Among the numerous responsibilities of a restaurant owner, setting the appropriate price for their menu items is one of the most crucial. It is essential to price the dishes accurately. They can neither be too high, which will damage the buying capacity of the customers; nor be too low which will harm the business profits. Menu pricing, thus, is a task of detailed thinking and market understanding.
Fixing the price of a particular dish involves not just the price of its ingredients but several other things as well. In fact, the price may not even remain the same for a particular dish at all times. Therefore, it is absolutely necessary to know the various expenses that ought to be considered during menu pricing.
The influences that shape the pricing of an item on the menu keep varying and shifting in accordance with its surroundings. But there are certain static parameters that justify the prices on the menu. They include:
– this category includes the cost of the ingredients, the cost incurred due to food wastage, and the cost of the portion size. It is important to consider food waste in this regard because even a little food lost due to spilling, overcooking, spoiling, or even storing adds to the calculation of the inventory.
– all the costs that you bear for a particular dish apart from the ingredients is considered as indirect cost. The expenses that are made to add value and quality to a particular dish are known as indirect costs. The cutlery that is used, the ambiance of the restaurant that includes the lighting, the tableware, also the electricity and water supply – all of these come under the indirect costs category.
– just as the name suggests these are the costs that are incurred owing to the change of seasons and its consequent change in the menu. Both direct and indirect costs come under this category. It is important that a restaurateur ensure that while there is a balance in the menu, close attention is paid to the use of seasonal fruits and vegetables. Though this is a fluctuating cost, it is a good way to bring balance to the menu.
– this entirely depends on the restaurant. The choice of services you wish to provide and the level at which you want to provide them is solely based on your discretion. The costs born on such services will add up to the overall costs and is known as the service costs.
– this is the costs that are made to maintain the restaurant, such as the budget or the renovation costs or the salaries of the employees. Even though these may not be directly connected to the food, yet the expenses made for every little thing within the restaurant matters which is why, considering these costs are very important when fixing the menu prices.
– when you are ready to set your menu prices, it is very crucial that you know the pricing of your competitors. The simple reason behind it is, if you fix a price that is higher than the market rate, you are likely to create a question in the minds of your customers. There is a possibility that you may even end up losing customers.
For instance, if KFC is charging Rs.350 for a burger which is 2 times more than a local shop serving burgers, there is definitely a reason for them charging that extra money. Their quality of ingredients gives enough reason to understand the value of the money that a customer is spending. Hence, if you as a restaurateur want to set a price for your menu which is higher than the others you will have to be able to justify it.
On the other hand if your prices are lower than the market, people may also be of the impression that your food quality is not good. Therefore, your only option is to set the price at par with your competitors.
– this is a tricky one. You will have to understand who your target audience is, based on that you should know how to set the prices. For example, if you wish to cater to a larger section of the society then your prices have to be affordable by the middle class. This would include – officer goers, college students, homemakers, factory workers, etc. who make a decent income. However, if your wish to serve high-profile clients in your five-star restaurant then your prices too should reflect it. My advice is, whatever your target audience, you need to understand that your menu prices should neither be too high nor be too low, both have adverse effects on your consumers.
– this refers to the ability of payment for different categories of people, such as millennials, single women, parents, etc. According to a survey, the categories can be labeled as ‘busy balancers’, ‘bargain hunters’, food service hobbyists’, and ‘habitual matures’. Every type of person has a particular habit of spending money at a restaurant; it is important to understand that and make changes in the menu price accordingly.
– having a standard portion size helps maintain a consistency in the menu pricing. Sizing portions is very important in keeping food costs in check. It also gives the added benefit of controlling wastage and therefore adding more profit to cost per dish.
: this is the ratio of the total cost of the ingredients with the selling price of the dish. So for example, if the total cost of the ingredients of one regular French fries is Rs.50 and the selling price of the prepared fries is Rs. 200 then the food cost percentage will be:
Ingredients cost / Selling price of dish X 100
50/200 X 100 = 25%
It is the amount you add to the selling price of your dish apart from the costs you had to bear for the ingredients and the preparation of the dish. This can be done be turning the food cost percentage equation upside down, which means –
Selling price of the dish/cost of the portion
So taking the previous example again, we can say that the markup price for a regular size of French fries is:
200/50 = Rs. 40
If you want to find out the percentage of the markup then you simple divide 1 with the food cost percentage. For example:
1/25 * 100 = 4%
Experts are of the opinion that while pricing a menu the profit percentage, the mark up percentage and the food cost percentage must all be in balance.
This is the price that helps you decide the selling price of your dish. Your menu pricing will thus be calculated by portion cost x markup price. For instance, if your portion cost is Rs. 5 and the markup is Rs.40 then your selling price will be Rs.5 x40 = 200
We can help you figure out your menu pricing with the following simple recipe calculator. Try it out and see how easily you can price your menu accurately.
Now that you know what menu pricing is and how it affects the restaurant’s success, you must also know the strategies that you could follow to price your menu accurately. Let’s see some of best strategies for menu pricing:
– this was the strategy used by the ancestors of the restaurant industry up until big names such as McDonalds and KFC came into the picture. This method uses intuition, customer psychology, competition, etc. Though this is not the ideal strategy to follow, yet this forms the basis of the other newer strategies.
– this strategy is all about focusing very closely on your competitors, as is evident from the name. The best way is to get hold of a menu from each of your competitors and check out for yourself. Now, keeping their menu pricing in mind, create your own menu pricing after carrying out the calculations accurately. But mind you, you should not forget your target audience. There will be a category of your consumers who care more about the prices and some who are more interested in better quality of food. For the first category, ensure to lower your prices, while for the latter you may choose to either keep the prices similar or even take a chance to raise the prices a bit. This strategy works very well for new comers.
– you will need to consider the net profit percentage, the gross profit percentage as well as the markup percentage (explained earlier), in this strategy. The traditional pricing factors also come into play when calculating the menu pricing via this strategy.
– this kind of pricing is the most commonly used dynamic pricing technique, where the prices are fixed based on the demand of that particular dish by the customers. When you notice a high demand of an item on your menu, it is only wise to hike the price and earn more profits out of it.
There are further distinct means, under this category, by which the pricing is done:
a. Price Skimming – this is when the price is set at its highest considering the rising demand of the dish and then gradually reducing the price with time.
b. Penetration Pricing – by virtue of this, the price of a dish is set at below the market rate. This is done to attract customers and eventually, the price is increased by introducing some add-ons with it.
c. Value-dependent Pricing – in this, a restaurant owner tries to capture the value a customer might attach to a particular item; the menu pricing is based on this value.
– this is the most common method used by restaurateurs for menu pricing. They include every cost made into this pricing strategy such as labour cost, the ingredients cost, rent, utility bills, etc. To this the profit margin is added and the final price of a dish is decided.
– also known as the ‘good,better,best’ strategy this is, as the name suggests, a range of options given to the customer for the same food. For example, as McDonalds would consider a simple burger as ‘good’ and have a particular price. When that burger is served with fries it is considered as ‘better’ and when two cold drinks and an ice cream are further added to that it becomes the ‘best’ version of the burger. Each of these versions has a separate price and has its own attractive factor for the customers.
Menu pricing thus is a detailed and very important aspect of the restaurant business. As restaurateur, therefore, it is crucial that you get a clear understanding of the subject, the process and the various strategies. This will certainly help in enhancing customer requirements as well as scale your restaurant business by leaps and bounds.
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