Restaurant Menu Pricing Guide

Menu Pricing; A How to Guide

By James R. Covart

“Back in the old days” menu pricing was simple:
you divided the cost of the ingredients by .33 and presto, you had your
selling price.

Times have changed and menu pricing can no
longer be calculated using food cost alone. Numerous restaurants with low
food cost percentages have gone out of business because the owners never
considered their other expenses. There are no “guaranteed” ways to price
your menu and assure profits, but there are formulas and strategies that
you can use that will assist you.

The method discussed here, takes into
consideration not only your cost of food, but also your other variable and
fixed expenses.

The more comfortable and knowledgeable you are
with the makeup of your business’ sales and expense figures, the easier it
will be to develop a menu pricing strategy and calculate your
prices.

Let’s review a few definitions and terms
associated with a typical income statement:

Year Ending 20__

Income
Statement  Shows your sales, cost of goods, gross profit,
expenses and profit for a given period of time.

Revenue (also known as
Sales)  Money earned from sale of food, beverages and other
merchandise.

Cost of Goods
Sold  The price paid for the food, beverages and other
merchandise.

Gross
Profit  The difference between the revenue received from
your sales and the cost paid for the products sold.

Expenses 
The cost of products or services used in operating a
business.

Variable Expenses  These are the costs that
change based on the number of guests that visit your operation or the
amount of your sales.

Fixed Expenses  These are the costs that do NOT change based on the number
of guests or the amount of sales.

Occupancy
Cost  Costs associated with
the actual occupation of your physical structure, including rent, real
estate taxes, interest on mortgage, and depreciation of a purchased
building or structure.

Operating
Expenses  Expenses incurred
in running your business. Does NOT include your cost of goods. Lines 13
through 23 represent examples of operating expenses.

Operating Income  Total
Gross Profit minus the Total Operating Expense. This is your income or
revenue before interest and income tax, and before paying any return or
dividend to investors.

You need to start with a few basic pieces of
information. Foremost, you need to know the cost of goods for each of your
menu items. Standardized recipes as the best means of knowing your food
cost. If you have standardized recipes, you will have all your food costs
available already. If your standardized recipe file is not up to date with
your current product costs, you will need to update your recipes. Don’t
forget to include all of the items that are served with the menu item.
These might include bread and butter, side dishes, condiments and a salad.
Keep in mind that it is better to over estimate your costs rather than
under estimate them.

Many operations have computerized their
inventory and linked them with their recipes to provide up to date cost
information. If you have not done this, consider it. There are several
good commercially available software products on the market, which, after
the initial setup, make this task a breeze

You will need to do an analysis of your sales
and the current selling price of each menu item. Your POS system should be
able to provide this easily.

A simple income statement, like the one shown
in this article will provide you with the rest of the numbers you will
need.

You can do the math by hand or on a computer
spread sheet such as Excel or Lotus 123 to make it easier.

Step 1:  From your income
statement, make a list of your Fixed Expenses and your Variable
Expenses.  This usually requires some “estimation.”  An expense
item frequently fall into both categories:

Step 2:  Create a chart or
spreadsheet similar to the one below.  Begin the process by listing
your menu items in column A.  In column C, fill in your actual cost
of the menu item from your recipe files.  Columns D, E and F are
formulas.  Column D is calculated by dividing your item (recipe) cost
by the selling price.  Variable Expenses, column E, is calculated by
multiplying the selling price (column B) by the variable expense
percentage calculated in Step 1.  You calculate the Contribution to
Fixed Expenses and Profit (column F) by first adding together your item
cost (column C) and your variable cost (column E) and then subtracting
these costs from (column B) the selling price.

Step 3:  Now you are ready to play
“what if?” with our menu prices.  Start by entering your current menu
prices in column B.  Take a look at the results.  Column D shows
the Food Cost Percentage of the item.  Column E represents the amount
that is needed to pay for all of the other variable expenses.  The
last column, F, shows the amount the menu price left to put towards your
fixed expenses and profit.

By analyzing the effect of
raising or lowering your selling price of items, you can get a pretty good
idea of where your prices need to be.  Keep in mind, this may or may not
be the amount that your guests are willing to pay. 

Ten years ago, changing your
menu was a major undertaking for most operations cost a lot of money to
do.  With today’s desktop
publishing technology and some forethought you can update your menu
quickly and easily with a trip to your neighborhood copy center.  You may even be able to do the job
in-house. 

Consider choosing a menu format
that allows flexibility.  A
nice cover with a printed insert or a design that allows you to make
changes by substituting single pages will allow you to change and “tweak”
your menu pricing and items gradually.  Instead of making dramatic price
changes once or twice a year, your menu can be adjusted to reflect your
actual costs. You can make price adjustments subtly, take advantage of
fluctuating commodity prices by featuring high profit items and turn your
menu into a sales and profit making tool.