Follow this step-by-step guide to calculate the right prices for a profitable restaurant menu.
A restaurant menu that is carefully and optimally priced generates profit. It’s an essential part of your business and will require some time to determine the right prices. Once fixed, stay abreast of raw ingredient costs and control the portion sizes to guarantee the prices remain the perfect sum to operate and earn a profit. Below, review the three steps for finding the right prices for your restaurantmenu.
(Curious about other pricing options? These restaurants have unusual methods for charging.)
Step 1: Know the Exact Costs of Raw Ingredients
Before anything else, first, calculate the exact costs for raw ingredients. Depending on your menu, this might take some time; however, it is essential that this step isn’t rushed. Incorrect calculations willlead to two outcomes:
- Under-charging the food, resulting in profit losses.
- Over-charging the food, turning off customers with the unfairly-high prices.
Working with your chef, review recipes for exact measurements. Every ingredient that goes into a dish, even the herb-infused butter, must be accounted for. To get a precise number for how much you are spending, check purchase orders and double-check inventory.
Step 2: Determine Portion Sizes
An often-overlooked step, controlling portion sizes guarantees that the menu prices continue to finance your restaurant operations and generate profit. Only by knowing the precise measurement and weight of each ingredient can you then calculate the true cost of a dish. Control the portion sizes thereafter with measuring tools, portioning out quantities during food prep, and specifying exact numbers for the BOH (for example, stipulate five shrimp pieces are allowed, not six).
Step 3: Calculate the Menu Price
Follow this leading principle for pricing out your restaurant menu:
1/3 Food Costs: 1/3 Labor Costs: 1/3 Gross Profit Margin.
The gross profit margin is 30% to 35% of how much you pay for food and how much your fixed costs are.
Now you know why it’s essential to figure out the raw food costs and portion sizes. Using these two categories of information, calculate how much is spent on food for every dish, including condiments and sauces.
Next, calculate the labor costs required to serve the food by totaling the hourly wage of all employees on schedule. The goal is to have a profit margin that is one-third of the menu price.
THE RESTAURANT MENU EQUATION
When figuring out the right menu prices, work your way backward from the desired menu price.
(Entire meal costs) + (Staff and occupancy costs) = Total Food Cost
Menu Price – Total Food Cost = Profit
Profit / Menu Price = Gross Profit Margin
An Italian restaurant is deciding the perfect price for its classic pizza margarita.
$4 (Food Costs) + $8 (Labor Costs) = $12 (Total Food Cost)
$20 (Desired Menu Price) – $12 (Total Food Cost) = $8 (Profit)
$8 (Profit) / $20 (Menu Price) = 40% (Gross Profit Margin)
The goal is to have a gross profit margin between 30% and 35%. In this case, the restaurant decides to lower the prices to avoid alienating customers with prices that are too high. The owner considers $16; yet the gross profit margin is too low at 20%.
The final price is $18; with a gross profit margin of 30%. The customers feel they are getting a better deal with a price under $20, and the restaurant doesn’t have to sacrifice its quality or labor to earn a tidy profit.
(In general, fine-dining establishments need at least 35% margin to operate, whereas fast-food establishments tend to have 25%.)
Why Calculating Restaurant Menu Prices is Important
One of the leading reasons why restaurants fail is that owners undervalue the importance of their food cost percentage. By calculating the right menu prices, you open the possibilities to succeed and grow your business:
- Now, you can control your restaurant’s profitability. Without determining the food cost, the profitability of your business is a guessing game.
- You can quickly learn if dishes are unprofitable. One of the best ways of cutting costs and saving money is by updating your restaurant menu and dropping the duds.
- Understand how the market affects the variables. For example, the vanilla shortage in 2017 deeply affected the budgets of restaurants, bakeries, and pastry makers. The spice became too expensive to casually use, and some businesses had to replace their vanilla recipes for something more affordable. Stay on top of the prices of your raw goods to make sure the restaurant prices remain balanced.
- When new recipes are considered, you can decide if it will be a success or not. If you are considering adding an expensive dish, be sure you have a balance of more affordably-priced menu items.
Once you have you determined the right prices for your restaurant menu, optimize the upselling potential of your menu with these 9 tips.