A restaurant’s success rides on its menu pricing. If prices are too low, the business will fail. If prices are too high, the restaurant may have to change its target audience. Determining restaurant menu prices is an art, and this art can make or break a business.
Pricing will pay for your business, so restaurants must account for more than a chef’s salary and food prices when setting their prices.
All overhead will need to be considered when you put a price on a menu item, and this will include:
- Insurance costs
- Equipment costs
Several things need to be considered when determining your pricing, including:
- Profit margins
- Food costs
How to Price Food in a Restaurant
Using an arbitrary number, let’s assume a pasta dish costs $10. As a patron, you may scoff at the price because you know that the cost to make the food is $3 (again, an arbitrary number). But business owners need to ensure that they make profit margin goals.
As a general rule of thumb (and this will fluctuate slightly), you need to account for the following when pricing a menu item:
- 30% for the food’s cost
- 30% for labor costs
- 20% for occupancy costs
Owners also need to turn a profit so that they will earn 20%.
Using the $10 pasta dish example, here’s a breakdown of the costs using this rule:
- $3 goes to ingredient costs
- $3 goes to the chef’s salary and waitress costs
- $2 goes towards occupancy costs, such as rent and utilities
- $2 will be profit for the owner
Profit margins are important to consider for all menu items, and this is because you need to be able to cover the costs of making the food, paying salaries and keeping the lights on. If you take the time to determine how much profit margins you’ll make from each menu item, you’ll have much better control of your restaurant’s costs.
If you need to be able to calculate profit margins for a dish, you’ll want to do the following:
- Take the menu price ($10) and subtract ingredient costs, salaries and occupancy costs ($8).
- You’ll be left with $2, which you’ll want to divide by 10.
- 20% would be your profit margin.
But 20% profit margins are not normal. Limited-service restaurants have profit margins that are more in the 6% range, and full-service restaurants have 2% margins on average.
Even if a menu item has a 20% profit margin, there are also slow days and days when business is better. Friday and Saturday account for the majority of a restaurant’s sales, so there will be days when chefs are not working to full capacity and waitresses are waiting around for customers to come in.
Rent, salary and utility costs will still exist whether or not customers walk through the door.
Costing Out Your Menu Prices
It’s not as easy as figuring out profit margins when determining how to price a menu. A restaurant pricing guide must also consider what customers will pay in the market. This is a tricky part of menu creation because every restaurant is different.
Upscale restaurants can demand higher prices, but their dishes may be on par with a lower-end restaurant.
You also need to consider local income levels.
GrubHub surveyed restaurants in their database, and they found that:
- Burgers in New York City cost, on average, $9.52.
- Philadelphia’s hamburgers cost, on average, $6.24.
If you were to stroll down midtown Manhattan, you’d find that most sit-down restaurants will charge nearly $19, some even more, and that is before tip and taxes.
Tourists are known to pay more, but midtown Manhattan’s average household income is also $139,000 per year. Higher earners are willing to and can afford to, pay more for their burgers.
You can research the average income in your restaurant’s location, but another way to determine the going rate is to go to other restaurants. Sit down in the restaurants, see what the competition offers regarding service and ambiance, and then jot down the prices for similar menu items to what your restaurant may offer.
After going to 3+ restaurants, you’ll start to develop a good understanding of the average prices for menu items.
If you price your menu too high, you may price yourself out of the market unless you offer something drastically different from the competition.
Specialty burgers or high-end beef may allow you to charge slightly more for your burgers, but there does need to be some justification for your prices.
Understanding Standard Gross Profit Margins
Given today’s pricing for food, we can determine the average gross profit margins for different menu items.
- Pasta typically increase profit margins because they have around a 15% cost compared to their menu prices.
- Salads also have a low cost, around 15% of the total item price.
- Appetizers and desserts are great items, too, because their costs are low and their profits are high.
- Alcohol normally has a 30% to 50% cost range.
- Steaks and meats, higher-end items, often have a 50% cost because ingredients are expensive.
What does this all mean?
Well, let’s assume that a person orders a $30 steak with 50% costs. Based on ingredients alone, and we do not include salaries, or any other expenses, a $30 steak would yield $15 profit. Now, let’s assume a table ordered $30 in pasta dishes. At costs of just 15%, these pasta dishes would yield a $25.5 profit.
Based off of this, it’s easy to see how profit margins may vary greatly depending on the price of a meal.
Oftentimes, pure profit from bills over $25, your steaks or seafood dishes, are far less than bills in the $15 - $24.99 range because of the increase in costs.
A restaurant that sells pasta dishes primarily will earn significantly more than a restaurant offering mostly steaks.
Markup and Restaurant Menu Pricing
You can’t fully understand how to price food on a menu without considering markup, too. Markup is what you’ll charge on top of food costs to cover your overhead. You can’t purchase ingredients for $2 and sell a meal for $2 or $3 – you need to cover additional costs.
It's impossible to break even or grow a restaurant without marking up your prices.
The total menu item price needs to cover everything, including:
The markup will need to consider:
- Average expected salaries
- Average rent costs
- Average utility costs
- Average sales volume
A general rule of thumb is that items have at least a 300% markup or three times the wholesale price. But you need to consider the price of the most expensive variation of the dish. Let's assume the pasta dish can include meat sauce, which may cost an additional $1 to make.
Based off of this figure, you may assume that the dish’s $1.5 base price is now $2.5.
This is why restaurants always opt for the highest possible cost for an item. A basic coffee with milk will have its price based off of the coffee with the most expensive variation of milk, which may be soy milk, for example.
Soy milk price is nearly double that of regular milk.
Markups will also be reflective in lunch and dinner prices. Lunch prices are almost always lower than dinner prices because restaurants are trying to attract more guests during lunch hours. Margins may be lower at lunch, but portions may also be smaller to account for this.
Restaurants will be able to adjust their prices over time, and they will have a much better understanding of their bills and sales volume.
When a restaurant has a better understanding of costs and sales, food prices can be adjusted higher or lower as needed. You'll also be able to determine the psychology of your local area.
There is a price that the average consumer will pay for an item and a limit to how much they’ll spend.
Entrees may be priced in the $15 - $20 range in lower income areas and higher when patrons in the area can afford a $30 entrée.
Determining how much patrons will pay for an item is best achieved by checking the prices of your competitors. Pay close attention to the least and most expensive dishes on the menu, and start averaging costs in your area.
Main chefs should be involved in pricing a menu because they’ll be able to determine each ingredient that goes into a dish. Everything from oils and spices to main ingredients must be considered in the average cost of the dish.
Once this is done, you’ll have a better idea of what general prices you can charge based off of the 300% markup (which may be even more, depending on local costs and experience).
You can then, based off of the dish, determine how long it will take to prepare and serve to add more markup as needed. If a meal takes an hour to prepare, it will need to be marked up higher than a dish that takes 10 minutes to make due to higher utility and chef-related costs.