The importance of menu pricing is often overlooked, yet it is the engine behind a restaurant's success. It's essential to remember that your restaurant lives and dies by its sales. If customers don't believe your menu is priced fairly, they won't hesitate to take their business elsewhere.
The most successful bar and restaurant operators understand that pricing is a complex subject, with many factors to consider. In this article, we'll explore menu pricing and the psychological influence behind it. You will also learn how to create a restaurant menu that maximizes profits while still being appealing to customers.
How to Optimize Your Restaurant's Menu Pricing Strategy
Menu Pricing for Restaurants
Without menu pricing, your restaurant would not be able to generate any revenue and therefore would not be successful.
The prices you see on a menu are not simply random - they are based on the cost it takes to make that dish and other necessary expenses, with the goal of making a profit. In other words, pricing menus are an art form.
It's critical for the restaurant management to consider several variables before finalizing and pricing a menu, such as food and overhead expenses, how much individuals can realistically pay for individual items, and what rivals charge for comparable meals. Considerations like these help ensure that the prices you set cover not just the cost of the food itself but also other vital business expenses like equipment, utilities, labor force wages, ingredients, etc.
It's no secret that restaurants rely on pricing to stay in business. But why are menu pricing strategies so important? Let's explore the psychology behind menu prices and how you can use that information to increase your profits.
The Psychology Behind Restaurant Menu Pricing
While creating your restaurant menu, be sure to consider pricing attentively. This is especially key for restaurants since customers can differ greatly on how much they would spend on a dish.
Studies have shown that when people see low prices, they tend to spend less. On the other hand, higher prices give the impression of quality and luxury, causing customers to spend more. This is why it's so important to find a happy medium with your menu prices - you don't want to scare away customers with too high of prices, but you also don't want to lose out on profits by pricing too low.
It's all about finding that sweet spot where customers feel like they're getting a good deal without feeling like they're being taken advantage of.
In the food-service industry, menu planning involves creating a meal plan for a restaurant or food service business. When customers visit a restaurant or bar to dine or drink, they can select from a menu, which is a comprehensive list of alternatives. Prices for menu items vary depending on multiple factors, including the ingredients used and how long it takes to prepare the dish. The meals served throughout the day also play a role in what's on the menu, for example, breakfast items will be different than those served at dinner.
Menu planning can help any chef keep track of available ingredients, take charge of the kitchen, and turn a profit.
Factors that restaurants must take into account when pricing their menus
Menu prices for restaurants are always subject to change based on location, supply and demand, and other circumstances.
Consider a scenario where you start a restaurant on the East Coast, where food costs are much higher than they are on the West Coast. There are several more factors to consider when pricing your menu items, including:
- locational variances in wholesale food prices,
- Cook and server pay rates, local competition, and
- Check average trends.
We've outlined below several factors to take into account.
1. Direct Costs
The first step in menu planning is taking into account the direct costs, which are the food and beverage expenses associated with each menu item. To calculate your direct cost, you'll need to consider the cost of ingredients, packaging, and any other ancillary items needed to serve the dish.
For example, if you're serving a steak, you'll need to account for the cost of the steak itself, as well as any sides, sauces, or other items that come with it. Direct costs for a restaurant may be divided into three categories. The following are the three branches:
- The cost of the ingredients
Direct costs are only those that go into your restaurant inventory and nothing more. This includes the cost of labor to procure ingredients and the raw food cost themselves, but not things such as transportation fees for getting said ingredients.
- Food waste costs
When you waste food, it not only affects your inventory levels but also becomes a direct cost that hits your bottom line. In other words, wasted food ultimately causes you to lose money. By accounting for these costs though, you can pinpoint which areas of your operation need improvement.
- Cost of portion sizes
The amount of food your portion and the yield you get from your raw materials will affect your overall cost.
Keep in mind that if the amount you spend on ingredients rises, so will the price of your menu items. The profit margin will be greater if direct costs are less than average, as you'll make more money when the menu price is lower.
2. Indirect Costs
- Indirect costs are everything you spend to make a dish, excluding the ingredients
In other words, it's the cost of making your food and dining experience amazing for customers, such as with great tableware, ambiance, lighting, and so on.
- Labor costs are an exclusive part of your indirect costs
All of the work that goes into making and serving food must be accounted for through salaries.
When you prepare your Profit & Loss Statement, the salaries and wages you pay to your employees to create and serve the meals as well as manage the restaurant will be recorded under "salaries credited," however they must be taken into account when determining price points for the menu.
