Along with a menu design that drives sales, pricing menu items properly is essential for a successful restaurant. Instead of just setting prices arbitrarily, here are some restaurant menu pricing strategies to help make your restaurant as profitable as possible.
Also known as markup pricing, cost-plus pricing is the most straightforward way to set menu prices. This method calls for first determining the cost of goods sold, the total cost of ingredients to make a menu item, then adding a markup to make a profit.
Although labor and overhead are significant costs for restaurants, consultant Matt Roberts of RestaurantNinjas.com says that breaking down those costs per item can be difficult. Instead, he recommends adding a larger markup for labor-intensive items and a smaller markup for others.
Calculating the Markup
Since the cost of ingredients usually accounts for 25% to 35% of a menu item’s price, simply divide the cost of ingredients by a number between 0.25 and 0.35. For menu items that are easy to prepare, divide by a number closer to 0.35; for more time-consuming items, divide by 0.25.
For example, if the ingredients for a basic hamburger cost $3, divide 3 by 0.35 to get 8.57. After rounding, the menu price should be about $9. On the other hand, if a gourmet mini strawberry pie with a lattice top costs $4 to make, divide 4 by 0.25 to get a menu price of $16.
Cost-Plus Pricing Disadvantages
Cost-plus pricing is simple, but since it doesn’t account for the market, you may over or undervalue menu items in relation to the competition. If your hamburger is $9 but competitors sell theirs for $6, customers may find your hamburger too expensive, resulting in fewer sales.
Likewise, if your mini pie is $16 but other bakeries sell mini pies for $20, you may be charging less than you could. Even though you might get more business from price-sensitive consumers, you’ll likely miss out on revenue that you could have obtained by simply charging a little more.
Known as market-minus pricing in the food service industry, this restaurant menu pricing strategy sets prices based on market conditions. After first determining the prices of similar products, you then create an item that will be profitable at that price.
As with cost-plus pricing, labor and overhead costs aren’t factored in directly but rather indirectly. If preparing a menu item is time-consuming, restaurant owners should set a higher price that customers will still find acceptable.
Making Profitable Menu Items
Since this method sets the price first, you then have to work backwards to make a product. It’s important to be mindful of the total cost of ingredients so that your product remains profitable.
For instance, if most pizzerias in your neighborhood offer 16” pizzas for $20, you might want to charge $23 for gourmet pizzas. However, if you use the finest ingredients, it might cost $15 to make a pizza, putting you far above the industry average of 25% to 35% cost of goods sold.
In this case, it might be better to use slightly lower-quality ingredients so you can make each pizza for $8, giving you a cost of goods sold that’s 35% of the menu price. Even though you may not want to compromise on ingredients, it may be necessary if you want to be profitable.
Market-Based Pricing Disadvantages
Although a market-based restaurant menu pricing strategy considers what competitors are charging, that can be a bad thing at times. If you focus entirely on what competitors are doing, it’s easy to potentially copy their mistakes.
For example, let’s say that local competitors charge $18-$20 for pizza. If higher income families are starting to move to the area, you could probably charge a bit more. By focusing solely on what competitors are doing and ignoring the big picture, you would lose out on easy revenue.
Loss Leader Pricing
Commonly used in grocery stores, loss leader pricing refers to selling in-demand products at low prices that aren’t profitable. The low price for the in-demand product draws people to the business who then buy other products with a higher markup.
The key to loss leader pricing is choosing the right menu item. It should be something that people really want and that will lead to sales of related products. If people don’t buy other items with a better profit margin, loss leader pricing isn’t very effective.
Utilizing Loss Leader Pricing
In a video on his YouTube channel, consultant Asher Karnes talks about a restaurant he liked that only marked up wine bottles by $10, far below the industry average. He remembers the restaurant always being packed with people drinking wine, those same people also buying food.
You can use loss leader pricing for special restaurant events such as Taco Tuesday, too. Selling discounted tacos on a night that’s usually slow is sure to bring people into your establishment who will then buy appetizers, drinks and desserts.
Loss Leader Pricing Disadvantages
Unfortunately, loss leader pricing can have unintended consequences. If you discount a popular product, you may sell out fast, frustrating customers who come to your restaurant to take advantage of the offer. When selling at a discount, make sure your restaurant is well-stocked.
Low prices can also negatively affect your brand. If your high-end restaurant constantly serves $1 glasses of wine, customers will start to see your brand as a bargain; eventually, they might start to think your $30 steaks should really be $20.
That’s why consultant Karnes suggests using loss leaders to bring people to your restaurant, cost-plus pricing for standard items and market-based pricing for special dishes. When used in conjunction with other restaurant menu pricing strategies, loss leaders can be good ways to increase profits.