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Before you begin designing your menu, you’ve got to determine menu pricing for each item. To do this means calculating food percentages down to the very last carrot.
Yes, this process is a tad tedious. It requires you to breakdown your menu items by portion cost, calculate overhead, and play with margins. However, with a pricing strategy that considers all operational aspects, you’ll set your menu up to generate profits from the beginning.
In this article, you’ll learn:
- How to calculate food cost percentage
- How to use your competitors as market benchmarks
- How to calculate menu prices using three pricing methods
- How to control food costs
- How to use alternative menu strategies (market pricing and prix fixed menus)
When put together, you’ll be able to determine fair, competitive prices for your menu items that will won’t rob you of profits, nor scare customers away.
Before we get into the nitty gritty of determining menu prices, you need to understand:
- Food Costs
- Food Cost Percentage
- Market Benchmarks
What are food costs?
Food cost refers to the total amount spent on food and beverages.
Why should you monitor food costs? Because:
- The cost of ingredients fluctuates according to season and provider. If items aren’t priced and monitored according to food cost, your menu items could quickly because too expensive to maintain.
- High food costs increase your prime costs (labor and Costs of Goods Sold) which can put your restaurant at great risk.
- If your food costs are too high and your prices are too low (aka your margins are too slim), you risk losing revenue.
Determining your food costs per portion is the first step to creating menu prices.
To calculate the portion cost of every menu item (or the total cost per meal), complete the following steps.
- List out all the ingredients portioned for a single dish.
- Determine the cost of the portion of the ingredients in the dish for a single serving. (Note: it’s better to overestimate than underestimate the costs of ingredients. This way you can give yourself some buffer room for inflation and changing prices.)
- Add all the portioned ingredient costs together.
- The resulting figure is your portion cost.
Let’s say you’re determining the cost of spaghetti and meatballs.
List out and determine the cost of ingredients:
- 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 total of these ingredients.
Portion cost = ($0.40 + $1.00 + $0.58 + $0.37 + $2.27 + $0.30 + $0.25)
This spaghetti and meatballs dish has a food portion cost of $5.17 per meal.
How to Calculate Food Cost Percentage
How to calculate food cost percentage is used to calculate the difference between the portion cost and the selling. You can determine the food cost percentage through the formula:
Food cost percentage = portion cost / selling price
For example: if a menu item is priced at $13 and the food cost was $4, your food cost percentage is 31%.
We’ll be using food cost percentage to calculate the price of each menu item, so keep this equation in mind as you read on.
pro tip: when you’re up and running, you can calculate your food cost percentage for all sales by dividing your total food costs by total sales during a specific period of time. the formula just changes slightly. total food cost / total sales = food cost percentage
Industry standards dictate that your food cost percentage should be between 25-40%. Most restaurants aim to keep their food cost percentage at around 30%. In general, higher food cost percentages are acceptable for fine dining restaurants and lower food cost percentages more desirable for quick service restaurants.
Determine your ideal food cost percentage
To do this, calculate your ideal food cost percentage based on projected sales, labor, overhead, and hoped-for profits. In many cases, food cost percentage is based on industry averages or a chef’s past experiences. Don’t do this! While the industry averages we spoke to above are a great benchmark, we recommend that you crunch the numbers to determine your restaurant’s ideal food cost percentage. Your situation will be unique to the rest of the market.
To determine your ideal food cost percentage, complete the following calculation using your own numbers:
Let’s say a restaurant has projected weekly sales of $15,000, labor costs of $9,000, overhead of $1,250, and a goal of before-tax profits of $800.
Food cost = sales – (labor costs + overhead + profit goal)
= $15,000 – (8,000+1250+800)
= $15,000 – 10,050
Food cost = $4,950
Food cost percentage = food costs / sales
= $4,950 /$15,000
Food cost percentage =33%
When comparing your restaurant’s ideal food cost percentage to industry standards, keep in mind:
Target food cost percentage varies by concept.
