Menu pricing is a crucial step when opening a restaurant, hawker stall, cafe, or what have you. It’s essential simply because it’s where owners derive most of their income.
Most owners make the mistake of arbitrarily pricing each dish on their menu. They run the risk of overcharging or undercharging their customers.
Don’t just think of menu pricing as something you can skip over in your F&B business. To get it right, you must follow a proper menu pricing strategy that sustains your restaurant’s profitability and sustainability.
The menu pricing strategy also allows you to determine your restaurant’s demographics, how often they visit, if they will patronise your establishment, and how much your restaurant will profit.
This article discusses no-fail menu pricing tactics to help you build a solid and profitable menu.
1. What Is Menu Pricing?
Menu pricing refers to carefully calculating the costs of preparing dishes or items on your menu. It’s based on many factors, not just the ingredients.
Menu pricing also considers food costs, overhead expenses, labour costs, and the guest’s capacity to pay for the menu.
Ultimately, your menu pricing or selling price must be calculated to make up for the costs and generate profit for your restaurant.
2. Things You Should Consider With Menu Pricing
Several factors impact menu pricing, no matter where you are.
For example, pricing factors for a hawker stall in Singapore may be similar to that of a small kiosk in Malaysia. However, the magnitude of those factors varies.
Knowing all of the above, it’s crucial that you painstakingly account for all of these factors before arriving at a tentative price. They’ll also help calculate your gross profit margin or even figure out which menu pricing strategy to implement.
Without further ado, below are the following factors to consider in your menu pricing strategy:
- Direct costs
- Indirect costs
- Overhead expenses
- Seasonal expenses
- Customer psychology
Direct Costs
Direct costs refer to the resources that go into a particular food item or product in your restaurant. Essentially, it is the cost of all the raw materials or ingredients that make up a dish.
For example, the direct costs of a laksa would come from the costs of the price of the rice noodles, chicken or seafood toppings, garnish, coconut milk, etc.
Direct costs are further subdivided into three:
- Buying price of the ingredients – You should not include the cost of transporting the ingredients in your selling price. It must only consider the price of the raw material which forms your restaurant stock or inventory.
- Food waste costs – Food waste also directly affects your inventory levels. You must also include the cost of wasted food or ingredients.
- Portion sizes – How you portion your food should also be factored into the direct cost of your raw materials.
Generally, higher direct costs translate to higher menu prices. It also follows that higher direct costs will lead to a lower profit margin.
Indirect Costs
Indirect costs exclude the cost of your dish’s raw ingredients. Indirect costs are simply those that come from the equipment or utilities needed to prepare a dish.
In a restaurant, these may refer to the price of silverware, cutlery, furnishings, lighting, stoves, fryers, etc.
Indirect costs also include labour expenses. This means your menu pricing is also affected by the salaries of your restaurant staff, be it the waiter, cashier, sous chef, etc.
Overhead Expenses
Overhead expenses are different from indirect costs. If indirect costs refer to the cost of preparing the menu item, overhead expenses are directly tied to the restaurant.
Some overhead expenses include rent, advertising and marketing budget, renovations, utilities, etc.
Overhead expenses are often volatile, so restaurant owners tend to find ways to lower their overhead costs when planning their menu pricing.
For example, a restaurant may transition entirely into a cloud kitchen, effectively minimising overhead costs. Some owners also resort to other strategies, such as buying energy-efficient equipment and implementing waste-free policies.
Seasonal Expenses
As the name suggests, seasonal expenses aren’t fixed. They are determined by market fluctuations and must also be factored in when calculating menu costs.
Successful restaurant owners must devise an effective menu engineering strategy to create a balanced menu and offer dishes at stable prices.
Similarly, too much of the same can drive you away from your target audience. It might do you well to create a menu that includes popular food trends and classic restaurant staples.
Seasonal expenses will most likely be the cost of ingredients, like meat, fruits, and vegetables. The market for these items tends to fluctuate depending on the seasonality and availability.
Customer Psychology
Customer psychology isn’t something you can quantify, but they have a significant impact on your menu pricing.
When deciding the cost of each food item, you must also tap into the psychology of your target audience. Set your menu costs in a way that would increase your gross profit margin and would have customers coming back.
