Making sure the price is right for each menu item is no game
— it takes lots of work. Before adjusting your prices, consider the following
eight factors:
1. Food costs. “You’ve
got to know your costs before setting a price,” says restaurant consultant
Linda Lipsky of Broomall, Pennsylvania. She recommends that food costs run
about 33 percent of menu prices, on average. This can differ per operation,
with fine dining restaurants typically posting higher food-cost percentages and
casual pizzerias running lower percentages. The percentages also vary widely
from item to item. “A soup could cost as little as 18 cents per serving to
make, but you’re not going to sell it for 54 cents,” Lipsky says. Soups,
appetizers, desserts and alcohol tend to have lower cost percentages than
entrees, she notes. Consider your sales mix when pricing items.
2. Margins. Food-cost
percentages are only part of the equation. “The biggest mistake I see operators
make is that they rely too much on food-cost percentages and not enough on
food-cost margins,” says Dennis Lombardi, executive vice president of
foodservice strategies for WD Partners, Dublin, Ohio. Take an expensive item,
such as lobster. If operators base their menu prices strictly on food-cost
percentages, they might price the lobster too high to sell. If they determine
they want, say, a $9 margin on entrees, they can price the lobster to sell with
a profit.
3. Additional costs. Don’t
forget to factor in your labor costs. The cost of baking and decorating a
chocolate cake in-house — rather than buying it premade — is more than just the
price of the ingredients. Include the price of any giveaways, such as bread and
olive oil, and the cost of food waste and spoilage.
4. Volatility. Food
costs can change at a moment’s notice — based on anything from world politics
to weather conditions. While large chains might sign contracts that lock in
prices, smaller restaurants usually don’t have that option, Lombardi says.
“Give yourself a cushion for volatile items,” he notes. Limit items,
particularly those with volatile ingredients, to specials or seasonal dishes,
he advises. Lipsky recommends printing your menu in-house, so you can easily
reprint it if your costs suddenly soar. “If your menu looks the same, your
guests probably won’t notice the price change,” she says.
5. Competitor’s
prices. When was the last time you dined at a competing restaurant? If
it’s been a while, you’re missing crucial information that can help you set
your prices. Find out what your competition offers and their price points.
Don’t look just at online menus, Lombardi urges. Go in person so you can see
the portion sizes, the preparation, the presentation—all factors that impact the
value perception.
6. Menu mix. Lombardi
recommends analyzing your menu composition by sorting the items into a matrix
like the one below:
|
Low Margin
|
High Margin
|
High Volume
|
|
|
Low Volume
|
|
|
Using this format, you can spot places to adjust prices,
push sales or drop items. For example, can you increase the margin on a high
volume/low margin item without losing significant sales? Can you increase sales
of a low volume/high margin item by placing it more predominantly on the menu
or giving servers a sales incentive? Remember: Different spots on the matrix
play different roles in building your business. “You need a couple of
items that are priced low enough to avoid the ‘veto vote’ from those in a
group who want to go out but don’t want to spend a lot,” Lombardi says.
7. Ingredient
adjustments. Before raising a menu price, consider whether you can
make the dish for less, Lipsky recommends. Can you select a less expensive
vendor, substitute similar but more affordable ingredients or make the portion
size smaller? If none of these are feasible, you might need to raise prices.
“But that doesn’t mean you have to raise the prices on your whole menu,” Lipsky
says.
8. Historical data. Review
your menu prices at least twice a year, if not quarterly, Lombardi recommends.
Be sure to examine previous price changes, and see how they affected your
bottom line before enacting your next set of changes.