Restaurant Business Basics: How to Price Your Menu

There are many factors which determine the success of a restaurant but perhaps none is quite so critical as food pricing. As food will be the only source of revenue for your business, the prices you charge for food must be able to pay for everything within your commercial kitchen. The raw ingredients, the staff, the preparation, the utilities... your food must be priced to keep you afloat while hopefully still turning a profit.

Of course, there's a flip side to food pricing: according to the basic principles of supply and demand, people must be willing to pay the prices you ask. So, pricing a menu involves walking a tightrope: charging enough money to keep yourself in business without over-charging and driving your patrons to other establishments.

In this guide, we’ll break down the basics of how to price your menu. We can't guarantee your success, but we can help you get off to the right start!

The 4 Principles of Effective Menu Pricing

I.  Have A Food Cost Goal & Commit To it

The single most important concept in menu pricing is the food cost. Food cost is a percentage, representing the final price of the dish compared to the initial costs. Or, put another way, your menu pricing is determined by how much money you're paying for ingredients.

Here’s a simple example: if you're selling a sandwich for $8 and the raw ingredients of that sandwich cost $2, then your food cost is 25%. On the other hand, if the ingredients were $3, then the food cost percentage would be 37.5%.

The formula here is simple: ingredients / final price. You can also work it in the other direction. If you take ingredients / percentage, you get the final price: $2 / .25 = $8.

Food costs for restaurants will vary somewhat, but they are generally in the area of 25%-35%. Never go above 35%! Any higher, and you'll be risking your profits. Obviously, the lower the percentage the better, but you still don't want to risk over-pricing.

As a rule, more casual establishments such as lunchtime cafes will have food costs below 30%, while fancier or dinner-focused restaurants will go above 30%. Why? Because patrons at more expensive restaurants expect more amenities such as "free" bread or after-dinner mints and those must be factored into the food cost percentage as well.

What does this mean for you? Based on the type of restaurant business you're running you’ll want to pick a specific food-cost percentage goal then do everything possible to never exceed that goal.

II. Everything Counts When Determining Pricing

This is where many young restaurateurs go awry. They forget to fully-itemize all their ingredient costs, underestimating how much money it costs to serve a meal. As a result, their food cost percentage is higher than they realize, and they hemorrhage money without being able to fully account for why.

So, it’s vital to account for every single individual cost of making a meal. Consider a simple example, a cheeseburger:

One sesame-seed bun, top and bottom
One 1/4-pound beef patty
One pinch of salt (approx. 1/3g)
One pinch of pepper
One 10g cheddar cheese slice
One leaf of iceberg lettuce
Two tomato slices
One pickle slice
Sounds good?

No, we missed something: the sauces! That's something a lot of restaurant owners overlook. Your bookkeeping needs to even account for the individual 5g squirts of sauces put onto the burger - plus an average cost of the condiments provided at the customer's table. See how that could add up over time to be a big loss if not accounted for?

Other common ingredients which are typically overlooked include:

• Slices of lemon, for fish dishes or drinks
• On-plate garnishes, such as kale or parsley
• To-go sachets of sauce, or pats of butter
• Mints or candies at the hostess stand

In the case of items like mints or on-table condiments, just take an average cost and spread it out across the tallied costs of all your menu items. So, if a single mint typically costs 1c, go ahead and add 1c to every dish. If an average customer uses 5c in table salt, add 5c to every dish.

This leads to another vital and related topic: portion control. For these food calculations to be accurate, you must always provide the exact same portion sizes in every dish. If you serve a shrimp scampi with eight shrimp, your cooks must always include eight shrimp. No more, no less. 

Therefore, it's important to specify matters such as "one pickle slice" in your recipes and bookkeeping. The more precise you are, the better your business financials will be. Restaurants with sloppy portion control can greatly harm themselves by driving up the price of their dishes with extra ingredients.

Put all that information in a spreadsheet and remember to update it regularly whenever your ingredient costs change. That spreadsheet will be your bible when it comes to determining final menu prices.

III.  Keep Your Pricing Competitive

Pricing doesn't happen in a vacuum: it's determined in part by supply and demand.  After all, any restaurant owner would - if they could - push the food cost percentage down to 25% or even lower by jacking up the menu prices.  However, when there are undoubtedly numerous other restaurants nearby, you can't afford to gouge too badly, or else customers will go to another business.

At a bare minimum, you should always maintain awareness of the menu prices of your nearby competitors and strive to never be the most expensive option.

However, there are several mitigating factors here which should be considered:

• Ingredient quality: If you have the best ingredients on the block, you can charge more - but make sure you advertise that fact!
• Restaurant ambiance: Theme restaurants get away with having higher menu prices (and therefore lower food costs) by having a unique atmosphere, which guests are paying for in their bill.
• Specialties: If you're the only person around serving a particular dish, you can charge more for it.
• Added features: Do you offer live music? Arcade games? A kids' area? Any extra amenities can be a reason to increase prices.

Additionally, utilize psychology when laying out your menu. There are a few ways to push guests towards your more expensive items.

• Instruct wait staff to point out your high-profit items at the first opportunity.
• Place high-profit items near the top of the menu, where guests are likely to look first.
• Utilize graphical elements like highlights or sidebars to point out high-profit items.
• Have a "specials" board at each table, highlighting these items.

Plus, don't forget you can overcharge for drinks shamelessly. Most patrons never notice, and nobody walks out of a cafe because the price of a Coke was 50c too high. This is even more true if you have a liquor license and can sell overpriced cocktails.

So, push your cocktails and bar services to make up for less-profitable food items, if needed.

IV. Be Willing to Adjust Pricing If Needed

Finally, as a rule, it's good business practice to be flexible and know when you need to make some adjustments. You never want to exceed your target food-cost percentage if you can help it, but you may still need to push that limit from time to time if you're having difficulty attracting customers.

Many restaurants utilize seasonal pricing (particularly in tourist towns) if they see more customers during one time of year but not others. Others may adjust pricing on their specials based on the time of day or even the weather.

This is something a good restaurant owner will play by ear and there's no real formula for 'perfect' flex pricing. It simply comes with experience and understanding your patrons, knowing how much to charge and when. However, inflexibility has been the ruin of far too many businesses who have refused to change their prices, even when times were tough.

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