Menu Pricing: How to Successfully Price a Menu
But successful menu pricing is so much more than this. There are other factors you need to consider including your market, your clientele, your brand, demand for your concept or cuisine, your competition, and ultimately the perceived value related to your unique selling proposition (USP).
In this post, you’ll learn how to price a menu by considering all factors that determine your position on a price continuum. At one end, you have the lowest price you can charge while still making a solid profit, and at the other end, you have the highest price the market is willing to bear.
Read on to learn more about this continuum and how to price a menu in four simple steps.
How to Price a Menu: Your 4 Step-Process
Menu pricing may seem daunting at first, but by following a few simple steps you can come to the right price for your restaurant.
Steps 1 through 3 are all about crunching numbers. You’ll learn how to calculate your target menu price by considering plate cost and target food cost percentage only. At this point, no other extra factors, such as your market or perceived value, are factored into the equation.
In Step 4, you’ll review factors like perceived value and USP that determine roughly where you fall along the price continuum. We say “roughly” because determining your position is not an exact science and involves some subjectivity. By getting an idea of where you fall on the spectrum, you’ll be better equipped to price your menu and make adjustments as you see fit.
Determine Your Target Menu Price
Here’s a three-step process to calculate your targeted menu price. Thanks must go to Roger Field’s for providing the template for this section. In Roger’s book Restaurant Success by the Numbers, he explains how to cost menu ingredients and then price a dish using your targeted food cost percentage.
Step 1: Calculate Plate Cost
Plate or recipe cost is the cost of a single dish and includes the cost of all the ingredients that go into making it.
Step 2: Determine Your Targeted Food Cost Percentage
Also known as the maximum allowable food cost percentage (MFC), this is the food cost percentage that you cannot go over if you want to remain profitable. To calculate it, you’ll use this formula:
MFC = 100 – ( (Labor costs + monthly overheads + profit goal)/ total sales)).
Most restaurants will obtain an MFC that’s unique to them, though it’s not uncommon to achieve a percentage of between 28 and 35. For our example, let’s assume your MFC is 32%.
Step 3: Determine Your Targeted Menu Price
The final step is a simple calculation. Take your plate cost and divide it by your targeted food cost to get a targeted menu price for your item. For example,
Food cost: $2.20
Targeted food cost: 32%
Targeted menu price ($2.20/0.32): $6.88, or $6.90 or even $6.99, rounded up.
Maximize Profits: Where Do You Fall Along the Price Continuum?
Now that you have your targeted menu price, it’s time to look at the other factors that influence your menu price and allow you to charge more or less, effectively moving you up or down the price continuum.
Step 4: Determine Your Place Along the Price Continuum
Factors that can influence the price include:
- The perceived value of your restaurant
- Whether you have a unique selling proposition
- The market and their willingness to pay
- The demand for your product
- The competition and what they’re charging
Perceived Value of Your Restaurant
Perceived value is how diners perceive your concept, which includes your food, atmosphere, service, ambiance, decor, etc. The higher your perceived value, the more you can charge and vice versa. To increase your perceived value, create a strong USP. Speaking of which…
Unique Selling Proposition
Your USP is the aspect of your restaurant that differentiates you from the competition, increases your perceived value, and allows you to charge a premium. Your USP can be anything that makes your restaurant unique—from your service, menu, and ambiance to your decor, location, and food presentation.
For example, maybe your restaurant is in a beautiful location with amazing views that customers will happily pay more for. Or, perhaps your restaurant is known as the top Mexican restaurant in the area, with food, music, and decor that beautifully captures an authentic experience. Or maybe, just maybe, you have the best service in comparison to other restaurants. Any of those features may be enough for you to charge more for your food.
The Market’s Willingness to Pay
Depending on the type of food you serve, you may have more or less flexibility in setting menu prices for your restaurant. People are more sensitive to the price of commonly available items, called commodities in economics terms, than they are to more niche offerings.
A typical example of a commodity food item is a burger. Generally speaking, there is an upper limit to what people are willing to pay for a burger. Admittedly this may differ depending on where you live and whether you have a USP, which justifies a higher price-tag.
But, even with a strong USP, some customers may struggle to discern if that burger is genuinely worth the extra money. As a result, most burgers and other commodity items are priced from low to moderate on your price continuum.
If the market is only willing to pay $6.00 for your burger, you cannot charge $6.99 or even $6.90. You’ll have to drop your price and forfeit some of your margins or risk having sales drop as customers choose to eat at other restaurants.
The Demand for Your Product
As a restaurateur, you can use demand-based pricing to set a price based on how in-demand your restaurant is. The higher the demand for your restaurant, the more you can charge.
For example, a restaurant that is fully booked months in advance can charge much more than one that isn’t. Similarly, if your restaurant is located in an airport, you have a captive audience. It’s unlikely they’ll leave to get food elsewhere if they’re hungry, which equates to a higher price tag.
There are a variety of ways to increase your demand, the obvious one being to use advertising to get more customers. The other way is to make sure you have a strong USP.
What’s the competition charging? Looking at restaurants that have a similar concept and seeing what they charge gives you a guideline to follow. But just because your competition is charging a certain price doesn’t mean you should charge the same. As you saw, if you have a strong USP, a higher menu price is often justifiable. On the flip side, the opposite is also true.
Menu Pricing and Beyond
Menu pricing is so much more than calculating your cost and factoring in your targeted food cost percentage.
If you want to price a menu accurately, you also need to factor in variables like your market, perceived value, and demand.
Once you have a firm handle on menu pricing, you can then focus on menu design, dish placement, and having the right mix of high and low margin dishes to hit your targeted food cost.
Request a demo to more about how xtraCHEF can help you with menu pricing.