Opening a restaurant is both exciting and stressful. As you prepare to welcome your first customers, you need to decide what foods you will be serving, how you are sourcing them, the atmosphere around them, and more.
One of the most important decisions you’ll make for your restaurant is how much your menu items should cost. Your price ranges will determine the number of customers who can afford your food and whether you are able to make a profit.
Here’s how to figure out menu item costs that are fair to both you and your customers.
What to Know Before You Price
Before you start calculating menu prices, there are several things you need to learn and take into consideration. First, consider how you’re sourcing your food and the costs related to it. There are a couple of expense types you should consider:
- Direct costs: The money you spend on the food itself plus anything related to your portion sizes or waste.
- Indirect costs: This is the money you spend on the customer experience that doesn’t relate to the food itself. Examples are ambiance, lighting, and music.
1. Direct Costs
Direct costs are the costs of sourcing ingredients, transporting them to your restaurant, cooking with them, and disposing of them.
If you source apples from an orchard, the direct costs associated with it are the cost to purchase the apples, the cost of gasoline to transport the apples from the orchard to the restaurant, the cost of ingredients that enhance the apples, and the cost associated with trash pickup for any uneaten parts of the apple.
Volatile food costs are prices that evolve with each season, with the in-season ingredients being more widely available and less expensive.
2. Indirect Costs
Indirect costs are anything associated with a customer’s meal that doesn’t involve food.
When they go to eat their apple pie, are they going to be surrounded by classical or modern music? Will there ever be live musicians for whom you’ll need to provide space and equipment?
What about the lighting? You could choose mood or dimmable lighting to make it interesting or choose bright bulbs that ensure you and your customers have an extra-clear view of everything on their plate.
Labor expenses also fall under this category, and the more involved a dish is for a chef, the higher you may want to raise the price to fairly accommodate the time and effort put in.
Another indirect cost is your service expense. When you expect your wait staff to prioritize extra-attentive service, you can raise your menu costs due to providing that service. The less your staff interacts with your patrons, the less you can charge.
Overhead Costs
Now that you’ve considered both your direct and indirect costs, you’ll need to consider your overhead costs.
Overhead costs are the expenses it takes to run your business, such as marketing, real estate, and advertising.
Pricing Boundaries
Your last consideration is how much you can charge versus how much you should charge.
Consider the highest and lowest possible cost for a menu item and use market research to determine a price that your customers are willing to pay for it.
Pricing Formulas
Now that you have all of those costs in the back of your mind, you can start seriously looking into what each dish costs your customers.
There are several formulas out there to determine the best price. Here are a couple of the most popular.
1. Pricing by Portion
Pricing by portion means you divide the cost of an ingredient by the portion served. When you price by portion, you can easily come up with a fair price for each dish to make a profit without giving an advantage to your competition.
The first thing you’ll want to do is look at the ingredients of each whole dish. For example, for a spaghetti dish, you’ll want to think about each part of the dish, including the pasta, the sauce ingredients, the meatball ingredients, and any sides that come with the dish.
Next, look at the price of the bulk order for each ingredient. For meatballs, say you get 100 pounds for $4 a pound. That’s $400 for your ground beef order. Then, consider how much of this meat goes into the meatballs for each dish.
If a quarter-pound (0.25 lbs.) of meat goes into your meatballs for each dish, you’ll divide that amount by the total weight of your purchase and then divide the price of it by that amount.
100 divided by 0.25 is 400. Divide the $400 cost of the beef by this number and you’ll come out with a price of $1 for your meatballs in that dish.
Make the same calculation with the ingredients to determine their portion of the overall cost, and you’ll be able to fairly calculate the amount the dish costs upfront to use as a starting price.
2. Pricing by Competition
You can also determine your menu prices by the prices of your competitors, taking into account the general market price created by them.
You could price your items the same as your competition in order to even the playing field and draw customers in to try your recipes for the taste, thus giving you popularity for having a superior product.
If you price your recipe slightly lower than the competition, you’ll attract customers looking for a good deal.
There is an advantage to pricing your items slightly higher than your competition, as your customers will unconsciously see your product as the higher-quality option.
Pricing Your Menu
Your menu prices are some of the most important decisions you’ll make when opening your own restaurant. By tracking your costs, evaluating and planning your portions, and knowing your market well, you can make the optimal decisions for your business.
Comments are closed.