You’ve likely spent weeks perfecting your restaurant’s menu, but have you spent enough time deciding what to charge for each dish? Surprisingly, your food pricing strategy can be more important in getting diners through your doors than the tasty meals you offer. According to a study published in the International Journal of Public Health, menu pricing is customers’ top priority when choosing a quick- or full-service restaurant—not to mention critical for your restaurant’s long-term success.
But while your team members understand the art of cooking, they may not have yet mastered the science of menu pricing. In this blog, we share tips, strategies, and formulas that can help bring about greater sales and profitability for your restaurant.
What is menu pricing?
Menu pricing is a restaurateur's approach for determining how much to charge for each dish. In simple terms, it involves calculating the costs required to make each dish and charging enough to recoup them while generating a profit. But here’s the tricky part—the profits also need to help cover other expenses, like labor, rent, and utilities. If you don’t price your menu properly, it can cost you not only profits but also the funds you need to keep your doors open.
With such high stakes, it’s important to follow proper menu pricing strategies. Luckily, there are several options to choose from. Different restaurants use different approaches for pricing food, such as calculating food cost, studying local competition, and conducting demand analysis. We discuss these in detail below, but first, let’s explore the larger picture of how to price a menu.
How to price a menu
Menu pricing can be broken down into a few key steps:
Determine your direct costs. Direct costs include the raw price of ingredients for menu items, drip loss while storing, and food waste. You can find these numbers in your restaurant’s profit and loss statement, and they can give you a baseline idea of what to charge for each dish.
Determine your indirect costs. Indirect costs encompass labor and operating expenses. Like direct costs, they need to be recouped through your sales. Depending on the type of restaurant you operate, these costs can greatly vary and will determine how much you need to charge for your offerings. For instance, if you run a casual restaurant with counter service, you can charge less because you'll spend less money on service. In contrast, if you operate a fine dining restaurant, you’ll have higher quality customer service and need to charge more in return.
Calculate your gross profit margin percentage. Your gross profit margin percentage is a ratio of the cost of goods sold to net sales. In other words, it tells you how much of your revenue goes toward the ingredients and labor required to make each dish. Most restaurants aim to keep this in the 25-30% range, and no higher than 35%. Using these percentages as goals, you can roughly gauge the success of your current menu pricing strategy and whether or not you’re charging enough to cover the labor and raw ingredients your dishes require. Use the following formula to calculate it:
Gross profit margin percentage = (net sales - cost of goods sold) / net sales
These numbers can serve as a starting point for your menu pricing strategy, but be sure to review your profit and loss statement for more detail about your restaurant’s finances. In addition to your direct and indirect costs, it should contain your net profit or loss, and sales and revenue breakdown.
Menu pricing strategies
It’s time to start crunching numbers. When pricing food, you can use one of several strategies to arrive at an appropriate price point. Here are three to get you started.
Pricing by food cost
A common approach to menu pricing is using food cost, or the cost of the ingredients used to make each dish. A rule of thumb is that the food cost percentage should be about 30% of the menu price. This means that you’ll end up charging roughly a little more than 3X what a dish costs to make. Here’s a formula for calculating food cost percentage:
Food cost percentage = food costs / food sales
To use this formula to price a particular dish, figure out how much the ingredients to make one serving cost. Then decide on your ideal food cost percentage, and solve for food sales.
Keep in mind that certain food items may have a limited lifespan or shelf life, meaning food waste could be an added expense in your food costs. You can get an overall picture of food waste and drippage by figuring out how much you spent on inventory at the beginning of the month and subtracting the value of the usable inventory you have left. Dividing this by total sales will give you an overall food cost percentage for your restaurant.
Finally, remember that raw goods are also known to fluctuate with the market. Certain ingredients may have different prices depending on seasonality, and their availability can change due to unpredictable economic, political, and agricultural conditions. These shifting costs make it crucial to regularly recalculate your food cost percentage.
Pricing by competition
Our second menu pricing formula involves pricing your menu similarly to competitors within your market. To use this method, start by studying the menus of local competitors. You can either set your prices to match theirs, or charge slightly less to give customers the perception of getting more value for their money. Another method is to set your prices slightly above your competitors and then add incentives like upgraded services or better quality products.