3. Overhead Costs
Overhead expenses are the day-to-day costs of running your restaurant, and they differ from indirect costs as they include expenditures that will have a direct effect on the restaurant. Your restaurant's marketing budget or the cost of upgrading it would be considered as your overhead costs.
When coming up with your restaurant's menu pricing, you have to think about the overhead costs. The only way your eatery can make money is through selling food, so all expenses related to that need to be considered when setting menu prices. It doesn't matter where the cost comes from; if it helps promote and sell the food at your restaurant, then it has to be accounted for in menu costing.
4. Seasonal Costs
Your restaurant menu prices and food costs are affected by these volatile, season-dependent expenses that fall under direct costs, indirect costs, or overhead expenses. Seasonal costs are one of your biggest factors to consider. Some of your expenses are seasonal and vary with the calendar year. It's critical that the food you develop is well-balanced. Every dish must include some low-cost items, readily accessible, and consistent-priced ingredients.
Seasonal costs affect more than just the price of an individual dish, but also the types of dishes available on the menu and quantities of different ingredients. The majority of your seasonal expenses will be made up of the raw food cost like meat, fruits, and veggies, which can change depending on the season.
Seasonal costing also allows restaurants to adjust their menus frequently, which keeps customers interested and coming back.
5. Service Costs
Costs for labor and other food-related expenses will vary your menu prices as needed. In comparison to fine dining restaurants, your service costs will be lower at a fast-casual or self-serve restaurant.
Don't overcharge since if your quality of service does not suffice the rates, you will lose clients.
6. Competitor Pricing
When determining how much to charge for the menu items, it's important to consider what your competitors are selling the same dish for. You can't price menu items too high above your competitors unless you're offering something significantly better in return.
Moreover, pricing lower than your industry average may actually result in decreased profits, despite potentially attracting more customers. Therefore, by understanding what the competitor's prices are, you'll have a better idea of where to price your menu items.
The restaurant's menu pricing model
The menu pricing model is a great way to ensure that your customers are getting the best possible value for their money. This type of pricing model allows you to offer a variety of options for your customers, so they can choose the perfect meal for their budget.
To achieve a 33% food cost, multiply your costs per plate by 3. This isn't particularly useful since it only guarantees that no matter how successful you are, you won't make a significant profit.
The "multiply by 3" method is not the only way to price your menu. There are numerous pricing methods that have proven successful for different types of businesses. Definitely, a menu pricing model is not one-size-fits-all, but it is a tried-and-true technique.
The common menu pricing models are as follows:
- Prix Fixe: the term "fixed-price dinner" refers to a specialty of the restaurant called Prix Fixe, which implies that there are numerous courses with one set price. This menu is popular for weddings, hotels, and certain restaurants.
- Promotion-based menu: The menu offers special and timely items that are only available for a short period.
- Limited menus: Restaurants with limited menus often focus on farm-to-table or seasonal items in order to keep prices affordable and fresh.
- Cuisine-based menus: The typical menu is cuisine-based, and it is designed to match the food concept and dishes available.
These are not only menu structures; they also have an impact on restaurant pricing. It's important to note that a Prix Fixe meal must generate a profit while taking into account each dish served. A promotion-based menu, on the other hand, allows businesses to promote high-profit, low-cost goods.
What is the most popular pricing strategy among restaurants?
Many restaurants employ various pricing methods, some of which are described above. Pick the pricing scheme that will make sense to your target demographic and fits with what you're willing to charge. While fast food places might go for a more promotional format, finer restaurants will likely use Prix Fixe menus.
The easiest approach to figuring out what pricing strategy your competitors utilize is to visit their restaurant and observe their menu.
How do you price a menu item that is appropriate for your concept?
Use this five-step approach to figure out your ideal restaurant menu pricing strategy.
Understand your restaurant's prime costs
Knowing your restaurant's prime cost is key to understanding how much you should charge for each menu item.
Your total production costs are the sum of your cost of goods sold and your labor expenses. This is also referred to as your controllable restaurant costs, which are the day-to-day expenses you can actively manage.
Prepare a cost analysis of your recipes
Although it is better than not knowing your prime cost, you should go the extra mile and calculate your restaurant's raw food cost or your menu costs.
