Owning a restaurant is hard work. It takes creativity, a love for food, and some simple math skills. Determining your restaurant’s menu prices is where the math comes in. When first opening a restaurant, you will have to invest money to turn a profit. You know what they say, you gotta spend money to make money. Revenue will eventually come from food sales, but you will have to pay for food supplies, rent, utilities, insurance, and payroll for your employees upfront.
To maximize profitability, you will have to have some capital left over after paying for all these expenses. Calculating menu prices means taking all these factors into account and setting prices accordingly to determine your profit per dish. In this article, you will learn everything you need to know about creating a pricing strategy for your menu.
Budgeting Your Restaurant
Lots of restaurant owners use the “30/30/30/10 rule” when thinking about menu pricing strategies. This rule can be helpful when thinking about your ideal restaurant’s total costs overall.
- The first 30% refers to the cost of food. This includes the cost of ingredients for each dish on your menu, cooking oil, spices, beverages, condiments, and so on.
- The second 30% refers to your restaurant’s overhead. This includes your rent, equipment, repairs, insurance, utilities, etc.
- The third 30% refers to the cost of having employees. These labor costs include payroll, unemployment insurance, and even possibly health insurance.
- The 10% refers to the profit you hope to make after all your other costs are taken care of. However, this can be adjusted by raising your menu prices to give yourself a higher profit margin. This could be acceptable if you’re located in a popular area or have a very popular restaurant.
If a restaurant is running smoothly, the finances should balance out in accordance with the 30/30/30/10 rule. 30% of funds are being spent on food costs, 30% on overhead, 30% on employees, and 10% profit. Keep this helpful rule in mind when thinking about your restaurant’s overall budgeting.
Determining Food Cost
When you want to add an item to your menu, you must first determine the wholesale cost of goods for each food in your item. The food cost is the amount of money spent on the item. In other words, how much do the ingredients cost per serving? Let’s break it down.
First, create a spreadsheet for determining your food cost. This keeps everything clean and easy to see. Now, add up all the costs that go into the dish you are pricing out. For example, if you are adding BLTs to the menu, you would need two slices of bread, four strips of bacon, one large piece of lettuce, and two slices of tomato.
Next, you need to calculate how much each portion of ingredients costs. If a whole loaf of bread costs $6.00 and 12 slices of bread come in the loaf, the cost of one slice of bread would be $0.50. You determine this by dividing the price for the whole loaf ($6.00) by the number of slices in the loaf (12 slices) to get the price per slice ($0.50). If you need two slices to make a BLT, then the cost of bread per BLT would be $1.00.
Calculate each ingredient and then add them up to determine the cost of one BLT. If the BLT comes with fries or a side, be sure to include this in your calculation.
|Ingredient||Wholesale Cost||Price Per Serving|
|Bread||$6.00 for a loaf of 12 slices||$6.00 /12 slices = $0.50 x 2 slices = $1.00|
|Lettuce||$2.00 for roughly 25 leaves of lettuce||$2.00 / 25 leaves = $0.08 per 1 slice|
|Tomato||$1.00 per roughly 4 slices||$1.00 / 4 slices = $0.25 x 2 slices = $0.50|
|Bacon||$6.00 per 1lb of bacon||$6.00 / 4 (roughly ¼ lb of bacon) = $1.50|
|Total price serving = $3.08 per BLT|
Once you have this number, you have successfully calculated the ideal food cost per serving (although you should also take into account variations in the market price for certain items). This will account for 30% of the menu price for your sandwich. You will still need to account for labor, overhead, and profit to determine the menu price for each item.
How To Calculate Your Menu Price Based On Food Cost Percentage
Now that you know the food cost per item, you can calculate the menu price using this equation: Price = Raw Food Cost of Item / Ideal Food Cost Percentage.
Remember, your ideal food cost is 30% of the item’s menu price because that is the ideal percentage of funds to be spending on food costs. Anywhere between 25% and 35% percent is also okay. Many restaurant owners like to try and keep food costs as low as possible to increase their profit.
Let’s go back to our BLT for an example: Menu Price= $3.08 / 0.30 (or 30%). Therefore, the base price for your menu would be $10.27.
How to Calculate Your Menu Price Based On Your Ideal Gross Profit Margin
Sometimes, calculating your menu costs based on food cost percentage has some disadvantages, as it doesn’t take into mind the bigger picture—your 30/30/30/10 overall budgeting. If you would like to take more factors into account and better predict your bottom line, try using your gross profit margin to calculate menu prices.
First, choose your gross profit margin—how much you earn, as a percentage, per dish. If you’re just starting out, then maybe your profit margin is 10% (like in the 30/30/30/10 rule). Or maybe you are a more established restaurant with lots of regular customers. Your profit margin could be much higher. Think 40% to 75%. Either way, you can calculate your menu prices using the following equation: Ideal Gross Profit Margin = (Menu Price – Food Cost) / Menu Price.
For an example, let’s return to the BLT and use a 75% profit margin. For simplicity, we’ll represent the menu price as “x.”
0.75 = (x – 3.08) / x
First, you must multiply both sides by x.
0.75x = x – 3.08
Next, subtract x from both sides.
0.75x – x = x – 3.08 – x
Which leaves you with:
-0.25x = -3.08
Finally, divide both sides by -0.25 to get your menu price! Which, in this case, is $12.32
You may also use this same equation to determine the profit margin of an existing menu price by simply plugging in your existing price and your food cost.
Menu pricing isn’t only determined by food costs and profit margins, there are several other factors you must consider. After all, a restaurant often provides more than just food. You must think about what else your restaurant does for customers.
Do you provide delivery? Oftentimes people are willing to pay a bit more for convenience. If you deliver, you can increase your profit margin accordingly. Similarly, a restaurateur with a sit-down restaurant, particularly in fine dining, could increase your prices to account for the experience of dining in your establishment. If your restaurant is fast-casual and your customers appreciate a good deal, maybe you want to keep prices low to accommodate your customers’ desires.
Your restaurant’s location is also a factor when determining your menu prices. If your restaurant is on the beach with an ocean view, you can charge a higher price per menu item just for the ambiance. Just think about any time you encountered different prices for the same item. If you buy a beer at the grocery store, it is typically about $3. When you buy that same beer at a restaurant, it may be $6, and at a football stadium, it could be upwards of $12! Pricing and markups have a great deal to do with context, so know your worth and price accordingly.
A good place to start, when comparing prices, is to look at the menus of similar restaurants near you. This will give you a sense of what people are willing to pay for any individual food item. It may also give you an idea of what is available nearby. Now you can differentiate your restaurant with unique menu items that could very well become your signature item.
If you want to up your game, you might consider hiring a company like Nextbite to help you develop competitive menu pricing methods. Nextbite uses market data to help restaurants develop menu prices, menu design, restaurant business concepts, and so much more.
There are several different ways to determine the menu pricing that is appropriate for your restaurant. Whether you decide to base your pricing on food costs or profit margins, make sure that you are charging enough. Remember that your restaurant provides people with more than just food.
Most of all, know your customer. If you know your customer well, you will easily be able to decide what kind of food, atmosphere, and pricing your customers can afford. Make sure you account for all the costs that go into running your restaurant, such as overhead, employees, and food costs. With just a little bit of basic math, your menu will be priced for success in no time!