Know Your Food Cost Percentage. Know Your Restaurant Profits.
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When restaurant prices shot up by 27.2% since June 2019, people stopped eating out as much. To win them back, chains like McDonald’s, Burger King, and Taco Bell started offering $5 meal deals. But what about smaller establishments?
Setting prices can be tricky for small business owners. They have to juggle market competition, changing ingredient costs, and what customers expect. With all this, they’ve to set the right prices on a menu. The price should strike the perfect balance between value and profitability.
This blog explores steps and tips to help small business owners create menu pricing strategies that bring success without unnecessary stress.
Example of a Balanced Menu
You want to charge enough to make a nice profit but not so much that your customers go away. So, menu pricing is that art and science of setting prices for items. It directly affects how much money you make, how happy your customers are, and how you stack up against competitors.
Here’s a guide to menu pricing strategies for small business owners:
Get to know your customers, what they usually spend on, and what they really like. You can gather this information through the following ways:
For example, a food truck in a college town might need to be budget-friendly. Plus, it should have quick-meal options. This appeals to students.
Example of the Division of Costs and Overheads
To set the right prices, you need to know all your costs and expenses. This includes the following:
Let’s say your tofu sandwich sets you back $2.50 and you’ve got an extra $1.00 for all overhead costs. Then, your total cost would be $3.50.
Food costs and overheads can further help you decide on the profit margin for each menu item. Just add a percentage to your costs to get the selling price. So, if that tofu sandwich costs you $3.50 and you’re aiming for a 30% profit, you’d price it at $5.00.
Consider similar businesses in your area or those targeting the same customer base. Analyze their menus, pricing, and customer reviews. You can visit them, go to their websites, or use tools like Google Reviews to see what’s up. Then, decide if you want to match their prices, go cheaper, or charge more, but keep an eye on your profits!
Pricing is more about perception and not just numbers. For this reason, customers often associate price with quality. So, setting your prices too low might make them question the quality of your offerings. Conversely, too high a price could deter them altogether.
Test different price points to understand customer psychology. You can also offer a range of options at various price levels to see how customers respond. Then, observe purchasing patterns and customer reviews to know what price ranges are most appealing to your audience.
A balanced menu mixes high-margin items, like drinks and desserts, with lower-margin ones, like main courses. Pair a pricey gluten-free granola with a humble fruit salad, for instance. Customers would happily spend more without feeling like they’re splurging.
Figuring out menu prices depends on your goals and what’s buzzing in the market. Here are some popular menu pricing strategies for you to see what clicks for you:
Menu of Dirt Candy, an Upscale Vegan Restaurant, in New York, USA, Exemplifying Value-based Pricing
Value-based pricing sets prices based on the perceived value to the customer. So, if your customers believe something’s top-notch or unique, they’re cool with paying a bit more for it.
For instance, a vegan-only restaurant might charge a premium for a dish. This could be because the ingredients are rare or the restaurant has an awesome ambience or theme.
Menu of Veggie Grill, a Fast-casual Vegan Restaurant Chain, Located in California
Menu of Plant Power Fast Food, a Plant-based Fast Food Restaurant Chain, Located in California
Veggie Grill and Plant Power Fast Food restaurants have a similar menu as they both cater to audiences having vegan preferences or liking vegan food options. This way, many small businesses usually check what other places are charging to set their prices. It is a common pricing strategy for restaurant menu. So, if lots of places sell similar dishes or cuisines, you can try to match or beat those prices.
Bundled Food Items at Burger King
Bundle pricing offers a deal where your customers can grab a bunch of different items together for less money than buying each piece on its own. This strategy makes the bundle seem like a better deal. This encourages customers to spend more. So, your restaurant can offer a meal deal that includes an appetizer, entrée, and dessert at a discounted rate.
Psychological pricing takes advantage of how customers perceive prices. So, a restaurant might put a $9.99 tag on a meal instead of $10.00 just to make it sound like a better deal. Here, the difference is minimal. Still, customers would see the price as significantly lower.
A Graphic Illustration of Cost-plus Pricing
Cost-plus pricing is pretty simple. Just add up how much it costs to make a dish and a bit more to make profits. It ensures that all costs are covered. For example, a dish costs $5 to make. Then, you add a 30% markup. So, the final price would be $6.50.
A Menu Board Showing Discounted Cocktail Prices
Loss leader pricing involves selling one or more products at a loss to attract customers. The hope is that they’ll purchase additional items at regular prices. So, you can sell a popular dish at a very low price to draw in diners who can then buy other, more profitable items.
Here are ten service pricing strategies to consider for your restaurant, café, bistro, or food truck:
McDonald's $1 $2 $3 Menu as an Example of Good, Better, Best Pricing
Mix it up with different price options. Like, you could have a basic burger for $10, a fancy one with extra toppings for $15, and a deluxe burger with all the best stuff for $20. This way, there's something for everyone!
Source: Hourly-Based Prices of Caterers in the USA in 2024
Charge customers based on how long they hang out or how long you’re serving them. For example, a catering gig might just charge a flat rate per hour for their service. This can be advantageous for longer events. Plus, it compensates for your time and resources.
Menu of Shamiana, Taj Hotel, a Chain of Luxury Hotels Exemplifying Premium Pricing
Set higher prices if you offer high-quality or luxury items for its perceived value. For example, a restaurant offers an upscale dining experience with top-notch ingredients and exceptional service. It might use premium pricing to reflect its exclusivity and high standards.
Example of Promotional Pricing through Happy Hours
Run some cool discounts or special deals to pull in more customers. Like, have a “Happy Hour” at your café with drinks half off to get more people in the door and increase sales during slow times.