In order to accurately calculate your ideal food cost, you need to first standardize your menu items. Once you have done that, you need to make sure that you are constantly adjusting for changing prices by capturing product price fluctuations. While it's helpful to be aware that your raw ingredients are becoming more expensive, it would be even better to know exactly which ingredients are driving up the price. This way, you can make changes to save money where it counts.
Determine the plate cost
After you've worked out your menu costs, the next logical question is how to price your meal. To calculate plate cost, simply combine the total recipe costs with the raw ingredient portion size.
By calculating your plate cost, you can determine which areas of your business are most profitable.
The ideal food cost percentage
This proportion of your total sales spent on food is known as your food cost percentage. It's the most you can spend on meals at your business before it starts losing money.
The average food cost percentage for a casual restaurant is approximately 25-35%. Most restaurants aim to reduce their food expenses, which will result in more of your earnings being pure profit.
Determine your targeted menu price
After you have all of the necessary information, you can start pricing menu items. To find your ideal menu item price, you need to consider several factors such as your target market, your restaurant concept, and trends in the industry. You also need to make sure that your ideal menu item price is aligned with your prime costs. If you want to stay competitive, you need to find a happy medium between what your customers are willing to pay and your costs. The final menu price should also take into account the psychology of pricing.
Let's take a look at an itemized example.
It's time to start crunching the numbers. To account for all of the expenses incurred while preparing a carbonara meal, for example, you may include the following:
Determine the raw food costs
Serving cost ground sausage = $1.30
Fresh ingredients for the sauce = $0.65
2 oz. pasta noodles = $0.07
Bread for table = $0.15
Soup/salad option = $0.80 (aiming toward higher cost estimate)
= $2.97 food cost per plate
Many restaurants often make the mistake of finalizing their menu and not recalculating, which is why gross profit margins are typically low. Even if your food, labor, and overhead expenses are relatively efficient compared to others in the industry, it's unlikely that everything will go smoothly in those early days.
To calculate menu prices, multiply the cost of each dish by three. The first number covers the cost of goods, the second labor and overhead, and the third is your desired profit.
$2.97 (food cost per plate)
x 3 (to estimate labor and overhead)
= $8.91 (estimated total cost per plate)
On average, fast-casual restaurants earn a profit of 6% to 9%. To ensure that your establishment is profitable, aim for a menu price that covers all of your costs while still providing enough leeway to reach your desired net profit.
High-profit margin at 9%:
Low-profit margin at 6%:
Calculating restaurant menu prices:
$8.91 + $0.53 = $9.44 (Menu price)
$8.91 (plate cost)+ $0.80 (ideal profit margin) = $9.71 (Menu price)
This will provide you with the target menu price, which you should round up to a quarter dollar value such as $9.50 or $9.99.
Ideal gross profit margin
Figure out how much profit you want to make, then use this menu pricing formula to set prices that will give you your desired margin.
Here's the gross profit margin formula:
Gross Profit Margin = (Menu price - Raw cost) / Menu price
If we use the same numbers from the above example, we can use this gross profit margin formula:
Ideal gross profit margin = (menu price - raw cost) / menu price
Ideal gross profit margin= (menu price - $2.97) / menu price
Ideal gross profit margin = (9.99 - 2.97) / menu price
Ideal gross profit margin = 7.02 / 9.99
Ideal gross profit margin = 0.703 or 70%
Your gross profit margin is a key element in determining your net profit, also known as your bottom line. The calculation below shows how to calculate your net income:
Gross Profit – (Labor Cost + Operating Costs) = Net Profit/Loss
The greater your gross profit margin, the less of a financial burden operating costs will be. To ease this strain, when pricing food, it’s important to have high-profit items and sell them efficiently.
Restaurant menu pricing strategies while keeping food costs under control
- Evaluate your food cost percentage monthly and compare it to your ideal food cost percentage.
- Compare prices of similar menu items at other restaurants in the area
- Review your menu and make changes as needed- consider removing items that have a high food cost or are not selling well
- Train your staff on the importance of portion control and menu pricing
- Keep an eye on trends in the industry- if you notice that customers are gravitating towards cheaper options, make changes to your menu accordingly
Menu optimization strategies
If you want to do some serious business, then re-evaluate your restaurant menu prices. Take a look at how other restaurants are selling their items and get some tips on menu engineering. You might be surprised at what small changes can do for your bottom line.
The Menu psychology and menu engineering
Looking to increase your restaurant's profit margin? Consider how menu psychology and pricing strategies might benefit your operation.
