Before diving into menu design, a crucial step is to meticulously determine menu pricing for each dish. This involves a detailed calculation of food percentages, right down to individual ingredients.
While it may seem like a tedious task, understanding and calculating your food costs, portion costs, overhead, and margins is essential. A well-thought-out pricing strategy that takes into account all operational aspects will ensure your menu is set up to generate profits from day one.
In this article, you will learn:
- How to calculate food cost percentage effectively.
- How to compare your prices against competitors as market benchmarks.
- Different methods to calculate menu prices, including three key strategies.
- Strategies for effective food cost control.
- Alternative menu approaches such as market pricing and prix fixe menus.
By understanding these elements, you’ll be equipped to establish fair and competitive prices for your menu items, maximizing profitability without deterring customers.
Before we delve into the specifics of menu pricing, it’s important to define some key terms:
- Food Costs
- Food Cost Percentage
- Market Benchmarks
Understanding Food Costs
Food cost refers to the total expenditure on food and beverages required for your restaurant operations.
Why is monitoring food costs crucial?
- Ingredient Price Fluctuations: The cost of ingredients varies based on seasonality and suppliers. Without monitoring and pricing menu items according to food costs, your menu could quickly become unsustainable and unprofitable.
- Impact on Prime Costs: High food costs directly increase your prime costs (labor and Cost of Goods Sold), placing your restaurant at significant financial risk.
- Revenue Erosion: If food costs are excessively high while menu prices remain low (resulting in thin margins), you risk losing potential revenue and impacting your bottom line.
Calculating the portion cost for each menu item is the foundational step in determining effective menu prices. To calculate the portion cost of each item on your menu:
- Create a detailed list of all ingredients required for a single serving of each dish.
- Determine the cost of each ingredient portion used in a single serving. (It’s advisable to slightly overestimate ingredient costs to create a buffer for inflation and price changes.)
- Sum up the costs of all portioned ingredients.
- The resulting total is your portion cost.
For example, let’s calculate the portion cost for a Spaghetti and Meatballs dish:
Ingredient Breakdown and Costs:
- Noodles: $0.40
- Tomato sauce: $1.00
- Spices: $0.58
- Bread crumbs: $0.37
- Ground meat: $2.27
- Butter: $0.30
- Oil: $0.25
The portion cost is the sum of these ingredient costs:
Portion cost = ($0.40 + $1.00 + $0.58 + $0.37 + $2.27 + $0.30 + $0.25) = $5.17
Therefore, the food portion cost for this Spaghetti and Meatballs dish is $5.17 per serving.
Alt text: Calculating ingredient costs for a spaghetti and meatballs dish to determine portion cost for menu pricing.
Calculating Food Cost Percentage
The food cost percentage is a key metric used to calculate the relationship between the portion cost and the selling price of a menu item. It’s determined by the formula:
Food cost percentage = (Portion cost / Selling price) x 100%
For example, if a menu item is priced at $13 and its food portion cost is $4, the food cost percentage is approximately 31% ($4 / $13 = 0.307 x 100% = 30.7%).
We will use the food cost percentage to calculate optimal menu prices.
Pro Tip: For an overview of your restaurant’s financial health, you can calculate the overall food cost percentage by dividing total food costs by total sales over a specific period: Total food cost / Total sales = Food cost percentage.
Industry benchmarks suggest that a healthy food cost percentage should fall between 25% and 40%. Most restaurants aim for around 30%. Fine dining establishments may accept higher percentages, while quick-service restaurants typically strive for lower ones.
Determining Your Ideal Food Cost Percentage
Instead of relying solely on industry averages, it’s crucial to calculate your restaurant’s ideal food cost percentage based on your projected sales, labor costs, overhead, and desired profit margins. This tailored approach is more effective than simply adopting generic industry figures.
To determine your ideal food cost percentage, use the following calculation with your specific financial projections:
Let’s assume a restaurant projects weekly sales of $15,000, labor costs of $9,000, overhead of $1,250, and a pre-tax profit goal of $800.
Food cost = Sales – (Labor costs + Overhead + Profit goal)
= $15,000 – ($9,000 + $1,250 + $800)
= $15,000 – $11,050
Food cost = $3,950
Food cost percentage = (Food costs / Sales) x 100%
= ($3,950 / $15,000) x 100%
= 0.263 x 100%
Food cost percentage = 26.3%
In this example, the restaurant’s ideal food cost percentage is 26.3%.
