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There are a lot of exciting moments attached to opening your own restaurant. First and foremost is that it is your own restaurant. Your inner toddler loves you for it (Mine! All mine!).
However, there are things that need to be sorted out that fall into the category of math, such as pricing your restaurant menu. If you think about it, this may be the most important part of the puzzle. Even if your experience in math boils down to a talent of ignoring anything that comes out of someone’s mouth after the word “budget”, it is time to take the bull by the horns. Or the hand by the calculator as it were.
Don’t worry, we aren’t going to stump you with math questions. Take a deep breath and let’s get on with the bare essentials of how to price your restaurant menu:
Direct costs vs Indirect costs
Flickr Image by dutchgrub, https://flic.kr/p/6LbzG3
This is accounting 101. Think about direct costs as the expenses that you can directly attach to an object. Your chef’s knife is one example. So is the food that you use to cook the dishes that you make. Think about direct costs as the expenses that are very easy to trace when you prepare for tax season.
Indirect costs are sometimes referred to as the real cost of doing business. The cost of the people that you hire with the mean knife skills are one example. So is the rent that you pay for the privilege of owning your own restaurant (Mine!).
Why is this important? Because once you figure out what you will be spending out of pocket, you can also determine the food costs. We will get there later. Until then, congratulations for your mathematical prowess. We will give you a virtual sticker because we ourselves love positive reinforcement (and stickers).
Portion Control
Flickr Image by Brian Glanz, https://flic.kr/p/2NS88a
This heading is no way is meant to tell you to stay out the kitchen in order to protect your waistline (although that isn’t a bad idea if you find it hard to say no to butter). Portion Control in restaurant lingo is meant to make you reconsider what goes on each plate. If you want each portion to look voluminous, you might want to bulk up with cheaper ingredients, like vegetables. If you are showcasing a star ingredient such as scallops, you can display fewer scallops with more garnishes and sides. This will make the dish look like a valuable choice for the customer, without digging too deeply into your own pockets.
Ensure that your kitchen is in the habit of measuring. A wise initial investment is of digital scales, cups and flat bottomed ladles. Although home cooks thrive with “a little of this and a little of that,” measuring ensures that extra dashes of ingredients aren’t adding up to big expenses. Let’s say that you are over portioning a $6.00 per pound product by half an ounce. This will add 19 cents to the serving costs. If you serve 100 in a day, this is a loss of $7,000 per year. Considering that is just one product, it is wise to figure out early how much fits on each plate.
Balance Your Menu
Flickr Image by waferboard, https://flic.kr/p/86HFc6
Although many articles online have reviewed the myth of balance, we will at least try to find it in a menu. Then we can let go of the idea of work/life balance because let’s be honest…it really doesn’t exist.
We digress. When it comes to menus, you have to think about the ingredients that you use. In the last five years, volatile food prices have become the new normal. As frustrating this is for the average consumer, it is even more frustrating for you. If your menu assumes that every ingredient will stay fixed in price, then you may have to change your menu prices every couple of weeks to keep up with them. Just consider that milk alone has risen in cost by 139.7% in the last 5 years.
If you can put high priced menu items alongside cheaper items, you will give your customers choice while evening out your profits.
If it is a highly volatile item or a special of the day, ensure that there is no price beside that item. This will allow you to determine the price according to the ingredients that are used.
In case you are rubbing your hands together in anticipation that your life is going to proceed much like the Wolf of Wall Street, please read ahead.
Stay competitive
Flickr Image by rick https://flic.kr/p/L7rxA
Although the pessimistic like to claim that there are no original thoughts or original ideas, we like to believe that isn’t true. Your restaurant is absolutely unique. However, it probably fits into a similar model of restaurants that have come before it. You may even have built part of your vision on the restaurant that inspired you.
This is a good thing. This will give you an idea of the “normal” prices for the items that you plan on having on your menu. Competitive pricing will take into effect what your competition is charging. Don’t charge too much below your competition, which is known as predatory pricing. The perception is that you intend to create barriers for new restaurants to open. Although that sounds like a delicious idea in theory, creating a monopoly in this fashion is effectively illegal in many countries (and it makes you look way too much like Dr. Evil from Austin Powers). Plus, this will make it hard for you to stay in business if things don’t go as planned.
Going in the other direction, don’t price too much above your competition. This will cause your customers to go elsewhere. Apparently, a perfectly competitive market charges exactly the same price for the same item. Since we don’t live in a perfect world yet, staying close to your competitor’s prices is pretty darn close.
Math: Ideal Food Cost Percentage
Flickr Image by Mike Fleming, https://flic.kr/p/4ZBDCc
We have arrived. It is time to break out the calculator. It is time to roll up your sleeves. Here is your question: A restaurant sells chicken in orders of 6, 9 and 20. What is the largest number of pieces of chicken you cannot order from this restaurant?
We’re just kidding (but if you want the answer click here).
Our math is a little easier than that, thank goodness. Food cost percentage is different for different countries and the type of food that you serve, but if you want a number to make your life easier, go with 30%. This will take into account the labor costs that can be high in North America. A profitable restaurant normally runs in the range of 28-35%.
Taking that magic number of 30, you will determine what price should reflect on the menu. Add up the base cost of each of the ingredients in the dish. Divide this number by 0.30 to get the price that should be on your menu. This will be the absolute minimum you should charge in order to make a profit.
In short, your formula is:
Cost of your product/percentage food cost = menu price
Some restaurant owners make this even easier by taking the base cost per dish and doubling it to reach a ballpark menu price.
We hope that this wasn’t as bad as it was sitting through Algebra class. Plus, this intentional math gives you much more than parental approval. You are one step closer to becoming the hottest restaurant in town.