How to Price Your Restaurant Menu

It all comes down to the math

a young couple eating pizza.
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Writing the menu is the fun part of opening a new restaurant. You can play around with terms and pair different foods together to see what looks good together. But designing the menu can be complicated as well and how to set prices can be particularly hard to understand.

How do you know how much to charge so you can be sure to make a profit? Food cost and portion control are two things that will help you price your menu correctly, but be careful not to price yourself out of the local market. Another way to ensure a profit is to create a balance of expensive and inexpensive items.

Your Gross Profit Margin

Your focus as a restaurateur should be on your gross profit margin percentage. It's what you have left over after you've met all your restaurant's expenses.

The most surefire way to calculate this percentage and to be sure you don't miss anything is to divide your expenses into three categories: food and beverage costs, wages and salaries, and occupancy. Ideally, you'll spend 30 percent of your profits on food and beverage costs, but in no case more than 35 percent.

Labor costs should take up another 30 percent, and your building—including insurance, taxes, and permits, in addition to mortgage or rent—should come in at about 20 percent.

If you keep close to these numbers, you'll realize a profit of about 20 percent, which should be your goal. You might think you could increase this by pushing your menu prices up, but what you might end up doing is pushing customers out the door.

Food Cost 

Food cost refers to the menu price of a certain dish in comparison to the cost of the food used to prepare that dish. In other words, how much you pay for food determines how much you must charge your customer for it.

Ideally, food cost should be in the neighborhood of 30 to 35 percent. In other words, if you pay $1 for something, you should charge a minimum of $3.35.

It might seem like you're charging a lot more than is necessary, but keep in mind that you aren't just paying for the food itself. You're paying someone to prepare it, to serve it, and to clean up afterward. You're paying for the building in which your customers are dining—all in addition to the actual food cost.

Everything in your restaurant from payroll to the electric bill must be covered by the food you serve. Let's look at a typical menu item that many restaurants offer: a filet mignon dinner.

The Basic Equation

Begin by calculating how much preparing that dinner is going to cost you to serve, including ingredients, staff costs, and occupancy.

The initial cost of the dinner can be broken down into two areas. The beef filet costs you $6 per portion. The wrap—the potato, vegetable, salad, and bread that come with the filet, as well as any condiments—costs $2.50. Therefore, the entire meal costs you $8.50. When you add in staff and occupancy costs, you might be up to $16.

Now subtract this from your proposed menu price and divide the result by the menu price. Let's say you've chosen a menu price of $25. The equation would look like this:

$25 - $16 = $9

$9 / $25 = 36 percent

What does this tell you? For one, your $25 price point is very close to being in the right ballpark. In fact, it's a little high. You might want to thrill your customers and drop the price to $24, letting them think they're really getting a deal.

Your gross profit margin on this menu item would still be a perfectly reasonable 32 percent, and the difference in price might lure other customers in the door. Psychology matters just as much as the exact numbers do.

Other Variables

If you wrapped the filet in bacon and topped it with herb butter, your costs would increase. This change might make that $25 price point more appropriate. Remember, everything that goes onto the customer's plate must be accounted for.

Let's say this drives your food costs up so that the total cost to you for this meal is now $17. At a menu price of $25, this would have the same effect as dropping the price to $24 without adding the bacon and herb butter. You're still at 32 percent, which is respectable. But your customers might be a lot happier with this embellished meal, and word of mouth is everything.

The absolute minimum you must charge to make a profit off this version of a filet mignon dinner is $25.

Portion Control

One reason chain restaurants are so successful is that they have a firm handle on portion control. The cooks in these restaurants know exactly how much of each ingredient to put in every dish. Shrimp scampi might have a portion control of six shrimp per dish, so every shrimp scampi that goes out of that kitchen will have six shrimp in it—no more, no less.

Everything should be measured out if you're going to practice portion control in your kitchen. Chicken, beef, and fish should all be weighed, while shredded cheese can be stored in portion control cups and a measuring cup can dish out mashed potatoes.

You can eyeball the serving amounts, sort of like Rachael Ray, if you feel comfortable cooking your menu, but err on the side of caution and make sure everything is measured out in the early stages of your restaurant, particularly if you're not the one doing the cooking.

Another way to practice portion control is to purchase preportioned items, such as steaks, burger patties, chicken breasts, and pizza dough. These items might be more expensive but you'll save money on labor and food waste.

A Well-Balanced Menu

Food markets fluctuate depending on the season, the weather, and even the price of gas. One day lettuce might be $10 a case, then it jumps to $30 a case the following week. Short of changing your entire menu every few weeks, there's little you can do when prices jump.

You can maintain your desired food cost, however, if you balance expensive items that are prone to price fluctuations with items that have more stable prices. So go ahead and include some fresh lobster and beef on your menu, but temper it with less expensive chicken or pasta dishes.

Keep in mind that the cost of some expensive cuts of meat can approach 50 percent of the menu price. The costs to you of appetizers and desserts is virtually nil so your gross profit margin percentage will be much higher here. Arrange your menu so that it all balances out to a decent profit for you.

The Bottom Line

Creating the right price points for your menu is essential for keeping costs down and sales up. Understanding the role of portion control and food cost will help you create a restaurant menu that balances customer expectations with an affordable kitchen inventory. Don't forget that psychological factor.

Menu prices are as important to your customers as they are to you. Most diners know what they're willing to spend for a meal before they even sit down at one of your tables—maybe not a firm dollar line in the sand, but they at least have some general parameters in mind. And it's human nature to be pleased when you spend less money than you expected.

Which brings us to one last very important factor in menu pricing. What are your competitors charging?

Visit them for a meal or have a friend or associate do so. What's the guy down the street selling his special filet mignon dinner for? You don't want to price yours $5 above that, no matter how the math works out. Your customers will begin dining down the street if your version isn't truly exceptional and worth an extra $5. And that, of course, is a whole different issue.