Restaurant menu pricing plays a crucial role in making your business a success. If you charge too much for your menu items, then you probably won’t attract enough customers to generate a profit. On the other hand, charging too little for your foods and beverages will only help you make money when you sell a huge number of items.
Before you can set prices that will help your restaurant thrive, though, you need to learn how to calculate:
- food cost for a recipe
- food cost per meal
- & your Costs of Goods Sold (COGS)
Food cost is simply the net cost of food ingredients in your current inventory. When it’s expressed in percentages, the food cost is calculated by dividing the net food purchases by the restaurant’s net sales. Let’s get started with some basic restaurant menu pricing calculations that will put you on the right track.
Know How to Calculate Your COGS
Knowing how to calculate your COGS will help you understand your restaurant’s overall expenses and revenues. When done properly, calculating COGS can also help
- you reduce waste
- and stock the inventory that you need for the week
Luckily, it’s very simple to know your COGS. Start with your current inventory, add any additional purchases, and subtract your ending inventory. That might sound confusing, so let’s create a real-life example:
On Monday morning, you have $5,000 of inventory in your kitchen. On Wednesday, you buy $4,000 in additional inventory. When you close on Sunday night, you have $3,000 of inventory left in the kitchen. When you add and subtract the numbers, you get the actual value of the food ingredients that you sold during the week.
In this case, you would calculate:
$5,000 + $4,000 – $3,000 = $6,000
That means you sold $6,000 of inventory during the week.
Use COGS to Help With Restaurant Menu Pricing
Knowing your Costs of Goods Sold (COGS) can help you set menu prices that will increase your sales and profits. The following equations will give you a deeper understanding of menu pricing economics.
Costs of Goods Sold/Food Sales = Food Cost
Dividing your COGS by your food sales gives you your overall food cost. For example, if your COGS equal $6,000 and your total sales value of your food (that is the total value of the menu prices) equal $18,000, then you get:
$6,000 / $18,000 = 0.33
That brings your food cost percentage to 330%. Generally speaking, the ideal food cost percentage for a quick service restaurant is 25%, whereas the ideal food cost percentage for a gourmet restaurant is 35%. Knowing your overall food cost makes it easier to choose effective food pricing strategies. You can also use the formula to calculate the food cost for a recipe.
When you break down your recipe into individual ingredients, you can decide whether you’re charging an appropriate food markup for the item. Keep in mind that lowering the cost of an expensive ingredient can increase your profits. Knowing how to increase menu prices will also boost your profits.
How to Calculate Food Cost Per Meal
Learning how to calculate food cost per meal is easy once you know how to determine your food cost. Instead of applying the equation to all of your food, just use the prices of individual menu items. For example, if the COGS for a sandwich that you sell for $6 is $2, then you can evaluate the food cost per meal as:
$2 / $6 = 0.33
That means your food cost per meal percentage comes to 330%.
Finding a Menu Costing Formula That Works for Your Restaurant
Now that you know how to calculate the food cost per meal and item, you can focus on finding a food markup that works for your restaurant. Start by dividing your COGS by your target food cost percentage. The following examples will show you how this determines your menu price.
If the COGS for a sandwich comes to $2 and you have a 20% target food cost percentage, then you divide the COGS by the target food cost percentage to get your menu price. In this case, your menu price comes to $10. COGS / Target Food Cost Percentage = Menu Price
$2 / 20% = $10
$2 / 30% = $6.67
$2 / 40% = $5
Deciding How Much to Charge for Alcoholic Drinks
Selling alcohol gives your restaurant a remarkable opportunity to increase its profits. The average markup on alcohol falls between 30% and 50%, which is much higher than you can expect to earn from most sandwiches and salads. The amount that you charge, though, varies depending on the perceived value of the drink. If a domestic beer costs your restaurant $1, you can sell it for $4.
When it comes to import and craft beers, though, you can charge higher prices because people think that they have higher values. When you buy a bottle of craft beer for $2, expect to sell it for about $6. People who like to drink craft brews at dinner don’t mind spending a little more. If they did, then they would stick to domestic beers that cost less.
Restaurant wine pricing can help you earn even more money in some markets. Most people still see wine as a high-class beverage, so they will spend more money on a glass or bottle than they would spend on beer. Be careful about marking up your wine by more than 30%, though. Unless you have specialty wines, a lot of your customers will avoid wine that costs too much.
Setting Reasonable Menu Prices That Will Attract Customers
The menu costing formula helps you set prices, but you need to stay within a range that will attract customers. Unfortunately, a food profit margin formula can’t determine how much money you will make by the end of the week. When setting menu prices, consider things like:
- The average cost of a salad in your area
- The sandwich pricing strategy and prices that your competitors use.
- The average cost of dinner at a restaurant similar to yours.
- How your lowest food cost menu item might affect customer behaviors.
The pricing strategy for fast food restaurants isn’t the same as those for high-end restaurants. Fast food restaurants rely on high daily sales. High-end restaurants don’t expect to sell as many meals, so they charge higher prices. In return, diners get delicious foods prepared by expert chefs.
The profit margin for your restaurant menu items needs to compete with those of nearby competitors. They also need to give you enough to cover your operating costs and earn profits. Restaurant menu pricing is a bit of a guessing game because you have to determine how much your customers will pay for your food. Many restaurants start with their projected prices, but they adjust their restaurant menu pricing as they learn more about their clientele.