How To Price Your Food Menu

How to Price Your Food Menu

In this blog I am going to show you how to price your food menu. There are two ways how a menu item’s selling price is determined. They’re food cost and gross profit margin. Both methods involve having a goal and working backwards to determine the price that will get you there.

How to Price Restaurant Food from Food Cost

The first and most common way to price a food menu is to start with each item’s ideal food cost and price to achieve it.

Food cost is the percentage of an item’s menu price spent to acquire and prepare that item. Most restaurants run a food cost of between 28–35%. That’s why figuring out how to reduce costs in a restaurant is such a high priority. The lower the food cost, the higher the profit and the happier you’ll be with your P&L restaurant statement.

Below we’ll walk you through the restaurant food pricing formula for how to find menu price using food cost.

Formula for Pricing Food by Food Cost

Planning out your menu prices shouldn’t be doen without performing a few calculations. The food price formula we’ll share with you below is key in hitting the sweet spot that gets you the most sales for the highest revenue.

Here’s how you do it:

Step 1: Identify desired food cost percentage.

Let’s say you’re trying to price an onion ring appetizer. You decide right off the bat that you want the food cost to be 20%. That’s quite low and quite profitable. Let’s see if a menu price to achieve a 20% food cost would be prohibitively expensive for your guests.

Step 2: Determine the cost of goods sold (COGS) of your onion ring appetizer.

Look at your invoices to figure out how much you paid for the raw materials that go into the onion ring appetizer. This is easy if you’ve used a bar inventory software like what we use here at F&B Serve to upload all your invoices digitally.

Looking at our records, we find that the COGS of a single onion right appetizer is $3.00. That includes the onions, the batter, and the dipping sauce.

Step 3: Calculate how to price food items.

Here’s the formula for food cost formula menu pricing:

Price = COGS / Ideal Food Cost

Price = $3.00 / .20

Price = $15

With raw materials clocking in at 3 bucks, you’ll need to price your onion ring appetizer at $15 to achieve a 20% food cost. That’s a tough sell if you’re not an upscale concept.

As a result, pricing a menu item by food cost isn’t the only way to do it.

How to Determine Menu Price from Gross Profit

Gross profit margin is the percentage of total sales that’s profit. The sales above your break-even point, for instance. If an onion ring appetizer has a gross profit margin of 25%, that means 25 cents of every dollar spent to make the dish (including raw ingredients and labor) is profit.

If you want to better understand how your menu sales factor into your bottom line, this may be the menu pricing method for you.

Formula for Pricing Food by Gross Profit Margin

Step 1: Determine ideal gross profit margin.

Choose the gross profit margin you want for your menu item.

Restaurant gross profit margins vary wildly. They can be as low as 20% and as high as 80%. The real bottom line is the net profit margin, which factors in all restaurant operations expenses.

Step 2: Determine the COGS of the menu item in question.

Just like the food cost method above, we’ll need to use the raw ingredient cost in this food pricing formula. In our onion ring appetizer example, this is $3.00 for onions, batter, and dipping sauce.

Step 3: Calculate how to price food items.

Here’s the formula for pricing food by gross profit margin:

Gross Profit Margin = (Menu Price – Raw Food Cost) / Menu Price

The equation solves for gross profit margin, not menu price. Which means a little experimentation is required. Let’s say we want a 70% gross profit margin on our onion ring appetizer. We have to plug in a menu price and see what happens. Let’s try $8.

Gross Profit Margin = (Menu Price – Raw Food Cost) / Menu Price

Gross Profit Margin = (8 – 3) / 8

Gross Profit Margin = 62.5%

Close! How about 10?

Gross Profit Margin = (10 – 3) / 10

Gross Profit Margin = 70%

Bingo!

$10 will get you a gross profit margin of 70% for your onion ring appetizer with a raw material cost of $3.

If you have an existing menu, you should calculate the gross profit margin for each of your menu items. This is an analytical task that software like we use at http://www.fandbserve.com can help make short work of. Find items with low margins and think about new pricing strategies.