Adjust prices based on demand, time, or other factors. For instance, a food truck at a busy festival might increase prices during peak hours when demand is high. Conversely, prices could be lower during off-peak times to encourage more sales.
Source: An Establishment Offering Project-Based Pricing
Set a price for a specific project or event rather than individual items. So, if a bistro is doing a wedding, they might just give its client one price that includes everything — food and service — for the whole event.
Conduct surveys to gauge perceived worth and adjust prices accordingly. Suppose you offer gourmet truffle pasta to your customers, who view it as a luxury experience. You can price it higher to reflect its perceived value.
Restaurants Offering French Dishes in Chicago
Keep an eye on what other restaurants are charging. Suppose you want to start a French restaurant in Chicago. To stay competitive, you can assess restaurants in Chicago so that you can decide on menu pricing. This way, you won’t miss out on customers looking for a good deal.
Example of Market Penetration Pricing for a New Restaurant
Set lower prices to attract customers and gain market share quickly. So, let’s say you open a new café and start by giving away coffee and pastries at lower rates. Once you’ve got a bunch of loyal customers, you can start hiking up the prices little by little.
Set high initial prices for a new or unique dish. Then, lower them gradually over time as demand stabilizes. This will attract early adopters as well as a broader audience.
Make the most of technology to ease making menu pricing strategies and adjusting prices. Here's how:
POS systems help you easily manage and set prices for your products. You can get the best prices calculated automatically based on your costs, sales data, and customer preferences.
OneHubPOS keeps an eye on your sales trends and helps you figure out the best prices for your menu. This way, you stay ahead of the game and make more money. Plus, it updates prices everywhere with a snap, so you don’t have to bother with all the nitty-gritty!
Menu engineering software takes pricing a step further. It analyzes the profitability and popularity of each menu item. It can help you identify which items should be promoted, adjusted, or even removed based on food costs, sales performance, and customer preferences. Then, you can make informed decisions that improve your menu’s profitability and appeal.
Various online tools and apps that simplify pricing range from calculators that help determine food costs to apps that analyze competitor prices and market trends. For instance, OneHubPOS offers a food cost percentage calculator that allows you to adjust your prices based on your production costs and other factors.
Since choosing the right pricing strategy for restaurant menu is crucial, we have some bonus tips to help you make the best decision:
Ensure your pricing covers all your costs. If your prices aren’t covering what you’re spending, your business could be in trouble. Just figure out how much each item or service costs you first. Then, set your prices to ensure you break even and generate profit.
Analyze your market to understand what customers are willing to pay. Then, add a reasonable markup that reflects the value you provide. You can play around with pricing — maybe charge extra for top-quality items and see what your customers go for. Find what clicks with them!
Regularly review your spending to spot where you can save some money without messing up the quality. Maybe chat with your suppliers, figure out faster production methods, or cut back on waste.
Here are some common mistakes you should avoid make while trying to set the right prices:
Do not set prices too high as it can drive customers away. But make sure you do not set them too low that it erodes your profits. So, if a coffee shop is charging $10 for a latte while other places are selling it for $5, people might just go somewhere else. And if they price it at $2 but it costs $2.50 to make, they’re basically losing cash.
Do not ignore market trends as you may miss opportunities. Suppose a bakery continues selling traditional items, but competitors capitalize on a new trend like gluten-free products. Then, it might lose market share.
Your restaurant might lose profitability if it fails to adjust menu prices after ingredient costs rise. So, you should regularly review and update prices to maintain profitability and competitiveness.
To simplify menu pricing strategies, start by understanding your market and analyzing costs. Then, set profit margins that balance value and profitability. Mix and match different pricing strategies like cost-plus, value-based, and competitive pricing to find what works best for your business.
Don’t forget to regularly review costs and monitor market trends. Make sure to tweak your prices often so you stay on top and keep making a profit.
OneHubPOS has all the cool features you need to set prices, track sales, and see what your customers want. You can easily adjust your prices whenever you need to and keep your profits high. Book a call with OneHubPOS today.
Whether a pricing strategy for restaurant menu is best or not depends on your local scene and goals. Still, competitive pricing is often effective. It aligns your prices with similar local establishments to attract customers while ensuring profitability.
Calculate your total costs, including food, labor, and overhead. Then, add a percentage to these costs to achieve a desired profit margin. To ease this process, you must track your restaurant analytics.
Conduct surveys, analyze sales data, and observe customer reactions to different price points. Offer trial pricing and gather feedback to gauge willingness to pay and adjust accordingly.
You should review menu prices quarterly or bi-annually to reflect changes in food costs, market trends, and customer feedback. This move ensures competitive and profitable prices.
Yes, you can apply various strategies as it works well. So, if you charge more for high-end dishes and keep the standard items affordable, you'll attract everyone from foodies to budget diners.
Communicate transparently about the reasons for the increase, such as rising costs or improved quality. Also, consider offering a limited-time discount or special deal. This would ease the transition.
Customer feedback helps understand perceptions of value and pricing acceptance. Use surveys and reviews to adjust prices based on what customers are willing to pay and their satisfaction levels.
Run pilot programs with limited-time offers or menu item trials at different prices. Monitor customer reactions and sales performance to assess the impact before implementing broader changes.
Check your sales numbers and what customers are saying. If sales are dropping, complaints are rising, or profits are shrinking, your pricing might need a tweak. Adjust your pricing strategy for restaurant menu accordingly.
Price seasonal items based on their cost, perceived value, and market demand. For example, offer a winter-themed dish at a premium if it uses high-quality ingredients or unique flavors.
Food trends increase demand for trendy items, allowing for higher prices. Stay updated on trends to adjust prices and offer popular items that align with current consumer preferences.
Sahana is a seasoned GTM leader with a passion for building startups. She excels in crafting GTM strategies for tech products, driving revenue growth.
