If you’re not using data and pre-determined restaurant KPI to come up with menu prices, your restaurant or bar profit margin is suffering. All successful bars and restaurants use data to price their menus-even with their Valentine’s day promotion ideas for restaurants. They determine what they want their menu prices to achieve, then the price to achieve it. That means knowing your business’s numbers inside and out. It’s the only way you can orient your menu to support your financial goals.
Many restaurants conduct a swot analysis to gain information about competitors and the local market. This information is useful for deciding on food menu prices. Check out a restaurant swot analysis example to get ideas for doing one. Here’s how to price a menu, complete with a menu and food price formula and some thoughts about buffets.
How Do You Price Your Food Menu?
There are two ways how a menu item’s selling price is determined. They’re food cost and gross profit margin. Both methods involve having a goal and working backward to determine the price that will get you there.
How to Price Restaurant Food from Food Cost
The first and most common way to price a food menu is to start with each item’s ideal food cost and price to achieve it.
Food cost is the percentage of an item’s menu price spent to acquire and prepare that item. Most restaurants run a food cost of between 28–35%. That’s why figuring out how to reduce costs in a restaurant is such a high priority. The lower the food cost, the higher the profit and the happier you'll be with your statement.
Below we’ll walk you through the restaurant food pricing formula for how to find menu price using food cost.
Formula for Pricing Food by Food Cost
Planning out your menu prices shouldn't be done without performing a few calculations. The food price formula we'll share with you below is key in hitting the sweet spot that gets you the most sales for the highest revenue.
Here's how you do it:
Step 1: Identify desired food cost percentage.
Let’s say you’re trying to price an onion ring appetizer. You decide right off the bat that you want the food cost to be 20%. That’s quite low and quite profitable. Let’s see if a menu price to achieve a 20% food cost would be prohibitively expensive for your guests.
Step 2: Determine the cost of goods sold (COGS) of your onion ring appetizer.
Look at your invoices to figure out how much you paid for the raw materials that go into the onion ring appetizer. This is easy if you’ve used a bar inventory software like BinWise Pro to upload all your invoices digitally.
Looking at our records, we find that the COGS of a single onion right appetizer is $3.00. That includes the onions, the batter, and the dipping sauce.
Step 3: Calculate how to price food items.
Here’s the formula for food cost formula menu pricing:
Price = COGS / Ideal Food Cost
Price = $3.00 / .20
Price = $15
With raw materials clocking in at 3 bucks, you’ll need to price your onion ring appetizer at $15 to achieve a 20% food cost. That’s a tough sell if you’re not an upscale concept.
But pricing a menu item by food cost isn’t the only way to do it.
How Do You Determine Menu Price from Gross Profit?
Gross profit margin is the percentage of total sales that’s profit. The sales above your break-even point, in other words. If an onion ring appetizer has a gross profit margin of 25%, that means 25 cents of every dollar spent to make the dish (including raw ingredients and labor) is profit. Read more about labor cost and prime cost.
If you want to better understand how your menu sales factor into your bottom line, this may be the menu pricing method for you.
Formula for Pricing Food by Gross Profit Margin
Step 1: Determine ideal gross profit margin.
Choose the gross profit margin you want for your menu item.
Restaurant gross profit margins vary wildly. They can be as low as 20% and as high as 80%. The real bottom line is the net profit margin, which factors in all restaurant operations expenses.
Step 2: Determine the COGS of the menu item in question.
Just like the food cost method above, we’ll need to use the raw ingredient cost in this food pricing formula. In our onion ring appetizer example, this is $3.00 for onions, batter, and dipping sauce.
Step 3: Calculate how to price food items.
Here’s the formula for pricing food by gross profit margin:
Gross Profit Margin = (Menu Price - Raw Food Cost) / Menu Price
The equation solves for gross profit margin, not menu price. Which means a little experimentation is required. Let’s say we want a 70% gross profit margin on our onion ring appetizer. We have to plug in a menu price and see what happens. Let’s try $8.
Gross Profit Margin = (Menu Price - Raw Food Cost) / Menu Price
Gross Profit Margin = (8 - 3) / 8
Gross Profit Margin = 62.5%
Close! How about 10?
Gross Profit Margin = (10 - 3) / 10
Gross Profit Margin = 70%
Bingo!
$10 will get you a gross profit margin of 70% for your onion ring appetizer with a raw material cost of $3.
If you have an existing menu, you should calculate the gross profit margin for each of your menu items. This is an analytical task that software like BinWise Pro can help make short work of. Find items with low margins and think about new pricing strategies.
Buffets use the same principles when determining their food’s selling price.
How Do You Price a Buffet Menu?
Buffet’s have it easy when it comes to costing out their restaurant menus. They only have one menu item.
Here’s how it typically works:
- Assume each visitor will eat about one pound of food.
- Calculate the overall raw material cost of one pound of food.
- Price to hit an ideal food cost or gross profit margin.
Let’s look at an example. Consider a buffet that calculates one pound of food has a COGS of about $4. This includes everything from cheap potatoes to expensive meat. It’s an average of everything on the buffet line.
