Menu pricing 101: Building a profitable menu from the ground up
Getting menu pricing right is one of the most critical things in the restaurant business. Dial in your menu pricing and your bottom line will be more resilient. We’re here to help you explore menu pricing strategies to optimize your restaurant menu both for you and your customers.
Of course, all establishments are different, so what’s “right” varies widely from one place to another. Restaurant owners have a lot to factor in to get their menu costs where they should be while leaving room for price fluctuations and changing market prices.
Before you start pricing menu items, run calculations to ensure costs are covered, leading to a solid profit margin. After all, a restaurant, pub, or bar needs to make money to stay afloat and prosper.
So, let’s dive into just how to nail menu pricing to lead to that prosperity that restaurateurs want. After all, restaurant menu pricing strategies are where the rubber meets the road and restaurants really get rolling.
From the bottom up: food cost percentage and labor costs
Standard restaurant wisdom dictates that the cost on a menu should be around 3x the cost of the original ingredients. So, if the ingredients in a dish cost $5, without doing any complicated number-juggling, you would arrive at a menu cost of $15. Traditionally, that number covers labor costs and overhead, and includes a modest profit margin after markup. An ideal gross profit margin should be somewhere in the vicinity of 30-35% as a solid benchmark, meaning your restaurant earns 30-35 cents for every dollar, while the rest goes toward the cost of the food and other expenses.
But that’s just the basic, lemonade-stand version of menu pricing. If you want to truly optimize your menu, you’ll need to get to crunching numbers and get a bit creative with your pricing.
Food cost percentage
An excellent place to start is to know your food cost percentage. Food cost percentage comes in two flavors: ideal and actual.
Your actual food costs need to be established first. These are determined by first calculating your cost of goods sold (COGS).
Here’s the formula:
Beginning inventory + purchases – ending inventory = COGS
Your total food sales divided by your COGS shows your actual, raw food cost.
This takes into account the reality of the food business—there’s food waste, uneven portion sizes, spillage, and non-standard food.
Your ideal food cost (or desired food cost) can be calculated by dividing your food cost by your food sales.
Ideally, you want your ideal food cost to be as close to your real food cost as possible. That’ll make it much easier to determine your restaurant’s menu pricing.
Here’s an example scenario to make things a bit more concrete:
Sam’s Pizza Place started a month with $7,000 worth of ingredients and purchased another $3,000 over the course of that month. At the end of the month, $3,000 of inventory was remaining. That means their COGS was $7,000.
Let’s imagine the restaurant reached total sales of $20,000 in that month. Divide the COGS of $7,000 by $20,000 and you’ll get an answer of around 0.286. Multiply that by 100 to get your actual food cost of 28.6%.
Compare that to pricing. If a pizza sells for $20 and the cost of ingredients for the pizza is $5, the ideal food cost should be 25%. So, to account for the additional 3.6% of food cost above ideal, a restaurateur would need to look for waste and spoilage as likely culprits in increasing the food cost.
Labor costs
Labor can cost a bundle, especially in times of labor shortages, but restaurateurs have no choice: You must hire labor unless you intend to run the entire show by yourself. That’s not a move we recommend, so instead we’ll offer a guideline. Try to keep your labor costs to less than 30% of total revenue to keep your menu prices from inflating too high to cover costs and while managing to pay your staff a fair wage.
Keep in mind that highly skilled staff pay off, and replacing staff is expensive, so paying competent staff well to keep them aboard is a solid bet long term.
Different restaurants, different menu pricing strategies
Your pricing strategy should reflect your location. For example, it’s no secret that a restaurant in Manhattan, New York would have higher prices than one in Manhattan, Kansas due to much larger overhead costs. The restaurants can serve the same food items, but prices would need to reflect their locations.
Pricing strategies also need to take into account the type of restaurant you have. A fast-casual restaurant can do well with combos and discounts, whereas they would be out of place in fine dining restaurants. Instead, fine dining restaurants or those focused on ambiance can focus on prix fixe menus (which are essentially the same as combos but sound fancier) or specials based on locally or seasonally available food. Regardless of the type of restaurant you’re running, a set price menu can be an attractive option for customers.