When comparing your restaurant’s ideal food cost percentage to industry standards, consider these key points:
Target Food Cost Percentage Varies by Restaurant Concept
While menu price largely dictates food cost percentage, different restaurant types have varying overheads, particularly labor costs, which influence the target percentage. For instance, a high-end seafood restaurant might tolerate a higher food cost percentage due to lower labor needs in preparing raw products compared to a from-scratch bakery and bistro. The bakery might have lower food costs (around 20%) but significantly higher labor costs for extensive preparation. Profitability can be achieved with a 40% food cost in one scenario and lost with a 20% food cost in another, depending on the overall cost structure.
Target Food Cost Percentage Varies by Menu Item
Different menu items will naturally have different food cost percentages. While your calculated ideal food cost percentage serves as a target, not every item needs to meet it individually. Focus on overall profitability. Some popular, high-revenue dishes might have a higher food cost but contribute significantly to the total profit margin.
Markup Variations
Certain items, like desserts, may have very low food costs (as low as 20%), but their menu prices can be marked up significantly (e.g., 500%) to align with market standards. A latte, for instance, might have a minimal food cost but be sold at a much higher price, resulting in a markup exceeding 1000% and a low food cost percentage. Conversely, a premium steak and lobster dish might have a higher food cost percentage and a slimmer margin to remain competitively priced. Balancing these variations across your menu is essential to achieve your overall target food cost percentage.
Uniqueness and Margin
Unique dishes allow for higher margins and menu prices. However, for common items also offered by competitors (e.g., fries, bottled beer), you’ll need to match competitor pricing unless you can justify a higher price based on superior value or quality.
Tips for Maintaining a Lower Food Cost Percentage:
- Initial Menu Cost Calculation: Begin by calculating menu costs using a lower food cost percentage (20-30%). This builds in a buffer for price fluctuations and ensures profitability.
- Monitor Seasonal Ingredients: Pay close attention to ingredients with fluctuating seasonal prices, such as oysters and specialty seafood. (Market Pricing strategies will be discussed later.)
- Supplier Management: Regularly compare and negotiate with suppliers to secure the best prices. Develop relationships with multiple suppliers to leverage market competition.
- Implement Food Cost Controls: Establish stringent inventory and receiving procedures. Ensure staff inspect deliveries to verify quantity and weight against orders.
- Control Spoilage: Implement clear labeling with expiry dates and creative strategies for using surplus ingredients or items nearing expiration, such as daily specials.
- Regular Food Cost Checks: Conduct monthly food cost checks to recalculate food cost percentages and weekly Cost of Goods Sold reports across your menu and inventory.
- Demand Evaluation: Regularly assess menu item demand. For high-demand items, consider gradual price increases to boost profit, while being mindful of competitor pricing and customer price sensitivity.
- Ingredient Re-utilization: Strategically reuse ingredients across multiple menu items to minimize waste and reduce the total number of ingredients needed.
Market Benchmarks
Before setting menu prices, it’s crucial to compare your potential prices against market benchmarks by analyzing competitor pricing for similar dishes. If your calamari is priced at $20 while competitors offer it at $15, you may be at a disadvantage. In such cases, consider lowering your food cost percentage by adjusting your price, portion sizes, or ingredient sourcing.
To remain competitive, your menu prices should be:
- Comparable: Priced similarly to competitors.
- Slightly Lower: If your target market is price-sensitive and attracted to deals.
- Slightly Higher: If your restaurant targets a more sophisticated clientele who associate higher prices with higher quality.
Conduct a competitive analysis to establish market benchmarks. Similar to menu testing, perform a competitor analysis dish by dish:
- Visit competitor websites.
- Access their online menus.
- Locate the specific dishes you wish to price compare.
- Create a spreadsheet with columns for Dish, Price, and Competitor.
- Repeat this for at least five local competitors, ideally those identified during your restaurant location analysis.
- Sort the spreadsheet by dish.
- Identify the lowest and highest prices to determine the competitive price range for each dish.
This analysis will be invaluable when applying menu pricing methods.
Pro Tip: Note that items like coffee, desserts, and certain alcoholic beverages often have high markups (100-500%). This is standard practice. As long as your prices are within the competitive market range, feel free to markup items to align with industry norms.
