A Definitive Guide to Menu Pricing and Calculating Food Costs

You are almost ready to open your new restaurant. Your head chef and sous chefs are engaged and you have even finalized your menu. But, have you priced your menu items yet? It’s one of the most tedious tasks, but very important too.

Now, there are several ways you can price your menu. You can find out the cost of your food and supplies and charge your customers three times the cost of it. Or, you can serve your meals at prices lower than your competitors. Or, you can simply work around your margins and ask for a price that covers your basic cost. However, these are not the ways you should price your menu. There is a high risk attached to it your prices might not be competitive or customers may find your menu too expensive, leaving you with minimal profits in either case.

Hence, it’s important to work out your costs and overheads so that you can arrive at a pricing as close to ‘perfect’ as possible, so that both you as well as your customers are happy

Factors that Affect Menu Pricing

1. Direct costs- These are associated with the food item itself. This involves the purchasing of food, portion sizes, drip loss while storing, and food waste from spilling, spoiling or overcooking.

2. Indirect costs- They are not the actual ingredients that go into the dish, but they add value and quality to your food. For example, your labour costs. Some dishes demand extensive preparation and plating up. For such dishes, you need to raise the price for the time and effort involved to make and serve it. Similarly, you need to take into account the overhead expenses like decor, ambience, lighting, crockery and cutlery and marketing efforts.

3. Volatile food costs- You need to account for the price fluctuation of fruits, vegetables and meat according to the seasons,  certain other natural factors or due to economic reasons such as inflation and taxes. For instance, due to unseasonal rainfall or hailstorm, the cost of alphonso mangoes can suddenly shoot up or due to poor rain, the vegetable prices can go up. If you have to pay more VAT on procuring your ingredients, that can affect prices too.

4. Competition– Check out your competition. For the same items, your pricing should be usually around your competitor’s. But,if you plan to charge more, you should have good enough ‘differentiating’ reasons to justify. Perhaps, your chef is more qualified than the competitor’s? Just make sure that your customer knows why you are charging what you are.

5. Service costs. The type of service offered can affect your menu pricing. If it’s a casual restaurant, you can charge less because you spend less on service. But, for a fine dining restaurant, the prices will go up as the quality of your service will also be better.

6. Boundary pricing. You know your costs the best; the rent you pay for its location, the quality of your food and service, etc. Figure out the lowest price you can charge while still making a reasonable profit and the highest price your customers will pay for your items.

 Also Read: 7 Pro Tips to Control Restaurant Food Costs

A Definitive Guide to Menu Pricing and Calculating Food Costs

Pricing Methods

Now, that you know the various factors that affect your menu pricing, let’s know the various pricing methods available to you:

1. Pricing by portion cost

In this method, you determine the portion cost by dividing the purchase cost by the portion.

For example, you buy 50 kgs of chicken at Rs 200 per kilo. So, your purchase cost is Rs 10000. If you serve 250 gms of chicken per portion, you will arrive at a cost of Rs 50 per portion. Do a similar exercise for each part of the menu items. Vegetables will be Rs 15, fat Rs 10, rice Rs 10 and other condiments Rs 5. You will arrive at a total of Rs 90. Now, multiply this by a pre-determined percentage, say 25-30% (most restaurants use this percentage), and you can arrive at a figure of Rs 112.5-117. As it’s an odd number, you can round it to Rs 120 or choose to cut it down to Rs110 per portion

 2. Pricing by raw food cost of item

In this method, you consider the raw food cost of the item and divide it by the desired food cost percentage to get the final price. For the same, you should know the cost of every ingredient in your recipe – from the meat to the vegetables, oil/butter and condiments. You even account for the ketchup, mustard or any other sauce served. Everything that goes on the plate needs to be accounted for.

For example, for a shrimp risotto, you need to know the cost of all the ingredients in the recipe including the shrimp, Arborio rice, stock, parmesan cheese, salt, pepper and parsley.

It will be something like this –

Raw Food Cost of Item ÷ Desired Food Cost Percentage = Price

Also, you need to factor in indirect costs, fluctuations in food prices and competition. So, if you want a food cost percentage of 35%, and you allow a difference of 5% for various factors, you would want to keep a markup of 30% on your food items.

3. Pricing by competition

In this method, you take the prices determined by your competition as your reference price. However, you can choose to price your items the same as your competitor, price your item slightly lower in order to attract customers who are looking for a bargain, or price your item slightly higher in order to attract customers who are looking for higher quality. However, as your restaurant needs to function within a certain price limit, it may put a strain on you to work out your profit.

4. Pricing by demand

This concept works on the rule of demand and supply. Restaurants in airports or food courts at malls charge more for their food as they are the only available source of food. As the demand is more than the supply, they are willing to get away with it. If your restaurant serves exclusive or specialty menu items or offers a different ambience (for instance, the revolving restaurant in Ahmedabad – Patang offers a 360° view of the city in its upscale restaurant), you can charge more for the food and the experience. However, make a study of your market and customer base before you price your menu items.

While finalizing your pricing, make sure that your menu and quality justify the price and are encouraging for your patrons to visit you again and again.

Also Read: 10 Restaurant Menu Mistakes You Did Not Know That Are Killing Your Restaurant Business

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  • Deepanshu Taumar

    nice informative article

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