- If you want to fine-tune food sales, it's crucial to analyze your menu items and which goods sold were hits and misses in the past month, quarter, or year. Examine your restaurant's profitability and popularity when making your decisions.
- Best practice would be to ask your staff which items should be featured. You can include anyone who might have valuable feedback such as serving staff, host/hostess, chefs, cooks, marketers, customer service, or support staff.
- Stay on top of market trends and research pricing when making choices. Be sure to keep your menu fresh, so customers don't get bored. Seasonal and limited-menu items can create a feeling of excitement and encourage customers to visit more often. Just be mindful not to go overboard as too much change can be confusing. If you're looking to increase food sales, consider a happy hour or another promotional pricing period.
- Another avenue to explore is testing out new items on your menu. This could be in the form of special offers, prix-fixe menus, or limited-time-only dishes. These can generate a lot of buzzes and help you determine what profitable dishes are worth keeping long-term.
- A balance between high and low-cost menu items. It's important to have a mix of high and low-cost menu items when developing your menu engineering. This allows you to appeal to a wider range of customers and still make a healthy profit. Some restaurants choose to keep their food cost percentage low by having mostly lower-priced items. Others might emphasize higher-priced items and use creative marketing to attract a wealthier customer base. There's no right or wrong answer, but it's essential to be aware of your options and understand your customers.
- Size and portion control. The size of your portions can have a significant impact on your restaurant's profitability. If you're selling large portions, you're likely losing money on food waste and overserving customers. On the other hand, if your portions are too small, customers might feel cheated and leave unsatisfied. It's essential to find the perfect balance to ensure both profitability and customer satisfaction.
There are a few ways to portion control without sacrificing the quality or quantity of your food. One method is to use smaller plates, which will make portions appear larger. Another option is to serve family-style meals where customers can order multiple dishes to share. This way, they can still get a good amount of food without overindulging. It's also essential to be aware of your food cost percentage. This will help you determine if you're making a profit on each dish and adjust portion sizes accordingly.
14 most practical and effective menu pricing strategies for restaurants to improve their bottom line.
1. Differentiated pricing based on the type of restaurant.
There are different types of restaurant menu pricing strategies for each type of restaurant. Whether you have fast food, casual dining, or fine dining establishment will affect how you price your menu.
Restaurant menu prices will include the total of your projected food cost, overhead expenditures, labor costs, and profit for each dish. This includes things like the cost of raw materials, restaurant décor upkeep, and other such expenditures.
The following are the Gross Profit margins according to restaurant type:
- Fine dining - 75%
- Casual dining - 55%
- Quick service restaurant (QSR) - 45%
2. Try Charging More for Exotic Dishes
The cuisine your restaurant offers is a key factor in deciding your restaurant menu pricing strategy. For example, if you serve gourmet Italian food, you can charge premium prices for your dishes even though the cost of raw ingredients may be low.
Take advantage of customers' willingness to spend more on premium experiences by charging a higher price for your exotic dishes. This will ensure that you earn a higher profit from each dish, while still providing your diners with an enjoyable experience.
3. Make use of a unique ingredient to refresh the recipes
You may improve a restaurant's menu by providing numerous versions of the same dish. For example, you could create higher profits by combining ingredients that lower food expenses while yet remaining profitable.
Also, offering specials can be an excellent way to increase traffic during slower periods. It can also help you move older inventory that's taking up valuable space in your kitchen. When done correctly, specials can be a great way to boost your gross profit. If you choose to run specials, be sure to track their performance so you can adjust accordingly in the future.
4. Use relative pricing
To encourage your clients to buy more, you may utilize a relative restaurant pricing technique. By strategic placement of cheaper items next to more expensive dishes, customers are likely to order the less costly option - but you'll still make a profit.
5. Decide on the best price for the right number of items
Determining the ideal menu item price can be tricky. Oftentimes, eateries make the missteps of either being too expensive or too cheap. If the establishment is charging too much, then potential customers will go elsewhere; however, if an establishment charges its meals for too little, then it won't rake in as much profit.
- Charging a higher price for additional quantities – Customers who are new to your business might not be aware of how much quantity you typically serve, so charging more money for larger quantities may sometimes backfire.
- Charging less for fewer quantities – While many restaurants charge less for smaller quantities of food to stay ahead of the competition, this can actually discourage customers from ordering more.