Menu Pricing Methods
Mark-up Margin Method
This method, often taught in culinary schools, combined with your ideal food cost percentage calculation, is a reliable approach to setting profitable menu prices.
First, using your calculated ideal food cost percentage (e.g., 33%), determine your mark-up margin using the formula:
Mark-up margin = 1 / Food cost percentage
For example:
Mark-up margin = 1 / 33% = 1 / 0.33 = 3.03
Next, calculate the selling price using the formula:
Selling price = Portion cost x Cost mark-up
Example: If the portion cost for Spaghetti and Meatballs is $5.17 and your mark-up is 3.03, the menu selling price is:
Selling price = $5.17 x 3.03 = $15.67
To maintain a 33% food cost percentage, you would need to charge at least $15.67.
Pro Tip: Industry best practices suggest rounding menu prices up to the nearest dollar, in this case, $16, increasing your profit by $0.33.
Finally, compare this price to your market analysis. If competitors are priced higher, you can adjust your price upwards to increase profit margin. If they are lower, re-evaluate your food costs to meet the competitive standard while maintaining an acceptable food cost percentage.
Minimum Menu Price by Food Cost Percentage
Use this formula to calculate the minimum selling price based on your desired food cost percentage:
Minimum Selling Price = Portion Cost / Food Cost Percentage
Example: For our Spaghetti and Meatballs with a $5.17 portion cost and a 33% ideal food cost percentage:
Minimum Selling Price = $5.17 / 0.33 = $15.67
Round up to $16 for your minimum menu price.
If aiming for a lower food cost percentage, say 25%, divide by 0.25 instead. This will increase the menu price (to $20.68 in this example) and boost profit. Experiment with different food cost percentages (20%, 35%, etc.) to find the optimal balance for each item and market pricing.
Always compare the resulting price against market standards. Adjust prices based on competitor pricing as described in the mark-up margin method.
Menu Prices Based on Overhead
First, calculate your daily overhead, including all non-food costs (rent, marketing, operating expenses, and labor). Refer to your financial forecasts for this data. Divide your total daily overhead by the estimated number of customers you expect to serve daily to find your overhead cost per person.
Example: If daily overhead is $1000 and you expect 125 customers, the overhead cost per person is $8 ($1000 / 125 = $8).
Then, use this formula to determine the minimum menu price:
Minimum Selling Price = Overhead Cost per Person + Portion Cost
For our Spaghetti and Meatballs example, with an $8 overhead per person and a $5.17 portion cost:
Minimum Selling Price = $8 + $5.17 = $13.17
This price ($13.17) would allow you to break even.
However, this might result in a higher food cost percentage than desired. In our example, it yields a 39% food cost percentage ($5.17 portion cost / $13.17 minimum menu price), which is relatively high.
To adjust for your ideal food cost percentage, say 33%, recalculate the price:
Adjusted Selling Price = Portion Cost / Ideal Food Cost Percentage
= $5.17 / 0.33 = $15.67
Rounded to $16, this price covers minimum expenses ($13), provides profit, and aligns with your target food cost percentage.
As with other methods, compare this price to competitor pricing. Adjust upwards if competitors are higher to increase profit, or re-evaluate food costs if competitors are lower to remain competitive while covering overhead and achieving your target food cost percentage.
Determining Contribution Margins
Once you’ve priced your menu items, calculate and log the contribution margin for each.
What is a contribution margin?
The contribution margin is the difference between a menu item’s selling price and its food portion cost. It represents the amount each item contributes to covering your fixed costs and generating profit. Analyzing contribution margins helps you engineer your menu for profitability and decide which items to promote or feature in specials.
Calculate contribution margin using this formula:
Contribution margin = Selling price – Portion cost
Example: For Spaghetti and Meatballs priced at $16 with a $5.17 portion cost:
Contribution margin = $16 – $5.17 = $10.83
Profitable menus prioritize high contribution margins, not just low food cost percentages.
Create a spreadsheet to track this data for each dish:
| Item | Food Cost | Selling Price | Food Cost Percent | Contribution Margin |
|---|---|---|---|---|
| Spaghetti and meatballs | $5.17 | $16 | 32% | $10.83 |
Implementing Food Cost Control Measures
Portion Control
Implement strict portion control measures to prevent food costs from escalating. Standardized portions ensure consistency and accurate inventory ordering. Outline set portions for every item in kitchen procedures and staff training.
