Setting the price for every item on your restaurant’s menu can be challenging, especially if you’ve never done it before, but the process plays a major role in the success of your business. Price your menu wrong and you could end up with low prices that leave only slim profit margins, or prices so high that they alienate your customers. By considering a few important factors, you can set prices that are fair for your customers and keep your business profitable.
Determining the Break-Even Point
Your menu pricing isn’t all about cost, so you should ignore the all-too-common formulas for calculating prices based on food costs alone. However, it’s important to know the cost of each item so you can calculate your break-even point on it. There are three types of costs you need to know to calculate your break-even point on a restaurant item:
- Direct Costs – These include the costs of any ingredients you use to make the item. For example, with a burger, your direct costs include the bun and the beef, plus any toppings, condiments, and seasonings that you put on.
- Overhead – This includes all your costs to keep your restaurant running and serve the item to a customer, such as employee salaries, rent, and utilities.
- Prep Work – Even though you include payroll in overhead, you also need to factor in the additional cost of items that take a longer-than-average time to prepare.
You may also want to add indirect costs, such as those for marketing campaigns or other types of advertising. Once you have all these costs down, add them together to determine your break-even point for every item on your menu.
Fluctuating Food Prices
If you’ve ever seen how much food prices can change, you may be wondering what you’re going to do if the direct costs of a menu item suddenly go up. For the most part, you just need to bite the bullet, as you can’t change your prices with every change in food cost. You can put “Market Rate” next to select menu items that have large pricing fluctuations restaurants often do this with seafood, such as lobster. However, it’s best to keep this practice to a minimum. The best way to mitigate this issue is designing a balanced menu that includes both foods that have fluctuating costs and items with stabler costs. This ensures that even if some food prices change, you’re still making a profit on most of your menu items.
Setting the Price Range
When you know the break-even point of an item, you can set a price range for it. The low point on the price range is the minimum amount where selling the item is worth your while. That could be a 10% profit, a $10 profit, or whatever you decide. The high point on the price range is the maximum amount that customers are willing to pay for the item. While this is subjective, you can get an accurate idea of it by conducting market research on the customers you’re targeting and by analyzing the pricing of your competition. With your price range set, you can choose an amount within that range.
More demand for your items lets you charge higher prices without your customers feeling gouged. There are many ways to build demand, although some depend on the type of restaurant you’re going for. You could run ads for your restaurant on TV, on social media, and through other avenues to attract customers and increase your restaurant’s appeal. Another option is to invest more money in a highly skilled chef. If your restaurant can provide food that is cooked much better than the competition’s, then you can charge more for it. Look for ways that your restaurant can stand out and offer something that isn’t available anywhere else in your area.
Psychological Pricing Tricks
Profit margins can be narrow in the hospitality industry, so it’s important that you maximize your return on every menu item. While psychological pricing tricks may seem silly at first glance, they can help your restaurant get the most money out of each transaction. The trick almost everyone knows is avoiding whole numbers, such as 10, and instead going with something like 9.99 or 9.95. Even if most people understand that this is a trick, it’s still effective. To make it work even better, don’t include a dollar sign with your prices, instead opting for just the number. When people see a dollar sign if front of a number, it reminds them that they’re spending money. Including one very expensive item on each page of your menu is a great way to make the rest of the items look less expensive in comparison. Pricing can make or break your restaurant. Start by adding up all the costs involved with a menu item to calculate its break-even point, and then set its price range. See if there are any ways that you can increase demand so you can charge more for your items. Once you have a clear idea of the price you want to set for each of your menu offerings, use a few psychological pricing strategies to boost your profits.