Let’s take a look at two specific menu pricing strategies to help boost total sales and net profit.
Haute cuisine, upscale, and ambiance-forward dining
Customers at an upscale restaurant expect a higher-than-average price tag. That’s one of the reasons some of them are there, in fact—many diners woo clients with high-end meals at such establishments. In such cases, higher prices mean higher standards of service, which can lead to business deals for them. In other cases, people just want a really nice meal coupled with a pleasant dining experience.
Menu design is always crucial, but it plays a special role in upscale establishments. In general, it’s wise to guide guests to a chef’s recommendations using boxes, stars, and other notations to point out dishes that a person should want to eat.
Menu engineering is a separate topic, but one key takeaway stands out in upscale dining trends: No cents on a menu. Only dollars.
For example, if your ideal food cost leads you to a menu pricing of $29.23, round up to $30. Such simplicity indicates to customers you’re not trying to bamboozle them with slightly lower prices. Customers associate flat prices with high-quality food, largely because nickel-and-dime tags like a “$.99” at the end of a price indicate you’re interested in saving a few cents wherever possible.
Casual to mid-brow dining menu pricing methods
The first thing a casual or mid-brow restaurant should do is determine their competitor pricing. Customers who frequent such restaurants will be well aware of prices in their area or national prices on average, and they’ll likely critique you if prices are too far above or below average for their area. Either way raises suspicion, even if your food is higher quality.
So while you won’t want to charge significantly more or significantly less than your competitors on main food items, there are some deft maneuvers you can pull to improve your restaurant’s profitability, which we’ll go over next.
Tap into consumer psychology
Three key terms can help you price your menu impeccably, no matter what type of establishment you operate or where you’re located. These are rooted deeply in customer psychology and are time-tested techniques.
Anchor items
Anchor items help “anchor” a customer’s price expectations by setting the highest and lowest bars on the menu. Conventional wisdom says that the highest-priced item on a menu “anchors” these expectations and makes all the others look cheaper by comparison. Many restaurant consultants ignore the possibility of setting low anchors as well—which can be equally valuable, and raise the floor for your goods in general.
Let’s take the example of a ribeye steak and a chicken burger—typically highest- and lowest-end entrée items at many restaurants. If a steak costs $35 and the chicken burger costs $8, your menu will look…strange. Instead, drag the price of your lowest anchor item up to a price somewhat in striking distance of your high anchor. Voilà: You’ve earned more with your lowest-priced item and are more likely to sell more profit-happy items.
Prestige items
Prestige items are the most expensive on any menu, whether it’s food or beverages. Establishments can make a pretty penny off of these items by upping their price significantly above the traditional 3x model. The reason here is simple: Customers wishing to buy such items either don’t care about the price or are intentionally trying to show off by spending money. So, let them show off. Take your most expensive wine or liquor and mark it up by an additional 30-50%, for example. Most customers won’t buy those items, but the ones that do can help you hit your all-time sales highs.
I did just that at a pub I owned, and customers who wanted it to be known they had money would gladly spend said money on those items. Specifically, I took my most expensive scotch and most expensive wine and increased their prices 50% above what I’d calculated to be a fair price. They still sold. Perceived value trumps real value in sales. What’s more, there was never a single complaint about the price. Again—if people want to spend money at your establishment, let them.
Loss leaders
Not every item has to be a major profit-maker for it to make its way onto your menu. You’ve likely heard the term “loss leaders” at grocery stores, where companies lose money with the intention of bringing you in to buy other things. The same principle can apply to restaurants, though we advise against ever actually losing money on a dish or drink you serve.
Instead, a popular item can be brought in for a time, like a special or seasonally available food, that you sell for less than the 3x model. Advertise the heck out of it, make it known that it’s temporary, and you’ll get customers in the door. Ideally, these will be new customers who will come back or regulars who bring their friends.