While food cost percentage is largely determined by menu price, different concepts require different percentages based on their overhead, including labor. A high-end seafood restaurant can have food costs on the high end of the scale, but their labor is lower because they don’t have to transform the raw product. This is unlike a from-scratch bakery and bistro. While they might have low food costs as low as 20%, the labor needed to knead the dough, prepare pastries and other baked goods is much more extensive. Thus, they will have higher labor costs. A restaurant can be profitable with a 40% food cost, as much as a restaurant with 20% food cost could be losing money.
Target food cost percentage varies by item.
Some items will require different food cost percentages. Although the food cost percentage you determined above serves as a target, not all menu items will carry the same food cost percentage. Look at the entire picture of profitability. Some items will have a higher food cost, but if they’re hot sellers and bringing in the revenue and have a high contribution margin, that’s ok! We’ll talk about contribution margin more later.
Some markups will seem too big.
For example: Dessert items could have a low food cost as low as 20%, but a menu price could be marked up as much as 500% in order to align with market standards. For example, a latte could have a food cost as low as 0.33 cents for coffee beans and milk. It wouldn’t be unreasonable to sell that latte for $3.50, which means there’s a mark-up of over 1000% and a food cost of 9%.
On the contrary, a steak and lobster meal might have a higher food cost at 30% and a slimmer margin in order to align with industry standards. Thus, it is important to balance your menu so that all low and high food costs combine to reach your target food cost percentage.
The more unique your product, the higher the margin.
If you’re selling a unique item, you can demand a higher margin and menu price. However, if you’re selling the same items as your competition (e.g. fried calamari, bottled beer, a basket of fries), you’ll have to match their price, unless you can prove why you deliver more value.
Tips to keep your food cost percentage low:
- Calculate menu costs using a lower food cost percentage to start (i.e. 20-30%). That way your menu items are slightly inflated to account for change and profits.
- Keep an eye out for seasonable ingredients that fluctuate drastically, like oysters, specialty meats, and other seafood. (We’ll talk about Market Pricing shortly.)
- Manage suppliers. Compare (or change) suppliers for the best possible prices. We recommend that you have relationships with a variety of suppliers so that you can easily find the best market price for ingredients. Read our section on how to find and compare food & beverage suppliers.
- Implement food cost controls on inventory and receiving. In your kitchen procedures, define that the staff member who is doing the receiving should inspect shipments to ensure that you received the quantity and the weight of inventory that you ordered.
- Control food spoilage by accurately labeling ingredients with expiry dates. Find creative ways to use excess ingredients and food that’s on its way out. Create specials using those ingredients.
- Standardize a monthly food cost check to recalculate Food Cost Percentage and weekly report of Cost of Goods Sold across your entire menu and inventory.
- Evaluate demand regularly. If the demand of a particular menu item is high, you can (slowly) raise your price on that menu item to increase your profit. Two things to keep in mind: 1. The price your competitors use. 2. There is a maximum your customers will be willing to pay for a dish.
- Make sure to strategically reuse ingredients across menu items in order to reduce spoilage and the total number of ingredients you need to order.
Before you begin the process of calculating menu prices, understand how competitors and the market have priced similar menu items.
If you’re selling calamari for $20 but your competition is selling their calamari for $15, you could be at a disadvantage. In this case, reduce your food cost percentage by either lowering your price, distributing smaller portions, or using cheaper ingredients.
To compete, you’ll want to price your menu items:
- At a similar price point.
- Slightly lower – if your target market is attracted to a deal and encouraged to buy by low costs.
- Slightly higher – if your restaurant’s target market favors sophistication; a higher cost could denote higher quality.
Determine market benchmarks through a competitive analysis.
As we did in Restaurant Menu Ideas & Testing, perform a competitor analysis by item.
To do this:
- Visit a competitor’s website.
- Open their menu.
- Locate the dish you’re looking price.
- In a spreadsheet, create a column for the dish, the price of the dish and the competitor.
- Repeat for at least five local competitors. Use the local competitors you identified in How to Choose a Location For Your Restaurant.
- Sort the spreadsheet by dish.
- Mark the lowest cost and highest cost to determine the competitive cost range for each.
