A Thorough Guide to the 4 BEST Pricing Methods for Restaurants
By on Operations | Last updated on 16 April 2019

Setting menu prices is crucial to any restaurant’s success, and is something that needs to be done periodically to respond to the changes in the market and the industry, while remaining profitable. Thankfully, there are established pricing methods, formulas, and strategies restaurateurs can use in doing so.

Here are the best ways you can determine your restaurant menu prices:

1

Ideal Cost Pricing Method

As the name goes, this method is the most optimal way to cost your restaurant’s menu items. The formula for this method looks like this:

Pricing methods: ideal cost formula = raw food cost + labor cost + overhead + profit margin + sales tax

 

Here’s a breakdown of each cost component:

Let’s say you’re setting a price for your cheeseburger. A breakdown of the ingredient cost per unit would look like this:

Raw Food Cost

Here’s a breakdown of the ingredient cost:

  • Hamburger Bun = $0.21
  • 1 oz Mayonnaise = $0.06
  • 1 slice of Onion = $0.08
  • 2 slices of Tomatoes = $0.14
  • 8 oz Burger Patty = $0.80
  • ¼ oz of Ketchup and Mustard = $0.02
  • 4 slices of Pickles = $0.04
  • 1 oz of Lettuce = $0.06
  • 2 slices of American Cheese = $0.18

Total Raw Food Cost = $1.59

Labor Cost

Let’s assume that the overall labor time to make and serve a single cheeseburger in a full-service restaurant is 15 minutes. And then let’s use the average hourly wage with this statistic from the Department of Labor, which is $12.23.

Therefore, our labor cost for this item is $3.06

Overhead

There are two factors you need to consider when talking about overhead: the restaurant’s monthly expenditures, and the amount of meals and drinks your restaurant can spread this cost over in a month.

Here’s a sample monthly breakdown for a restaurant’s overhead:

  • Rent = $15,000
  • Utilities = $1,500
  • Insurance = $800
  • Others = $1,000

Now, based on an earlier projection, you’ve realized that the restaurant can dish out 4,400 meals a month.

To break down the overhead cost for the menu price, we divide the total overhead by the number of meals in the month.

So, for this example, let us set the overhead cost at $4.15 per burger.

Profit

For the sake of example, let’s set the profit margin at a fair rate of 8%

Sales Tax

Let’s assume that the restaurant is located in California. According to Chron, the highest restaurant sales tax in the state is set at 8.75%.

Now that we have that broken down, let’s add all of it up:

Cheeseburger

Raw Food Cost$1.59
Labor Cost$3.06
Overhead$4.15
Profit Margin (8%)$0.70
Sales Tax (8.75%)$0.83
TOTAL IDEAL FOOD COST$10.33

 

Using this pricing method, your cheeseburger would be priced at $10.33. This pricing method can serve as your baseline for properly costing your entire menu.

2

4 best pricing methods

Competition Pricing Method

Other restaurants may be your adversaries in the market, but they can really help you out on setting the right price for your menu.

To use the competition pricing method, you first have to find out how much your direct competitor is charging for the same menu item. From there you have three options. You can either charge:

  • less than the competition, offsetting the reduction to other factors (less labor, less marketing expense, etc.)
  • more than the competition, choosing to upsell your menu through premium ingredients and/or service
  • the same price as the competitor, relying on other factors and methods to guarantee sales (e.g. location has higher footfall)

Now let’s use our cheeseburger example once again. We’ve established that the ideal food cost is at $10.33. But your competitor full-service restaurant is also pricing their cheeseburgers at the same price. One way your restaurant can compete is by cutting down the cost by half, $5.99. And the way to reduce the price is to minimize overhead and labor cost, which you can do by pivoting your restaurant to a quick-service establishment.

While this is a quick and easy method of menu pricing, one of its disadvantages is that you can’t be 100% sure that you are covering your restaurant’s costs, so it would be better to use this and the ideal cost method side by side.

3
Demand-Driven Pricing Method

While the competition pricing method lets you rely on your competitors in the market, the demand-driven pricing method lets you rely on your customers instead.

The key to using this method is fully understanding your customer’s behavior in relation to other factors.

This pricing method boils down to basic economics. The higher the consumer demand for your restaurant’s menu items, the higher the price point you can set.

Two perfect examples of demand-driven pricing in the restaurant setting are:

  • Airport Restaurants and Stadium Concessionaires — since these stores have a “captured” market, food and drink items sold there are more expensive than equivalent items at other establishments.
  • Whenever there is a new fad food craze (e.g. Cronuts), the customer demand is exponentially high and the supply is limited. This leads to restaurants increasing the price to generate extra revenue.

Going back to our cheeseburger example, let’s say that your recipe featured a special blend of beef. It became such a hit with your customers that they line up for blocks on end for a chance to have a bite of your restaurant’s cheeseburger. With that increased demand, you can increase the price accordingly. Your $10.33 cheeseburger can go up to $15.99.

Use this method wisely. The major disadvantage of the demand-driven pricing method is that it may drive customers away from your restaurant.

 4
Bonus Tip: Combine Different Pricing Methods

Your restaurant isn’t limited to a single pricing method for your entire menu.

Mixing up different pricing methods lets your restaurant get the absolute most revenue from your entire menu.

You can break down your final menu pricing with these suggestions:

  • Ideal Cost for specials or items that are not part of your regular menu
  • Competition Pricing for menu items your restaurant may want to sell quicker
  • Demand-Driven Pricing for menu items that are truly unique to your restaurant

To remain profitable, restaurants need to continuously make sure that they are implementing effective food pricing strategies. These pricing methods, when used wisely and alongside each other, will surely drive any restaurant to success.