We all understand that the general principle for running a profitable business is relatively simple.
You need to generate more revenue than you pay out in expenses.
This can be accomplished by charging the correct amount for the goods or services your business offers.
However, if you own or operate a restaurant, you know first-hand how difficult setting menu prices can be. Your goal is to provide customers with tasty food, great service, and good value, but you also need to make sure every item on your menu helps recoup your operating costs and then some.
Setting just the right menu prices boils down to having a thorough grasp of your costs and understanding how customers perceive your restaurant.
Food costs are the total costs of each ingredient used to prepare an item on a menu. To accurately determine food costs you must include everything from the main ingredient to the items that season (oils, salt & pepper, etc.) and garnish (parsley, etc.
To accurately calculate food costs, you need to know the exact cost for each ingredient and follow a consistent recipe each time you prepare the dish. We understand that food costs do fluctuate due to seasonality, availability, or other varying factors. We suggest that you use the highest possible ingredient cost when determining the prices if you rotate menu items with different seasons.
Once you have established a solid understanding of each menu item’s total cost, you can start to calculate the appropriate amount to charge. Food costs should be about 30-35 percent of your sales, depending on the type of restaurant you operate.
Other Cost Factors
Restaurants also incur a number of other costs that need to be covered by menu prices.
Common examples include:
• Labor costs: You need to account for the wages and benefits you pay your employees to prepare food, serve customers, and help operate the restaurant.
• Preparation costs: Not all menu items take the same amount of time and effort. The ones that take more work merit a higher price.
• Overhead expenses: Restaurants have a lot of overhead costs, such as rent, utilities, equipment, maintenance, marketing, and much more.
There will likely be other costs that are unique to your restaurant you’ll need to take into account. Just be sure you have insight into all your restaurant expenses, so nothing goes unaccounted for.
Determining Your Menu Prices
Once you have all your costs worked out, you can finally set your menu prices. They’ll need to cover all your restaurant’s costs and provide you with a profit. The next question is typically – How much profit is reasonable? You of course want to make as much money as possible but you don’t want to be labeled as an overpriced restaurant. Here are few factors to take into consideration:
• What type of restaurant do you operate? – People expect a meal at a fine dining restaurant to be expensive and look for more value when eating at a fast-casual restaurant. Be sure that your menu prices align with your customer’s expectations.
• What do your competitors charge? – Go around your community and see what similar restaurants are charging. It’s also an opportunity to learn what you can do better than your competitors so you can develop a loyal customer base.
• What makes your restaurant appealing? – Do you use local fresh and organic ingredients? Are you located next to a fun place such as Disneyland? Is there a beautiful view from your dining room such as an ocean view? Is your restaurant in a historic part of town? These small advantages that help attract customers allow you to have slightly higher menu prices.
Setting menu prices is a delicate balance and requires deep thought and cost analysis. But it’s an exercise that will set your restaurant up for long-term success so be sure to give your menu pricing the attention it deserves.
Our MCDA CCG advisors strongly encourage restaurant owners/leaders to consider each of these facts when pricing your menu and doing the calculation of costs. If you don’t already have previous experience in determining appropriate menu prices for your restaurant, the level of individual variation can make this a tricky process. If you find yourself with questions during this analysis, our team at MCDA CCG are more than happy to help.
Call our office in Placentia, Orange County, California, and we can work to provide solutions to best benefit your situation; whether this mean changing prices for individual items or the menu, from analyzing sales and profits due these changes, we can determine the best prices for your menu!
And remember, your sales and bottom line are your best indicators of success. Don’t wait, call us today!