If you’re running a cafe, restaurant or hotel with an F&B operation, your menu pricing will have a direct impact on your ability to be profitable.
It’ll also have consequences for how well you can fund the essential elements in your business such as marketing, utilities, wages and raw ingredients.
The good news is that finding your ideal restaurant menu price is actually relatively straightforward, and there is some science to it.
In this article, you’ll learn:
- what your gross profit margin is and why it matters;
- 2 ways to calculate base menu prices (ideal food cost percentage and ideal gross profit margin);
- how to work out the gross profit of an existing menu;
- really simple but effective ways to price your restaurant menu by taking into account demand and the competition;
- a quick-fire 7-step guide to pricing every item on your menu;
- the importance of portion control; and
- the psychology behind restaurant menu prices.
A 2019 survey revealed that high food and operating costs were the biggest challenges for 52% of new restaurateurs. This neatly reveals why getting the menu price right is so important.
What is a gross profit margin?
Your gross profit is the difference between the price at which you sell dishes and the cost of the raw ingredients (typically referred to as ‘cost of goods sold’ [COGS]).
For many restaurants, a gross profit margin of around 70% is acceptable (i.e. if a diner bill amounts to £100, £70 of it is gross profit). Gross profit isn’t your take home profit, though - that’s net profit, which comes after all your taxes and overheads are removed.
Here’s a simple calculation for determining your net profit:
** Gross Profit – (Labour Cost + Operating Costs) = Net Profit/Loss**
These two strategies are great whether you’re just starting out or need to update your existing restaurant menu pricing.
Just remember that you don’t have to apply the same ideal food cost percentage or profit margin to every item on your menu. Some dishes may benefit from a lower or higher margin, depending on their popularity and positioning of the menu.
Option 1: Ideal food cost percentage
This method is the simplest, and leaves plenty of headroom if you’re conservative with your initial menu pricing.
- Establish your ideal food cost percentage. This is the portion of sales you spend on food. The average for most restaurants sits between 25-35%. Be conservative if you’re unsure - you can always change this in the future.
- Determine the raw food costs. Take one dish and separate the raw ingredients. Add up the total cost of those ingredients - this is your COGS (cost of goods sold).
- Use this equation to calculate the price. Price = COGS / ideal food cost percentage.
Example: If the raw cost of your signature dish is £5 and your ideal food cost percentage is 25%, the menu price should be £20.
This method focuses more on the profit you wish to make and helps you better understand how your bottom line works per menu item.
- Establish your ideal gross profit margin. Be realistic with this and base it on your ingredients costs. Remember - 70% is a good starting point for most restaurants.
- Use this calculation to establish the price. Ideal gross profit margin = COGS / sale price.
Example: If your ideal profit margin is 75% and the raw food cost is £5, your calculation would look like this (after solving for the menu price): 75% = (£20 - £5) / £20.
If you have an existing menu and you’d like to get a handle on the gross profit you’re making for each dish, you can use the above equation to work out the gross profit margin, too.
Demand and competition: how they should influence pricing
So far, we’ve looked at calculating the restaurant menu price based on mathematical equations, but life isn’t always that simple in the hospitality industry.
Consumer demand and the march of your competition will - and should - influence your pricing, and that’s where you’ll need to ignore the calculations (to a degree).
Depending on where your restaurant is located and the type and volume of completion you have, you can try the following strategies:
- Just price your menu the same as the competition. You see this most commonly in the coffee shop sector - because it works, and the competition factors then come down to brand and experience.
- Go lower. If your margin is still enough to keep things chugging along.
- Go higher. No, really - a higher price will position you as a better option in the eyes of many consumers, if that fits with the plan you have for your brand.
When it comes to demand, tread with caution. If you experience consistent growth in terms of covers and are particularly busy most of the time, raising or lowering prices are both viable options.
There’s an argument to say that by raising prices, you’ll even create more demand because you’ll be seen as a premium choice, but, equally, doing so might alienate parts of your audience.
Ultimately, you should always take into account the potential impact on your brand and customer satisfaction if you decide to raise or lower prices based on how busy you are. You’ll know if it’s the right or wrong decision, deep down.
Here’s a file-and-keep, quick-fire guide for arriving at a menu price for every dish or item you sell.
- List all the ingredients that go into the dish.
- Calculate the delivery fees, interest, return charges and any other expense related to each ingredient.
- Calculate the cost of goods sold (COGS) by adding up the prices you pay for each ingredient.
- Determine the percentage derived from the dish by dividing the desired menu cost by the cost of the food.
- Add up your overheads for that dish. This will include marketing, taxes labour and rent. Dividing the total of your overheads daily by the number of potential covers is rudimentary, but provides a decent baseline.
- Come up with your ideal food cost percentage. For example, if the dish is priced at £10 and the overhead cost is £5, your food couldn’t cost more than £5 to break even.
- Consider if your menu prices cover the food costs and overheads. Do they return a profit? The principle in step 6 will assist here.
Make your way through each step above (you don’t have to do so in a linear fashion) and keep refining that menu price until it makes sense commercially.
It’s important to do the above for each item on your menu and to consider different ideal food cost percentages and gross profits for each dish. For instance, if you price your starters low, can you make up for the lost profit by hiking up your main course prices?
As a last step, work out if your food cost percentages can support your restaurant by paying the bills and staff. If they don’t, your prices simply aren’t sustainable.
The importance of portion control
Portion control sits at the heart of the most successful restaurants. They know exactly how much of each ingredient to use for each dish and never break those boundaries.
We’re often talking fine margins here - one prawn over or under, for instance - but when you add up the number of dishes sold, it becomes clear how over or under portioning will vastly impact the gross profit of every menu item.
Take time to measure everything out in the kitchen and make good portion control a standard that must be adhered to. Meat should be weighed and items like grated cheese stored in portion control cups.
Sometimes referred to as ‘menu engineering’, the psychology behind menu pricing is fascinating.
Studies show that diners will often order the first item they notice on the menu, so try diverting their attention to your high profit dishes immediately. You can do this by boxing them out on the menu or using emotive language such as “dishes our chef loves”.
Your serving staff can play a big role here, too. If they’re aware of the high profit dishes and the reasons people might enjoy them, that should form a large part of their table talk by gently enticing diners to choose those dishes.
Lastly, think about the ‘golden triangle’ when designing your menu. This is based on the theory that most people will look at the centre, then the top-right, followed by the top-left corners of the menu when first viewing it.
Sales and their resulting profit will be the most important factor in determining the success of your restaurant. It’s why you should spend a great deal of time on your menu pricing and make sure it’s revisited regularly.