How to price your menu

You’re about to open your first restaurant and you have drafted out a delicious and tempting menu. But now you must decide on prices for each dish, and you’re torn: if one particular dish comprises $8 worth of ingredients, should you feel guilty for charging $10 or will you grasp for a profit and charge $30? 

Customers are not only paying for the ingredients in their meal – they are also paying for the services of a chef and wait staff, as well as chipping in for your electricity bill and rent. On top of all these expenses, you also want to make a profit. But if you inflate your prices too astronomically, you risk alienating regular patrons.

We look at some strategies to set a realistic pricing structure that will help raise a profit while providing customers with value for money.

The simplest way to calculate your menu prices is to multiply the cost of ingredients for each dish by a certain percentage. The cost of ingredients is traditionally seen as roughly one-third of the final menu price. Some restaurateurs see the ingredients as 30% of the bill, so if your ingredients cost $1.00, you would charge a little more than $3.00. Others find it easier to multiply the cost of ingredients by a magic number, such as 265%. So if the ingredients in your steak sandwich cost $1.00, you charge customers $2.65. This gives you $1.65 to cover extra expenses, with anything left over as profit. (If you prefer a simpler number to $2.65, you could round it up to $3.00, increasing your final profit a little further).

If you have been in business for longer than a year, you can apply your past income/ expenditure pattern to calculate a profitable price for each dish. Set out your annual expenditure on an Excel spreadsheet, with one column for fixed expenses (such as rent) and another section for variable expenses. Staff wages could feature in both columns as you put a lump sum in the fixed column and an additional amount in the variable column. This way you have allowed for variations in expenditure according to circumstances.

Once you have worked out your annual expenses, work out the daily cost of running your restaurant. Then list your menu items and estimate how much you need to charge for each dish to meet expenses. This will take a fair bit of estimation and guesswork as you cannot anticipate how many diners will appear each night and what they will order. It helps to keep all your dishes within a specific price range so you’re not holding out anxiously each night for at least one person to order the lobster.

In the beginning, you might find it tempting to mark up your prices with a huge margin so you can ensure a substantial profit. However, this puts you at risk of pricing yourself out of your own market: you will struggle to attract first-time customers or hold onto repeat customers. Look around at the demographic of your location, and research the average price of meals in the area. If you are offering something exotic and extraordinary, you might attract a niche market prepared to pay extra for an unusual and high-quality feast. However, if your fare is comparable to other restaurants in the area, you will benefit from staying in the same price bracket.

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