Restaurant Menu Pricing: The Secret to your Restaurant’s Success
What’s the one key ingredient – figuratively speaking – of your restaurant’s ultimate success? Some restaurant or bar owners think it’s all about location, location, location. Others may lean toward a loyal customer base. And don’t forget about seasonal swings and capitalizing on the “perfect timing” aspect of sales.
All valid “ingredients,” for sure. But have you considered the importance of menu pricing as a key driver of revenue and profit? Think about it this way: whatever type of eatery you run (restaurant, bar, catering service, food truck, etc.), day-in, day-out purchases off your menu are the most consistent source of income. And finding the right balance to offer customer value and optimal profit is critical to a profitable enterprise.
Pricing a menu impacts your restaurant well beyond the daily, weekly, and monthly books. Without a sound, sustainable menu pricing formula in place, it’s virtually impossible to ensure other sectors of your business are funded, including everything from utilities, labor, real estate, food stock levels, and much more.
RASI’s complete line of accounting services, including intuitive analytical applications, gives your restaurant a distinct advantage in all phases of pricing a menu, from conception to implementation. Let’s get into some specifics of restaurant menu pricing, including a key distinction with menu engineering.
Fundamentals of Pricing a Menu
Finding the right menu prices isn’t done by accident or on a whim. The most successful restaurant owners know it’s all in the details – namely, profit margins, food cost percentage, current market conditions, the competition, and more.
Keep in mind, menu pricing is much different than menu engineering. While menu pricing deals with finding the best possible menu costs, menu engineering is a true nuts & bolts exercise. Seasonal sales swings, vendor pricing, supply costs, you name it – menu engineering is more or less the “algorithm” of smart pricing strategies. Make sure you check out our informative article on menu engineering for some more in-depth analysis on the subject.
When figuring out your menu pricing formula, or even when engineering your menu, it’s helpful to keep in mind the relationship between costs and profit margins, especially in the wake of skyrocketing inflation: when costs increase, margins decrease. There’s simply no way around this inverse, dynamic relationship.
But back to the menu pricing formula…what are some ways to set your restaurant menu pricing?
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Restaurant Menu Pricing Based on Ideal Food Cost Percentage
Once you figure out your food cost percentage, you have the foundation in place to set a profitable menu. Food cost percentage takes two factors into consideration:
- How much is spent on food ingredients
- How much revenue is generated from this expense
Simply divide the ingredient cost by the sales, and you have the ideal food cost percentage. Those two factors in the equation require four different inputs: starting inventory, food purchases, final inventory, and total food sales.
Let’s say your restaurant, Frank’s Lunch Box, has a starting inventory of $5,000. You made $8,000 in purchases. At the end of the year, your final inventory was $3,000. With total food sales of $30,000. Your food cost percentage would be:
(Starting inventory + food purchases) – final inventory / total food sales, or
(5,000 + 8,000) – 3,000 / 30,000, which is
10,000 / 30,000, or
So, your ideal food cost percentage is 33%. For every one dollar of revenue, 33 cents were spent on food inventory. Lucky for your restaurant, that’s right in the “sweet spot” of food cost percentage. Most profitable establishments keep food costs anywhere from 25% to 35% of overall revenue.
Now, how does this factor into restaurant menu pricing? The ideal menu item price formula is:
Cost per serving / ideal food cost percentage
If Frank’s has a food cost percentage of, say 40%, and you’d like to decrease that to 25%, you need to reduce this factor by 15%. Let’s say Frank’s best-selling chicken sandwich is currently on the menu for $10.00, and costs your restaurant $4.00 per serving to make. That’s a 40% food cost percentage.
In order to get the food cost percentage down to 25%, let’s plug the numbers into the equation.
Cost per serving / ideal food cost percentage
$4.00 / 25% = $16.00. So, in order to get your food cost percentage to a more manageable 25%, you have to raise the price of the chicken sandwich from $10 to $16.
Gross profit margin and cost of goods (COGs) are also helpful factors when pricing a menu. Here are a few other things to keep in mind:
- Competition pricing. It’s always helpful to know what your competitors are charging for similar menu items. If price reductions or slight increases are required, we recommend slight modifications to separate your restaurant’s menu from the competition.
- Premium menu items. Market trends and fads are common in menu items. Take “gourmet” grilled cheese sandwiches, for example. Even when made with premium breads and gourmet cheeses, many restaurants can charge up to $20 for a sandwich, even though it only costs less than $5 to make!
- Pricing balance. Your entrée selections should have a “ballpark” range that’s not too drastic; most restaurants, for example, charge anywhere from $18 to $30 for main courses. If the range is too sharp — $5 sandwiches next to $25 salads – that will cut into your profits and may confuse diners…”does this restaurant know what they’re doing?”
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Contact RASI Today – To Learn More About Restaurant Menu Pricing
Here’s a smart strategy – connect with our restaurant accounting experts today. Our powerful, agile restaurant accounting software gives you plenty of tools to help with menu pricing, not to mention multi-unit inventory, compliance, payroll, and much more.
Request a demo today, or call us directly at (720) 826-9900.