How To Price A Menu Based On Markup And Profit Margins

A restaurant’s success rides on its menu pricing. Determining food 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:

• Ingredients
• Salaries
• Utilities
• Insurance costs
• Equipment costs

Several things need to be considered when determining your pricing, including:

• Profit margins
• Food costs
• Markup

How to Price Food in a Restaurant

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%.

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 need 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.

Costing Out Your Menu Prices

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.

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.

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.

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.

Markup and Restaurant Menu Pricing

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:

• Ingredients
• Salary
• Rent
• Utilities

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.

Markups will 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.

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.

Source: https://mcdonaldpaper.com/blog/restaurant-menu-pricing-guide