If the buffet wants to hit a 25% food cost:
Price = COGS / Ideal Food Cost
Price = $4.00 / .25
Price = $16
But what if the buffet wants to hit an 80% gross profit margin? They crunch the numbers with a $16 price:
Gross Profit Margin = (Menu Price - Raw Food Cost) / Menu Price
Gross Profit Margin = (16 - 4) / 16
Gross Profit Margin = 75%
Hmm, not quite there. Let’s increase the price to $20.
Gross Profit Margin = (20 - 4) / 20
Gross Profit Margin = 80%
Ding ding ding! $20 will give this buffet an 80% gross profit margin.
The hardest part about how to price a buffet is calculating the average COGS per pound, or the raw food cost. Buy after that, it’s just one food pricing calculation.
So that’s how to calculate food prices for restaurants. Now let’s look at how to price a co*cktail menu.
How Do You Price Drinks in a Restaurant?
If you’re looking for information on how to price drinks in a restaurant, you’ve come to the right place.
Check out our wonderful resources below:
- Alcohol pricing. A guide to using pour cost to set profitable prices on co*cktails and liquors-including types of rum.
- Wine price. A walk through wine bottle markup and how to profitably price your bottles.
- How to price wine by the glass. A wine by the glass program can be a massive moneymaker. Here’s how to price one.
- Beer pricing for bars. Bottles, drafts, and craft beer pricing.
Once you’re familiar with using a liquor cost calculator, then it’s off to the races.
Strategies for How to Price Restaurant Menu
Food cost and gross profit margin are internal factors. You must also consider external factors like your competition and your clientele. And finally, trying your hand at menu engineering always helps.
Here's how to determine selling price for restaurant:
Competitor Pricing
You have to look at nearby competitors with similar concepts and menus. While you may calculate the perfect price based on your food cost … your competitor may have a lower food cost. Their pricing may put pressure on you to lower your price to remain competitive. Don’t make the mistake of thinking your bar or restaurant exists in a vacuum.
To make sure you’re getting the best deals possible from suppliers, use a perpetual inventory system like BinWise Pro. You can send POs directly to suppliers, track cost history, and make sure you’re always getting the best deal possible.
Demand Pricing
You may have a menu item that’s flying out of the kitchen. While that’s encouraging, it may also be a sign that the price is too low. Often, from a profit standpoint, you can make up for what you lose in volume with an increase in margin.
The only way to know is to experiment with and iterate on your pricing strategy. And if you’re using a QR code menu, you don’t have to worry about paper costs.
Psychological Pricing
There’s a story in Robert Cialdini’s influential marketing book Influence that illustrates an aspect of psychological well.
A jeweler couldn’t get rid of a certain type of necklace. She kept discounting them and discounting them. Nothing. Then one day she went out of town and left a memo to her staff to price the necklaces as 2-for-1. The staff member misunderstood the memo and doubled each necklace’s price. They sold out of necklaces.
Higher prices can communicate higher quality, and vice versa. If you have the right kind of bar or restaurant concept, you can get away with higher prices. People actually expect it and may be suspicious of lower prices. Delivering on quality expectations is an important part of how to improve customer satisfaction in restaurants.
Menu Engineering
Menu engineering is the science of making your most popular menu items your most profitable and vice versa. It involves the consideration of types of menu layout, formatting, and prices.
The goal of all menu engineering is twofold:
- It lowers the food or liquor costs of your top-selling menu items or most popular co*cktails (using a standardized recipe helps).
- It makes profitable, low-cost menu items more visible and appealing (using bar and restaurant marketing tactics like happy hour ideas and bar promotion ideas). Just make sure you know what is happy hour and the best happy hour times.
This is typically done through in-depth analysis of costs, bar profit margin, sales patterns, and menu psychology. With historical sales data and pour cost reports available at the click of a button, bars and restaurants across the country rely on BinWise Pro for their menu engineering.Generally the chef and management will work together on this, but even the line cooks can help. You can include this in your line cook job description to make sure you hire people who are interest in menu engineering.
Frequently Asked Questions About Menu Pricing
Some other questions you may have about menu pricing and the food price formula include:
What should Icharge for menu items? The food price formula and other practices outlined in this article will show you the technical aspects of what to charge for menu items (whether a seasonal menu, a brunch menu, or year-round menu). For your bar or restaurant in particular though, it'll all come down to your profit margins. While these formulas and functions are all extremely useful, don't forget to factor your specific menu and profit situation into the equation.
Why is food cost important? Food cost, and understanding how it can affect your business, is important because without an understanding of food cost, you'll have trouble with growing your profits. You could have the best bar or restaurant, with great food and drinks, and a great atmosphere. If, however, you don't understand the food price formula and how to price your menu, your profits won't grow, and overall your business will be good, but it won't move forward.
To be honest, bars and restaurants across the country rely on BinWise Pro for all facets of their menu pricing strategies.
All menu pricing is data-driven. If you’re not using a beverage inventory platform like BinWise, your menu pricing isn’t specifically engineered for profit. And that may be why your restaurant balance sheet suffers. Don’t become part of the restaurant failure rate. Use BinWise Pro.
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