How to Price Food for Your Restaurant
If you have a passion for food, then there are few better career choices than opening a restaurant. Although running a restaurant is certainly a great deal of work, it can also be a very rewarding vocation, particularly if you’re able to make your restaurant a success.
Several decisions will need to be made when you’re opening your restaurant, including where your establishment will be located and what type of food you’ll offer. However, perhaps the most important decision you can make is how you will price your food. Improperly priced food can make it nearly impossible to turn a profit, potentially causing your restaurant to fail before it gets going.
Before you open the doors to your restaurant, it’s important to learn how to price your food so that you can set your business on the path to success.
Menu Prices vs. Food Cost
A good portion of the money you spend running your restaurant will go toward the food used to make your meals. When you’re trying to come up with the right price for your menu items, it’s important that you charge enough to offset the cost of the food while also being able to profit from your menu items.
In general, restaurants will shoot for a food cost percentage that ranges between 20 percent and 40 percent. For instance, if it costs you $4 to make an item on your menu, the price that you charge for this item should be between $10 and $20. Pricing food in this manner should work for most restaurants. However, because every restaurant is different and has different food costs, you should consider the specific needs of your establishment when calculating your prices.
Ideal Cost Method
One of the most common ways of pricing food for a restaurant is using the ideal cost method. With this method, you will calculate your prices by taking the raw cost of your food and then dividing this cost by your preferred food cost percentage.
Let’s say that the raw food cost for one of your dishes is $5 and you’re shooting for a food cost percentage of 30 percent. Using the ideal cost method, you would divide $5 by 30 percent to come up with a menu price of $16.60. Many restaurant owners might choose to either lower this price to $16.50 or raise it to $16.99 to make it more ideal.
While the ideal cost method is easy to use, it doesn’t always result in the best pricing because it only takes your raw food costs into account and excludes important factors such as your indirect costs, your competitors’ costs, and the instability of pricing. If you choose to use the ideal cost method, you should adjust your desired food cost percentage to account for other expenses, such as condiments.
Pricing Based on Demand
Another good way to price food at a restaurant is to closely examine your sales to find out which of your menu items is most popular with your customers. There is generally a much higher demand for food than there is supply, which means that visitors to your restaurant will tolerate higher prices for dishes that they cannot find at other establishments.
If your restaurant has a signature dish that isn’t served at other restaurants in your area, or if there is a menu item that outsells the rest of your offerings, you can price these dishes slightly higher than the rest of your menu. However, it’s important that you only use this pricing method for your hottest-selling dishes. Pricing every item on your menu as if there is tremendous demand may turn off your customers instead of drawing them to your business. Make sure your menu has the right balance between lower- and higher-priced meals.
Price Based on Your Competitors
The restaurant industry is extremely competitive, and if you want your restaurant to succeed in a crowded marketplace, you will need to make sure that your pricing takes into account what your competitors are charging for their food.
When you use the competition pricing method, you will choose your prices based either on the basic prices of the market or the specific prices of your competitors. For example, you could choose to price your menu exactly the same as your competitor’s, which would prevent them from underselling you. On the other hand, if you’re looking to take customers away from the competition, you could establish yourself as an affordable restaurant by offering marginally lower prices than your competitor. Finally, you could indicate you offer higher-quality food by pricing slightly higher than your competitor.
If you wish to use the competitor pricing method, you will likely need to do a great deal of research to make sure that you aren’t over- or underpricing your food.
In some restaurants, the best solution for calculating menu prices is building pricing around the most profitable menu item.
There are several ways you could use this method to calculate the prices for your restaurant. If the highest-grossing menu item outsells the rest of your menu by a large margin, then you can make up this difference by pricing the rest of your menu a bit higher, which should help you maximize your profits. You could also build your restaurant around your most profitable item, meaning you would heavily advertise this dish and have your servers promote this menu item when interacting with customers.
Differences Between Restaurants
The most important factor in pricing the food at your restaurant is completely understanding your individual restaurant’s costs. The type of restaurant you own can greatly affect your food cost percentage, which is why it’s crucial to examine your costs before you price your menu items.
For example, the food cost percentage of a quick-service restaurant will be much higher than the percentage at fine dining restaurants because quick-service establishments have lower labor costs, a higher customer volume and lower menu prices. Because labor costs are much higher in fine dining restaurants, their menu prices will naturally need to be higher.
How your food is prepared can also affect your pricing. If you make all of your items in-house with fresh ingredients, then you will have much higher labor costs than a restaurant that purchases some or all of their menu items premade.