You’ll use this analysis when you complete the menu pricing methods we’ll describe below.
pro tip: you’ll notice that some items like coffee, dessert and some alcoholic beverages have incredibly high mark ups, anywhere between 100-500%. this is common. as long as you’re in the competitive market range, feel free to mark up your menu items to match industry standards.
Menu Pricing Methods
Determine Menu Price by Mark-up Margin
This is the menu pricing method that culinary schools teach. Combined with the ideal food cost percentage calculation you completed above, it is a sure-fire way to set your prices up for profitability.
First, using the food cost percentage you calculated above, determine your mark-up margin. We’ll continue to use 33% as our food cost percentage.
Use the formula:
Mark-up margin = 1/ food cost percentage
mark-up margin = 1/33%
The next step is to calculate the selling price. Use the formula:
Selling price = portion cost x cost mark-up
For example: If the portion cost for spaghetti and meatballs is $5.17 and your restaurant has a mark-up of 3.03, the menu selling price of the spaghetti and meatballs is:
Selling price = $5.17 x 3.03
You would have to charge at least $15.67 for the spaghetti and meatballs if you want to keep your markup at 3.03, which is 33% food cost percentage ($5.17 food cost / $15.67 selling price).
pro tip: best pricing format standards dictate that you round the menu price up to $16. bonus: that’s an extra $0.33 profit!
Finally, ensure the menu price is in line with market standards. Compare the price to the competitors prices on your analysis.
If you’re competitors are priced higher, adjust the menu price so that you increase your profit margin.
If your competitors are priced lower, you’ll have to revisit your food costs in order to meet the competitive standard while meeting an acceptable food cost percentage.
Determine Minimum Menu Price by Food Cost Percentage
Use the formula:
Minimum Selling Price = Total Portion Cost / Food Cost Percentage
For example: Referring back to our spaghetti and meatballs example, we determined that the portion of that meal was $5.17. Our ideal food cost is 33%.
Minimum Selling Price = $5.17 / 0.33
The result is your minimum menu price: $15.67
Round up to $16.
If you’re aiming to have a lower food cost percentage, say 25%, in the last step, divide the menu item by .25. This will increase the menu price of the dish (in this case to $20.68), but also means you’ll generate a higher profit. You can then play with various food cost percentages (20%, 35%, etc.) and make a decision based on the menu item and market pricing.
As always, ensure the menu price is in line with market standards. Compare the price to the competitors prices on your competitive analysis.
If you’re competitors are priced higher: adjust the menu price so that you increase your profit margin.
If your competitors are priced lower: you’ll have to revisit your food costs in order to meet the competitive standard while meeting an acceptable food cost percentage.
Determine Menu Prices Based on Overhead
The first step is to calculate your daily overhead. For the purposes of this formula, your daily overhead includes all the non-food costs (rent, marketing, taxes and operating expenses, including labor) required to run your restaurant daily. You will most likely need to refer back to your forecasts to get this information.
Divide your overhead by the number of customers you expect to serve each day.
For example: If your overhead is $1000 per day and your estimated customer traffic is 125 customers a day, then your overhead cost per person is $8. ($1000/125= $8)
Then, use this formula to determine your minimum menu price:
Minimum Selling Price = Overhead + Portion Cost
This means: If your overhead is $8 per person and your portion cost is $5.17, you’ll need to price the menu item at $13.17 to break even.
Minimum Selling Price = $8 + $5.17
In some cases this will give you a higher food cost percentage than is ideal. In our example, calculated food cost with overhead gives us a food cost percentage of 39% ($5.17 portion cost / $13.17 minimum menu item price), which is high.
So to counter that, you need to adjust the price according to your ideal food cost percentage.
For example: If your ideal food cost percentage is 33%, you’d price that menu item at $15.54. ($5.17 portion cost / .33 food cost percentage = $15.54).
Rounded, your selling price would be $16.
On each dish sold, you would cover your minimum expenses ($13) and make a profit ($3).
As with the other formulas, compare the price to the competitors prices on your analysis.
If you’re competitors are priced higher: adjust your menu price and increase your profit margin.
