Writing the menu is the fun part of opening a new restaurant. But 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 you also have to be careful not to price yourself out of the local market. It's challenging to create a balanced menu that fares well against the competition and keeps you in business.
Here's a look at everything you should consider when pricing your menu.
Understand 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 expenses directly related to selling your product (primarily cost of goods and direct labor).
The most surefire way to calculate this percentage and to be sure you don't miss anything is to divide your expenses into two categories: food and beverage costs and wages. Ideally, you'll spend around 25-30% of your profits on food and beverage costs, but generally no more than 35%. Labor costs should take up around another 30%.
If you keep close to these numbers, you'll realize a gross profit of about 35% to 40%, which is a good target in the restaurant business. Keep in mind that further expenses (occupancy costs, marketing expenses, etc.) will come out of this before you realize your final net profit.
Start With 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 customers for it.
As mentioned, food cost should be in the neighborhood of 25% to 35%. In other words, if you pay $1 for something, you should usually charge a minimum of $2.85.
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, serve it, and clean up afterward. You also need enough gross profits to pay for the building in which your customers are dining and take care of the other costs of keeping your business afloat.
So, once you know the costs of those other business expenses, you can zero in on the target gross profit you'll need to achieve. Armed with that, you can then work to price your menu. Let's look at a typical menu item: a filet mignon.
The Basic Equation
Begin by calculating how much preparing that dinner is going to cost you to serve, including ingredients and staff costs.
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 labor costs, you might be up to $14.50.
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 - $14.50 = $10.50
$10.50 / $25 = 42%
What does this tell you? For one, your $25 price point is in the right ballpark. It's even a little high. You might want to thrill your customers and drop the price to $24, letting them think they're getting a deal. Your gross profit margin on this menu item would still be a perfectly reasonable 39.5%, and the difference in price might lure other customers in the door. Psychology matters just as much as the exact numbers do.
Prices Shift as You Make Changes
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 $15.50. At a menu price of $25, this would have a similar effect to dropping the price to $24 without adding the bacon and herb butter. You're still at 38%, which is respectable. But your customers might be a lot happier with this embellished meal, and word of mouth is everything.
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 be used to dish out mashed potatoes.
Another way to practice portion control is to purchase pre-portioned 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. 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 mix 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 balance it with less expensive chicken or pasta dishes.
Keep in mind that the cost of some expensive cuts of meat can approach 50% of the menu price. The cost to you of appetizers and desserts is virtually nil, so your gross profit margin on those items can stabilize the low margin on pricier ones like a steak.
Arrange your menu so that it all balances out to a decent profit for you.
Size up the Competition
Menu prices are as important to your customers as they are to you. Most diners know roughly what they're willing to spend for a meal before they even sit down at one of your tables. And it's human nature to be pleased when you spend less money than you expected. Creating the right price points for your menu is essential for keeping your margins under control and staying competitive.
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 clearly worth an extra $5. And that, of course, is a whole different issue.