You can also use this strategy to check your work after setting prices by food cost. Investigate what your local competitors are cooking up and what they charge for their dishes. If your prices are much higher or lower than other nearby restaurants that have the same customer base and offerings, it may signal an opportunity to charge more—or a red flag that you’re losing potential business with high prices
Pricing by demand analysis
Pricing by demand analysis is similar to pricing by competition, but this strategy focuses on the supply and demand for particular menu items or cuisines in your market. To start, study restaurant options near you. If there is a large number of similar restaurants, competition is stiff and it may be best to price items slightly lower. However, if there aren’t many similar restaurants, customers have fewer options and you may be able to price your menu items marginally higher.
The demand analysis model works particularly well in airports and stadiums, where restaurants have captive customers. Because diners have few options, prices are often far higher than they would be at similar restaurants outside airport or stadium security gates.
Optimizing profits with menu engineering
After determining the best price point for each of your offerings, you can use a concept called menu engineering to promote your most profitable dishes and improve margins on those that aren’t quite as lucrative.
First, group your menu items into the following categories:
Stars: Stars are the best items your restaurant has to offer, both profitable and popular among customers. Be sure to promote these dishes as much as you can.
Plowhorses: While popular, plowhorses aren’t quite profitable. Rework these dishes to reduce their food or labor costs while preserving the aspects customers love.
Puzzles: Puzzles are profitable but not yet popular. If possible, think of new ways to make them appealing, whether with slight tweaks or better menu descriptions.
Dogs: Dogs aren’t profitable or popular. Decide whether to cut these from the menu, revamp them to improve margins, or simply avoid promoting them as much as other offerings.
Next, use menu design principles to feature the most profitable items while making less profitable ones harder to find. Both layout and font size can impact which dishes customers choose. Consider using visual cues to draw customers’ eyes toward profitable dishes, and bury the less profitable ones at the bottom of your menu.
Finally, don’t forget other menu design considerations that can make a big difference in ticket sizes. Appetizing menu descriptions are key to selling dishes that fall into the dogs and puzzles categories, while professional photos can help diners conceptualize dishes they might not be familiar with or have never before encountered.
Factors that affect menu pricing and profitability
While we discussed a few popular ways to approach pricing food, there are a number of additional factors that can influence the success of your restaurant pricing and profitability. They include:
Customer preference: What dishes do customers in your target demographic seek out? If a certain dish is trending (think back to the avocado toast or rainbow bagel crazes), you can likely get away with charging more. Perennial crowd favorites are also worth more to customers, and can bring potential for an upcharge.
Cohesion: Just as you look at the individual components of each dish to determine what to charge, it’s important to look at them in the context of the rest of your menu. A high-priced luxury entree may seem out of place on the same menu as a hearty, affordable dish, and could leave customers confused about your concept.
Regional variability: A small-town restaurant can’t charge New York City prices for the same fare, and vice versa. The region you're in will dramatically impact the amount you can and should charge for your items.
Portion control: One hallmark of a good restaurant is consistency, a quality that can also save you money. By ensuring portions are consistent every time your chefs prepare a meal, you can reduce unnecessary expenditure. Weighing meats and proteins or measuring side dishes can all help achieve portion consistency.
The key takeaway is that there are many factors to consider when pricing your restaurant’s menu, and a number of strategies you can use to arrive at reasonable prices. Above all, though, every restaurant is different, with varying costs, customer bases, and geographies. Don’t be afraid to try different approaches until you find one that works for your unique circumstances.
Creating a winning restaurant menu pricing strategy
It takes skill, knowledge, and foresight to price your restaurant's menu appropriately. Often, this is a trial-and-error process, requiring you to experiment with customers' responses to different price points. Customers are used to seeing prices go up, as long as the fluctuations aren’t too drastic. When you hit the sweet spot between margins and customer perception, you’ll be ready to celebrate success and repeat customers.
If you’re looking to further expand your customer base and boost your profits, consider partnering with DoorDash to build an online storefront or offer self-delivery. Learn more about our suite of products and how you can get started.