Any successful restaurant business relies on customers’ sensory reactions to the items on the restaurant menu. The delicious descriptions, the colorful design, your personal restaurant branding—all are significant factors that influence your patrons’ appetites and choices. And then, of course, there’s the cost.
The following suggestions to properly cost your menu is another part of a series of blogs on menu pricing and standard portion control, outlining actions you can take to increase profits and improve your restaurant cash flow.
There are three common pricing methods for setting menu prices—the prime cost method, the add-on method, and the multiple of food costs method. These methods are calculated based on each individual menu item’s cost. As a restaurant business owner, you’ll always want to be aware if a menu price can be lowered to yield adequate profits. These pricing methods consider the product cost, so remember that developing standard portions and determining the cost of each item is vital to properly costing your menu.
A simple equation to consider is that the menu price less the food cost is the restaurant menu item’s “contribution margin.” You’ll want to remember this when evaluating your menu.
There are some additional factors besides food costs to consider when developing menu pricing.
Know what the market will pay
Research indicates that more affluent customers are not overly concerned with differences in prices (such as $3.50 and $3.85, for example). This is especially true if the restaurant menu item meets or exceeds customer expectations (things like late night hours, portion size, and high-quality ingredients). As such, you may want to evaluate if some restaurant menu items are over- or under-priced based on what your “average” customer values. Doing this may mean you could increase your restaurant’s gross margin as well your restaurant cash flow.
Restaurant business owners must also be aware of competitor pricing. It’s critical to know what competitors are charging for similar menu items. The main advantage of using one of the common pricing methods discussed above it that they give you an idea of how far you can go to meet or beat your competition while still making profits.
Many things can impact a competitor’s prices. For one thing, a restaurant with a similar concept may have a favorable lease agreement and be able to price its menu items much lower than yours. Differentiating your menu from your competitor’s may be more viable than trying to beat its prices.
Another thing to do is to examine menu prices in the immediate area that have similar price ranges even though they have different menu items. Use a “menu pricing worksheet” in order to document competitor’s prices.
Minimum wage increases
Restaurant business owners must always know federal, state, and city minimum wage laws.
Some restaurateurs believe that increases in menu prices should coincide with increases in minimum wages, since customers are aware of these increases and are likely less resistant to restaurant menu price increases.
A substantial increase in minimum wages leaves many restaurant owners thinking that they must increase all workers’ wages. So, as a restaurant business owner, you’ll need to decide whether to increase menu prices, reduce personnel costs in other ways, accept a reduction in profits, or strategize another way.
To determine the impact of an increase in minimum wage on your restaurant and any possible menu price increase, consider the following:
- Calculate the impact of an increase in minimum wage on your operations.
- If you’re in a competitive market, determine if you should increase tipped employees above the minimum to retain a good and loyal staff.
- Remember, if your menu prices go up, your tipped servers may then earn more money, countering your need to raise their wages above the minimum.
- Most restaurants will increase the wages of nontipped hourly employees earning just above minimum wage to avoid losing employees due to wage compression.
During periods of economic slowdown, consumers often choose to eat out less often, leaving restaurant business owners to deal with reduced revenues. Nonetheless, many restaurants choose not to increase menu prices. Instead, cutting costs in other ways can be effective, such as:
• Reducing work hours of employees
• Eliminating overtime hours as much as possible
• Reducing your hours of operation
• Freezing management salaries
Don’t forget to consider how your competition in the area is responding to an increase in wages. You’ll want to choose the best options for you and the most beneficial impact on your restaurant business.
Why spend precious time on food costs, pricing methods, and market conditions when you could be enjoying your guests, providing sensational food, and beating your competition instead? Book a discovery call. Accounting Innovations’ team of committed restaurant financial experts can provide customized help with pricing and accounting services that meet the needs of your restaurant business. We love working with restaurant owners to enhance cash flow and relieve the financial stress that comes with managing the books—leaving you more time to manage the cooks. Book a discovery call now!