a good restaurant point-of-sale (POS) system can significantly improve your restaurant workflow.
Use your POS to keep track of your sales and see how much your restaurant is growing over time. Make informed business decisions quickly and see how different changes can affect your business in real-time.
There’s no better feeling in the world than running a successful business. That’s why you should give your restaurant its best chance at success by investing in the right people, the right tools, and at the right time.