Strategies for Portion Control:
- Standardized Meal Portions: Define specific quantities or weights for each item per order (e.g., five coconut shrimp per order). Communicate these standards in kitchen manuals and training.
- Pre-Portioning: Portion food during preparation, especially for busy periods, to minimize errors. For example, pre-portion marinated chicken using scales.
- Standardized Serving Ware: Use consistent-sized ladles, spoons, and spatulas. Train staff to use these tools for portioning instead of eyeballing.
Comparing Actual and Theoretical Food Costs
Regularly monitor inventory and food costs by comparing actual food costs to theoretical food costs.
Actual Food Costs:
Actual food costs reflect the real costs incurred to sell menu items over a period. This requires careful inventory management. Actual food cost is the true cost of food and beverage used to generate sales over a specific period.
Theoretical Food Costs:
Theoretical costs represent your ideal cost scenario, assuming minimal waste, spoilage, or theft. Item food costs used here are the same as your portion costs, including paper costs like napkins.
Formula for Actual Food Costs:
Actual Food Costs = ( (Beginning Inventory + Purchases) – Ending Inventory ) / Total Food Sales
- Beginning Inventory: Value of food and beverage at the start of the period.
- Purchases: Total cost of all food and beverage purchases during the period.
- Ending Inventory: Value of remaining inventory at the end of the period.
- Total Food Sales: Total revenue from food sales during the period.
Example: Beginning inventory: $20,000, Purchases: $6,000, Ending inventory: $22,000, Food sales: $13,000.
Actual Food Costs = (($20,000 + $6,000) – $22,000) / $13,000 = 0.307 = 30.7%
Formula for Theoretical Food Costs:
First, calculate Theoretical Cost of Goods Sold (CoGS):
Theoretical Cost of Goods Sold = ∑ (Item Food Cost × Item Units Sold) for all menu items
- Item food cost: Ideal portion cost per item, including paper costs.
- Item units sold: Number of units sold for each item (from POS data).
Then, calculate Theoretical Food Cost:
Theoretical Food Cost = (Theoretical Cost of Goods Sold / Total Food Sales) x 100%
Example: Theoretical CoGS: $3,000, Food sales: $13,000.
Theoretical Food Cost = ($3,000 / $13,000) x 100% = 23%
Comparing Actual vs. Theoretical:
In this example, actual food cost (30.7%) exceeds theoretical food cost (23%) by 7.7%. This variance could be due to spoilage, waste, inconsistent portioning, or theft. While complete alignment is unlikely, minimizing this gap by addressing inefficiencies in portion control, inventory management, and supplier relations is crucial.
Alternative Menu Strategies
Market Pricing (MP)
Market pricing, often indicated as “MP” on menus, allows for price adjustments based on fluctuating ingredient costs. It’s used for seasonal, imported, or specialty items like seafood.
When and How to Use Market Pricing:
Use market pricing for items with volatile ingredient costs that change daily, weekly, or monthly. This ensures profitability and avoids frequent menu reprints. For instance, oyster prices often fluctuate seasonally, making market pricing ideal.
Prix Fixe Menus
A prix fixe menu offers a complete set of courses (e.g., appetizer, main, dessert) for a single price. It often includes a limited selection of dishes within each course.
When to Use a Prix Fixe Menu:
Prix fixe menus are common in fine dining and increasingly popular in other restaurant types. Some restaurants offer prix fixe menus exclusively for simplified operations and predictable profits. They are also effective for special occasions like holidays or restaurant weeks to attract new customers and manage high demand.
Advantages of Prix Fixe Menus:
- Streamlined Service: Limited choices simplify service and accommodate larger parties.
- Cost Efficiency: Combining low food cost items (e.g., salads, desserts) with popular mains enhances perceived value while maintaining profit margins.
- Revenue Predictability: Provides accurate revenue forecasting per guest.
Conclusion
Menu pricing is both an art and a science. Continuous analysis of food costs in relation to revenue is vital for restaurant success. Don’t hesitate to adjust prices or compare and switch suppliers as needed. Restaurant profitability depends on it. While menu prices are important to diners, they are only one factor. Effective menu design also significantly influences customer choices, which will be explored further.
Silvia Valencia Headshot
By Silvia Valencia
Former Digital Marketing Manager at TouchBistro, managing content for the RestoHub blog.
Topics: RestoHub