If you price your menu items too high, you might drive away a large chunk of your customer base. Alternatively, pricing menu items way below their market value might tell customers your food isn’t that good.
We’ll discuss how you can arrive at reasonable menu pricing with a good mix of all these factors.
3. Menu Pricing Concepts To Understand
If you want to get your menu pricing strategy down to a tee, be mindful of these concepts:
Food Cost Percentage
Food cost percentage refers to the ratio of how much money your restaurant spends on beverage and food ingredients (food inventory) to the revenue they produce when sold as menu items (Food sales).
Food Cost Percentage = (Total Costs/Food Sales) x 100
The ideal food cost percentage will fall between 25% to 30%.
Gross Profit Percentage
Gross profit percentage, also known as the gross profit margin, is how much you earn (total sales) in relation to the cost of making the dish (cost of goods sold/COGS).
Gross Profit Percentage = [(Food Sales – Cost of Goods Sold)/Food Sales] x 100
Net Profit Percentage
Also referred to as the net profit margin, the net profit percentage is how much your restaurant profits after all expenses are paid.
Net Profit = Food Sales – Cost of Goods Sold – Total Fixed Costs
Net Profit Percentage = (Net Profit/Food Sales) x 100
4. How To Compute Your Menu Prices
Here’s how you can set a base price for every item on your menu:
Step 1: Set an ideal food cost percentage. You can set the value anywhere between 25% to 30%. Many restaurants try to lower their food costs by choosing local suppliers and finding affordable, high-quality alternatives.
Step 2: Figure out the raw food cost of the menu item. Let’s go back to the laksa example. Your total raw food cost would be all the ingredients needed to prepare the dish, even the garlic and ginger. In production, the raw food cost is the same as your COGS.
Step 3: Compute the menu price using this equation:
Menu Price = Raw Food Cost/Food Cost Percentage
For example, your ideal food cost percentage for a bowl of laksa is 30%, and your raw food cost is 2 SGD. Compute your menu item price like so:
Menu Price = 2 (raw food cost) / 27 (ideal food cost percentage) x 100
The price for this particular menu item would be 7.41, meaning you are selling the laksa for 7.41 SGD.
5. Other Menu Pricing Strategies
There is no single method to price your menu items so that you earn profit from them. You can use these tactics and figure out which fits your business model the best:
- Traditional Pricing – Traditional menu pricing involves pricing your items based on any of the following:
- Gut feel – Prices are based on how you think each item should be valued.
- Competitor pricing – Prices are based on what your direct competitors are doing.
- Customer psychology – Prices are determined by putting yourself in your customers’ shoes. For example, would you buy a 7 SGD laksa or look elsewhere to find a cheaper bowl? Is the price justifiable for a regular serving, or would it better fit a large serving?
- Cost Plus Markup Pricing – In this pricing strategy, you add a markup or extra amount on top of your raw food costs.
- For example, if it costs 2 SGD to make a regular bowl of laksa and you want to mark it up by 50%, the new price would be 4 SGD. This is the most popular menu pricing method thus far, and many restaurants depend on it due to its simplicity.
Conclusion About Menu Pricing
Menu pricing can seem tricky to approach. However, it’s quite simple once you get the hang of it.
You are free to execute any menu pricing strategy that fits your needs. Do you want to price your menu items based on how your competitors do it? Or do you want to set an ideal food cost percentage?
It ultimately depends on the kind of dishes you serve and all other expenses. You may even utilise a SWOT analysis to compute your menu pricing and determine the viability of your F&B business.
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Frequently Asked Questions About Menu Pricing
What Menu Pricing Strategy Do Restaurants Use?
The cost-plus pricing strategy is popular across restaurants. In this method, the owner accounts for all expenses that go into a plate or dish.
These expenses include:
- Fixed costs
- Ingredients cost
- Salaries of waitstaff and kitchen staff
- Rent
- Utilities
How Many Items Should You Include In A Menu?
Ideally, there should be 5-10 items in each menu section, with most of them belonging to the entrees.
How Do You Price A Buffet Menu?
Buffet menus are priced by taking the average number of customers daily and dividing that into the daily food cost of the buffet.
What Is Food Cost Control?
Food cost control is the practice of reducing business expenses to increase profit margins.
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