If your competitors are priced lower: revisit your food costs in order to meet the competitive standard while meeting an acceptable food cost percentage and accounting for overhead.
Determine Contribution Margins
Once You’ve Priced Your Menu Items, Log All Contribution Margins
What is a contribution margin?
The contribution margin is what’s left over between the menu item’s selling price and its food portion cost. The contribution margin of each item will give you a picture of how each item contributes to your overall profitability once you’re up and running. This will help you engineer your menu for profits and decide what items to feature more prominently or include in weekly specials. We’ll dive into a profitability analysis of your menu in our upcoming article on menu engineering.
Determine your contribution margin using this formula:
Contribution margin = selling price – portion cost.
Example: Using our spaghetti and meatballs that has a selling price of $16 and a portion cost of $5.17
Contribution margin = $16 – $5.17
Profitable menus (and profitable restaurants) don’t just keep food cost percentages low: they aim to keep contribution margins high.
For each dish, create a spreadsheet using the following template:
|Item||Food Cost||Selling Price||Food Cost Percent||Contribution Margin|
|Spaghetti and meatballs||$5.17||$16||32%||$10.83|
Implement measures to contain your food costs.
Keep your menu costs from running wild by implementing portion control measures. These standards ensure that the same portions are consistently delivered to guests. Portion control makes inventory ordering more accurate and keeps food costs consistent for every dish. In your kitchen procedures, outline set portions for every item to avoid increasing food costs inadvertently.
Control portions by:
- Standardizing meal portions: Whether it’s five coconut shrimp or eight jalapeno poppers per order, set a number or weight for each item per order. Communicate this in your kitchen manual and staff training program.
- Preparing food portions ahead of time: Food is most likely to get portioned incorrectly on a busy night when the pots and pans are flying. To avoid this, take the onus off chefs by portioning food during the preparation process. For example, when marinating chicken in preparation for service, use a scale to portion each piece of chicken ahead of time.
- Using standardized sized serving wares: Purchase serving wares (e.g. ladles, serving spoons and spatulas) of the same size. Instruct your kitchen staff to consistently distribute portions using these serving wares instead of eyeballing portions. E.g. Use two serving spoons of mashed potatoes so that guests receive the same portion of mash no matter which chef is doing the serving.
Compare Actual and Theoretical Food Costs
Once you’re up and running, you’ll have to monitor your inventory and food costs on a regular basis. To do this, compare your actual food costs to your theoretical food costs.
What are your actual food costs?
Your actual food costs accounts for all the actual costs you incurred to sell your menu items over a period of time. This means you’ll have to calculate your inventory diligently and carefully.
Actual food cost is defined as the true cost of food and beverage used to produce your food and beverage sales over a specific period.
What are theoretical food costs?
Your theoretical costs is your desired cost scenario. It describes what should have happened to your food costs in an ideal world without shrinkage, waste, spoilage or spill. The item food costs you use in this formula are the same food costs you priced out for your portion costs. The caveat is that the cost includes paper costs, like napkins, take-out boxes, etc.
After you determine your theoretical food costs, you’ll compare the two metrics against one another to determine the variance.
Formula for Actual Food Costs:
Actual Food Costs = ( [Beginning Inventory of F&B] + [Purchases]) – [Ending Inventory] )/ Total Food Sales
Beginning Inventory: The actual value of food and beverage you have at the beginning of the period.
Purchases: Any products you’ve purchased from a food and beverage supplier during that time, down to the very last onion.
Ending Inventory: The actual value of inventory that’s left at the end of the period.
Example: Let’s say your initial inventory was valued at $20,000. Your purchases that week were $6000 and at the end of the week you had $22,000 left and food sales of $13,000.
Actual Food Costs = ([$20,000 + $6000] – $22,000) ÷ $13,000
To see this as a percentage multiply the number by 100
100 x 0.307
Your total actual food cost percentage is 31% (0.307)
Formula for Theoretical Food Costs:
First you must calculate, theoretical CoGs.
Theoretical Cost of Goods sold: This is the total of ideal portion costs for all menu items, multiplied by the true number of units sold for each menu item.