Strategic menu design
A well-designed menu will draw customers’ attention to the items you want to sell the most, i.e., high-profit and high-popularity items.
A good place to start is with a concept called the “Golden Triangle.” When people look at a menu, they typically look at the center, top right, and then top left of the menu. So, your most popular, pricey, and profitable items should go in the top right, whereas your “workhorses,” or reliable and popular but not as profitable items, make sense in the top left.
Since readers’ eyes are drawn to blank spaces, make room around special items and draw more attention to them with embellishments like boxes or larger fonts. This can be used, for example, to draw attention to a house special steak.
Pricing options for new restaurants
Often, new restaurants will need to be creative with their pricing strategies. Unique pricing strategies can help your establishment stand out from the competition, placing you in a unique category. Or, at least, it can help you draw in customers from competitors.
Competition pricing
The strategy behind competition pricing is simple. It’s this: You undercut your competitors’ prices in order to draw customers to your restaurant. This strategy has worked for many types of businesses, both big and small, across many domains. And it’s certainly relevant in the restaurant industry.
A good way to use competition pricing is to look to areas where the cost of ingredients is low or, similarly, the labor cost to prepare an item is low. Some simple examples are appetizers or sides like french fries or potato skins as well as mixed drinks and wine. The reason is simple: It costs very little labor (i.e., operating expenses) to drop an extra batch of fries into a fryer. Similarly, it costs very little labor to pour a gin and tonic or similar mixed drink, or plop a bottle of wine onto a table. Cutting profit margins on these items can help move more product quickly while attracting customers with lower prices.
How much lower should you go? While you want to avoid breaking even on profit items like those mentioned above, undercutting competition by 10-20% can still net you profit while attracting customers to your establishment for other offers. Low-cost wine can make for excellent advertisements, for example, and draw in customers who will most likely purchase other items as well. If the different prices are notable enough, you can expect a rush of customers—potentially of a different demographic than you’re used to seeing.
Especially in a market where prices are very fixed, a lower selling price can attract a surprising amount of customers. When my pub opened, I offered beer at a price point about 20% lower than my competitors, which I could do due to lower operating costs. The result? Consistently high sales on an already high-profit item.
Demand pricing
Supply and demand fluctuates with seasons, and so do food prices. Rather than maintain a strict set price for items over the course of a year, consider adjusting prices to reflect seasonality and popularity. Is a specific dessert gaining popularity in your area? Another dollar or two on the menu will help bump your bottom line without irking customers.
Setting a seasonal menu can help in working with demand pricing, like nudging upwards the cost of refreshing cocktails in the summer or pumpkin-themed everything in the fall. Switching to a seasonally driven menu can also help with inventory management. Since your COGS will be lower when food is in season, you can look to shore up other operating costs by hiring more staff or trimming the fat where it’s necessary.
Demand pricing can also reflect the unique offerings of a restaurant. For example, if your establishment is known for its one-of-a-kind ambiance, you can charge more since customers will understand what they’re paying for. If you have other offerings like entertainment, a good view, or an excellent location, you can also up your prices since demand will be higher for your restaurant.
The extreme example of demand pricing can be found in beer bars that operate like the stock market. You don’t need to go that far, but being able to adjust your prices perhaps monthly will add a fair bit of leeway to your pricing and can attract customers via a flexible pricing formula.
Optimize your sales with Yelp
No matter what kind of establishment you operate, you’ll need top-notch software to keep your place running. If you need a feature-packed front-of-house software suite that integrates with numerous popular POS systems, Yelp Guest Manager is just what you need. The platform offers tableside ordering and payment, seamless integrations with third-party delivery apps, push-button reservations and waitlists for customers, and two-way communication with your guests—and a whole lot more.
Want to know more? Reach out to us for a free demo and we’ll show you how to get the ball rolling. When business is up and your menu pricing is just right, you’ll have customers crowing about your top-notch service, too.