Take a look at your costs, paying special attention to what you’re paying for labor and your food cost percentage, and you should be able to effectively calculate your menu prices.
Cost of Goods Sold and Food Cost Percentage
If you want to be able to price your restaurant’s menu correctly, then you first need to calculate your cost of goods sold. While this might sound intimidating, it simply means finding out how much the food used in your restaurant cost you when it was purchased.
To calculate your cost of goods sold, you will need to know your starting inventory, how much inventory you purchased during the week and how much of your inventory is left at the end of the week. So, let’s say that at the beginning of the week your inventory totaled $6,000 and that, at some point during the week, you purchased an additional $2,000 worth of inventory. Finally, let’s assume that at the close of the week you have $3,000 left in your inventory. To calculate your cost of goods sold you would add $6,000 to $2,000 and then subtract $3,000, resulting in a cost of goods sold of $5,000.
By calculating your cost of goods sold, you will be able to keep track of your restaurant’s finances and identify areas where you can eliminate waste.
You can also use your cost of goods sold to calculate your restaurant’s food cost percentage. Using the previous example, let’s say that your costs of goods sold is $5,000 and that your sales during the week were $16,000. To come up with your food cost percentage, you would divide $5,000 by $16,000, which is 0.31 or 31 percent. For most restaurants, this is an ideal food cost percentage.
Keep these calculations in mind and you should be able to determine if your pricing strategy is effective and make necessary adjustments so that your restaurant is profitable.
Why You Need to Understand Food Cost Percentage
As you can probably tell by this point, understanding your food cost percentage is vital when you’re trying to price your menu. While developing menu pricing is the primary purpose of your food cost percentage, there are several other ways you can use this information to help your restaurant succeed.
First and foremost, understanding your food cost percentage is the best way to maintain your restaurant’s profitability. If you notice that your profits have dipped, you can compare your food cost percentage to your menu prices to determine the problem. If you don’t know your food cost percentage, it will be almost impossible for your restaurant to turn a profit.
Your food cost percentage can also be a great tool for eliminating waste in your restaurant. Having this data at your disposal will allow you to identify menu items that are no longer profitable and can help you decide whether you should raise the price for these dishes or remove them from your menu completely.
Food cost percentage will also help you understand how the food you’re ordering can affect your overall costs and the profitability of your restaurant. If, for example, you order a food item that has significantly increased in price due to lack of availability or some other factor, you will likely need to alter your menu pricing to adjust for these increased costs.
Finally, a full understanding of your food cost percentage will allow you to experiment with your menu. You can create new dishes and then examine how they affect your food cost percentage. If there is a negative effect, you can either change up the dish or eliminate it from your offerings. On the other hand, if the new dish has a beneficial effect on your food cost percentage, you can add it to your menu without worry.
Ways to Improve Your Food Cost Percentage
If you find that your restaurant’s food cost percentage is less than ideal, there are a few strategies you can use to optimize this number and improve the success of your business.
First, you can slightly raise your menu prices to see if there’s a positive effect on your food cost percentage. If you choose this strategy, be sure not to raise your prices too much, as this may turn off your customers.
Second, you could re-engineer your menu to help improve your food cost percentage. Find the items that aren’t selling and completely remove them from your menu. Next, take your most profitable items and put them front and center.
Third, you could try to be smarter when shopping for your food. If your menu heavily features items such as potatoes or pasta, you can usually buy these items in bulk for a much lower cost than you would pay when purchasing individually. Visiting food wholesalers is usually a good solution for buying food in bulk and reducing your total costs.
Finally, you need to closely examine your meals to make sure they are optimized for profitability. Be certain that your portion sizes aren’t too large. If customers are routinely leaving food on their plate, then it’s likely your portions are too big. You should also be sure that the main ingredient in your meal isn’t an expensive item. Constructing a meal primarily from an expensive ingredient can cause your costs to skyrocket. It’s also a good idea to limit the number of free items you’re giving away. If your food cost percentage is a long way from ideal, stop putting free bread and butter on your table.
Correctly Price Food at a Restaurant
There are almost countless factors that you need to consider if you want your restaurant to succeed, including the prices you are charging for your food. Profitable restaurants have almost always given a great deal of thought and attention to their pricing, and you should do the same if you want to stake your place in the restaurant industry. Fortunately, by keeping the right information in mind, especially your food cost percentage, you should be able to come up with prices that both you and your customers will love.