When devising your restaurant’s menu pricing strategy, there are many important factors to consider. Some of these factors include the wholesale cost of food items, the cost of labor and plating, market volatility, customer perceptions, and of course, market demand and competition within the marketplace.
What affects restaurant pricing?
Several components allow restaurateurs to estimate their profitability, which includes studying the profit and loss statement. Understanding a restaurant’s profit and loss statement can be broken down into two parts—profits are the price of goods that are sold, while loss is considered the expense, that is, the direct and indirect costs of operating a restaurant. Some of these direct costs include the raw price of ingredients for menu items, portion sizes, drip loss while storing, and food waste. Some indirect costs go towards labor and other operating expenses.
Service costs will also differ depending on the type of restaurant. A casual restaurant with counter service can charge less since you'll spend less on service. In contrast, a fine dining restaurant will have higher menu prices and higher quality customer service. Along with these indirect costs, delivery costs may be a factor. Adding additional premium services such as delivery can provide customers the perception of higher value, thus justifying higher price points. Different restaurants may charge different prices for delivery, and some may even offer free delivery as a service to its customers.
Once you calculate your break-even point, consider other external factors that will come into play in your pricing strategy. These factors may include customer preference within your target demographic, the regional variability of prices, and competition within the local market for similar restaurants.
Restaurant menu pricing methods
Pricing by food cost of an item
A basic calculation for pricing a menu item is to base it on a percentage of the raw food cost of said menu item. A rule of thumb is that the cost of the food, or what you pay for the raw food cost, should be about 30% of the menu price. For example, if a burger costs $3 to make, then you should charge $10 on the menu for that burger. Of course, this is just one guideline, and many other factors come into play, including your market demographics and customer perceptions of relative value.
Also, certain food items might have a limited lifespan or shelf life. Food waste might be an added expense here. Another consideration is portion sizes. Some restaurants are well-known for their large portions and may use relatively less expensive ingredients to create certain menu items. Further, food costs may fluctuate with the market. Ingredients may have different prices depending on their seasonality and availability. Prices can also be affected by natural causes or economic conditions that affect the restaurant supply chain.
Pricing by competition
When considering the role of competition, price your menu about the same as your competitors within your market. Using this competition method, you must take the time to study the menus of your local competitors. You could either set your prices to match your competitors or offer your menu items at slightly lower prices to give your customers the perception of getting value for their money. Another method is to set your prices slightly above your competitors and then add incentives like upgraded services or a better quality product.
Pricing by demand analysis
Pricing by demand analysis is similar to pricing by competition, but it is based more on the supply and demand for particular menu items or type of cuisine in your general market area. For instance, you must understand other restaurant options in your area and price your menu items accordingly. If there are a large number of similar restaurants, you might end up pricing items slightly lower. However, if there are fewer restaurants similar to yours, you may be able to price your items marginally higher, because customers will have fewer options.
For example, the demand analysis model applies to airports. Here, customers have fewer options, and prices are often far higher than similar restaurants outside airport security gates. The airport restaurant has a captive audience.
It takes skill, knowledge, and foresight to price your restaurant’s menu appropriately. Often, this might be a trial-and-error process as you experiment with customers’ responses to different price points. Customers are used to seeing prices go up, albeit not in an overly drastic manner. When restaurants hit the sweet spot between customer perception and having a favorable profit and loss statement, you are ready to celebrate success and repeat customers.