- Charging a higher price for fewer quantities – When restaurants charge higher prices for smaller portions, this can often disappoint customers who feel like they paid too much for too little food – which might lead them to never come back
Don't base your restaurant pricing solely on how much food there is if you want to get the perfect balance between quantity and price. Serve a decent amount of food, and list both the number of servings and the cost next to each menu item. But also keep other vital factors in mind that goes into preparing and serving the meal.
6. Include a Signature Dish in Each Course
By including a "Chef's Special" on the menu, you will satisfy customers' curiosity about your favorite dish while also giving them something exclusive.
Here are three easy steps to get it done:
- To create a more profitable dish, add some luxurious ingredients.
- Naming it the 'Chef's Special' would work.
- In order to increase the visibility of each category, place the call-to-action button at the top or within a highlighted box.
You can sell such things in each category, on your restaurant's menu, and charge a premium price while still turning a profit.
7. Never put the currency signs next to the menu price
The most basic yet often neglected restaurant menu pricing strategy is to omit the dollar sign from the price. When customers see the dollar sign on an item, they are more aware of how much money they are spending.
The currency signs may daunt customers and discourage them from ordering food. It's what we need to minimize in order to coax diners into not thinking about the price too much. That way, they can focus on enjoying the experience without worrying about how much it'll cost. We recommend only using foreign currencies if you're expecting guests from other countries though.
8. Prices should be displayed at the end of menu descriptions
When pricing menu items, it must have drool-worthy descriptions of the dish that list all tantalizing ingredients used. This will explain the delectability of the item and encourage customers to order it.
Listing the prices at the end of each description will make customers crave the item more by time they finish reading. Cravings for a product make someone want to experience using it, regardless of how much it costs.
9. Use Complimentary Item Pricing
Offer discounts on complimentary items to help push related food items.
Bundling items together is another popular pricing strategy for restaurants. This could be something like an appetizer, entrée, and dessert for a fixed price or you could offer a discount on a certain number of items. For example, buy one entrée and get the second half-off. This is an excellent way to increase sales without cutting into your profits too much. Just be sure not to bundle items that are already highly discounted or low-margin.
10. Use Price Anchoring
Price anchoring is a pricing strategy whereby restaurants use an anchor price to make other items seem like a better deal in comparison. This is often done by listing a higher-priced item next to a lower-priced item on the menu.
For example, if you have two appetizers, one priced at $8 and the other at $12, the $8 appetizer will seem like a better deal to customers even though both items may be equally priced. This is a common pricing trick that restaurants use to increase sales and profits.
11. Implement Upselling Techniques
Upselling is a technique whereby restaurants encourage customers to upgrade their order to a more expensive item. This could be done by offering a discount on the upgrade or by listing the benefits of the upgraded item.
For example, if you're selling burgers, you could upsell customers by offering a bigger burger with fries and a drink for a discounted price. This is an excellent way to increase profits without raising prices.
13. Follow Market Trends
You can make a lot of money by following the market and food trends to identify the most profitable dishes or ingredients that are trendy. For example, you could charge more for avocado toast because it is considered trendy.
Make sure to always consider what your target market is willing to pay. Just because something is trendy in one area doesn't mean it will be where you're selling. People want value for their money and if they feel like they're being taken advantage of, they'll go somewhere else.
14. Creating an effective menu engineering and design
You can enhance your menu engineering and design by utilizing a minimalist menu-based approach and only including the most essential ingredients items. This will help customers to find what they're looking for more easily and streamline the ordering process.
It is important to improve your menu engineering and price menu items appropriately. Make sure that the prices fit your restaurant type and the target market. Don't forget to update the menu regularly. This will keep customers coming back for more.
Final thoughts on menu pricing and what restaurateurs should keep in mind
Establishing a menu price is like being a tightrope walker. You want to find that balance between what it costs to produce the dish and what your customer would be willing to spend on it. To accurately price your menu items, consider all areas of your restaurant's operation and compare them to other restaurants' pricing strategies.
In the restaurant industry, there is no one-size-fits-all solution to price a menu. It's time to put the techniques you've learned into practice once you've mastered some of the most efficient and common pricing strategies. The most crucial thing is to be mindful of all potential solutions and organize them accordingly.
As you fine-tune your restaurant's menu prices, consider the long-term effects on your bottom line. Smart pricing decisions can lead to increased customer satisfaction and loyalty, which, in turn, will see your ROI flourish.