Theoretical Cost of Goods Sold = [ (Item A Food Cost × Item A Units Sold ) + ( Item B Food Cost × Item B Units Sold ) + Etc. ]
Item food cost: The ideal portion cost for each menu item + the cost of ingredients and paper costs if applicable. (E.g. napkins, take-out containers etc.)
Item units sold: The true number of units you’ve sold of each menu item. You should be able to pull this figure from your POS.
Then, using that figure, you calculate, Theoretical Food Cost.
Theoretical Food Cost = (Theoretical Cost of Goods Sold / Food Sales) x 100
Total food sales: Total food sales for the same duration of time as your CoGS % above.
Example: For simplicity, let’s say, you’ve gone through your entire menu, and found that you have a Theoretical Cost of Goods Sold of $3,500. Using the same sales figure as we did for Actual CoGS, we’ll say our food sales was $13,000.
Theoretical food cost = ($3,000 / $13,000) x 100
= 0.23 x 100
Your theoretical food cost is 23%. That represents the theoretical food cost you should incur in an ideal scenario.
In this case, our theoretical food cost is 23% and our actual food cost is 31%. This gap can be due to many things including: food spoilage, spill, inconsistent portioning, and shrinkage (i.e. theft.) While narrowing the gap is ideal, it’s important to note that your theoretical food cost and ideal food cost may never match. By comparing what should have happened (theoretical food cost) to what actually happened (actual food cost), you can work to narrow the gap by identifying inefficiencies in portion control, inventory management, suppliers, anti-theft and any of the other factors we identified earlier.
Alternative Menu Strategies
What is market pricing?
Market pricing is often listed on menus as MP. By indicating “market price” on your menu, you can determine the price on-the-fly. It’s used when you need to change the price of a dish on a daily, weekly, or monthly basis based on the cost of ingredients. Many restaurants use market pricing on seasonal items (think: seasonal produce), imported items (think: Kobe beef), and other speciality items (think: seafood).
When and how do I use use market pricing?
Use market price in cases where you need to constantly change the price to match volatile food costs. Market pricing ensures you’ll make a profit on the item. It also saves the cost of reprinting you menus whenever the cost of ingredients change.
For example, many restaurants indicate that oysters are for sale at market price. Since the cost suppliers charge for oysters varies from season-to-season, adjust your selling price as they do to continually make a profit.
Prix Fixe Menus
What Is a Prix Fixe Menu?
A prix fixe menu is a separate menu that uses a single price for a complete set of courses. For example: for $35, the diner would get to choose a starter/soup/salad, main, and dessert from a limited selection. Consider pairing a low food cost percentage green salad and dessert, with a popular main. By mixing low cost and high demand dishes on your prix fixe menu, you have a greater profit margin, while still enticing and offering value to your diners.
When to use a Prix Fixe menu
While prix fixe menus are often found in fine dining restaurants, they’re growing in popularity among many dine-in concepts. Some restaurants choose to offer prix fixe menus only. They do this to get a solid idea of the profits per guest. Other restaurants band together during a festival, like Toronto’s Summerlicious or Chicago Restaurant Week, to get new diners in the door with the hope they’ll become repeat customers later. Restaurants commonly distribute Prix Fixe menus on high traffic special occasions like Thanksgiving, Valentine’s Day, New Year’s Eve, and Mother’s and Father’s day.
Advantages of a Prix Fixe menu
Since guests can only choose from a few dishes, you can:
- Accommodate larger parties and higher demand since there’s less menu variety.
- Since you’re packaging low food cost apps and desserts with an enticing main, guests perceive that they’re getting a great bang for their buck, while you keep your food costs down and your profits up.
- Account for revenue by order with greater accuracy.
Pricing your menu is an art as much as it is as science. What matters most as you open your doors is that you’re constantly analyzing your food costs in line with revenue. Don’t be afraid to gradually change your prices or seek alternative suppliers. Your restaurant’s health and profitability is on the line. While menu prices are apart of diners’ decision making, they’re not the only thing that attract hungry customers. In the next section, you’ll learn how menu design can influence diners’ choices.
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