As a restaurant owner, you may find it challenging to set the price for every item on your menu, especially if you’ve never done it before, but the process is crucial to the success of your business. Price your menu too low, and you could end up with slim profit margins that make continued operation risky. Price items on your menu for profit solely, and you could alienate your customers. By considering a few important factors affecting how to price your menu, you can set prices that are fair for your customers and keep your business profitable.
Determining the Break-Even Point for a Restaurant
As you consider how to price menu items, you need to think beyond cost. Even though common formulas detailing how to calculate food costs in a restaurant base calculations on food costs alone, it’s important to know the cost of each item so you can calculate your break-even point. There are three types of costs you need to know to calculate your break-even point on any 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.
- Overhead – This includes all the 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 how to calculate food costs reliably. In a few cases, you can place words “Market Rate” on your menu. Many restaurants do this with lobster, for example, though you want to keep this practice to a minimum. You can mitigate this issue by designing a menu that balances foods that have fluctuating costs against items with stabler costs. This way, even if some food prices change, you still have a healthy profit margin on your restaurant 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. The high point on the price range is the maximum amount that customers are willing to pay for the item. While this is a subjective process, conducting market research on your target audience and analyzing the pricing of your competition can help you define your price range. With your price range set, you can choose an appropriate price designed to reap the highest return.
When you see customers demanding more of a particular dish, you gain valuable data on how to price that menu item. This high demand lets you charge higher prices that your customers are happy to pay. You can build demand through running ads for your restaurant on TV, on social media, and through other avenues to attract customers and increase your restaurant’s appeal. If you invest in a highly skilled chef, you can offer a menu that makes customers willing to pay a premium price. Look for ways that your restaurant can stand out by offering dishes that aren’t available anywhere else in your area.
Menu Pricing Tips
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. Avoiding whole numbers such as $10 in favor of $9.99 or $9.95 may be a trick, but it’s still effective, as is leaving off the dollar sign off the prices on your menu, instead opting for just the number. When people see a dollar sign, 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. Restaurant menu pricing software may help you make smart choices. Using an accounting system, such as QuickBooks Online, you can generate a Profit and Loss statement automatically. Learn how today.