Menu Pricing; A How to Guide

“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:

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.