Food And Menu Pricing For Your Restaurant
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One thing I’ll never forgive formal culinary schools for, is teaching new impressionable would-be chefs to use a budgeted cost percentage to price food menus. Chain restaurants share an equal responsibility for perpetuating this bad practice by focusing their managers on food cost percentages without letting them in on the secret that the cost percentage is a management tool, not a pricing tool.
Though most culinary programs teach many different methods for pricing food, every culinary student seems to emerge from the Culinary Institute of America or Le Cordon Bleu believing in the world of restaurants, all they have to do to be profitable is serve great food and deliver a 33% food cost, or is it 25%, or 35% or 30% or 19%?
The truth is, hitting a budgeted food cost does nothing to guarantee there will be enough money left over from the sale to pay for things like labor, rent, insurance, linens, smallwares, uniforms, utilities, taxes, etc, etc, etc.
Hitting that cost percentage really means nothing.
Further, not hitting it only means, “I should give things a closer look.” It doesn’t mean there is a problem. On the contrary, a high food cost could mean you’ve been selling a lot of high cost items that contribute more gross profit per sale. Are you going to make more money selling 50 hamburgers priced at $6 that cost $1.50, or 50 lobsters priced at $30 that cost $15?
As long as there isn’t a significant increase in the overhead of serving the lobster, gross profit dollars win every time. You don’t want to sell the item with the 25% cost and $4.50 gross profit, you want to sell the item with the 50% cost and the $15 gross profit.
Rather than comparing the food costs, you should be comparing the gross profits from each item. Obviously, if you have $15 left over from the sale after paying for food (gross profit) compared to $4.50, you’re going to have a lot more money to pay your overhead and turn a profit.
If you want to create prices in your restaurant that guarantee you’ll have enough dollars left over after paying for food, you’ll need to make three important considerations:
- Market price point - What does your market consider a fair price for the food you are preparing, served in the atmosphere you offer?
- Menu item cost - I know I said you shouldn’t use cost percentages. That doesn’t mean you don’t include the cost of the food into the price. You need to keep up-to-date recipe dollar costs for every item on your menu, and use those costs to figure into your pricing.
- Needed gross profit - What does every person who walks through your door cost you to serve? You have a lot more costs to cover than just food. That’s just a fraction of the picture. You must consider every expense of running your business when pricing menu items, including the profit you need to make.
I guess now the question is, “How do I price by gross profit?”.
I’m glad you asked.
Market Price Point
You can’t throw prices out there, whether based on cost percentages or gross profit, without considering what your market is already paying for those products elsewhere. Just like your potential customers, you must consider what other operations are charging for the same type of food, or even the same dishes, that you are offering.
If you are going to charge more for the same dish than your competitor down the street, you have to be able to justify your price with added value. Added value could be larger portions, more exotic ingredients, better atmosphere, better location, live entertainment or something else. It could also be the promise and delivery of a unique selling point that your competition doesn’t have.
Whatever your prices, they must offer value to your customers. If your customers don’t feel your food is worth what you’re charging, you won’t have enough of them to make money no matter your pricing method.
Menu Item Cost
How much does each menu item cost you to make? Ingredient costs go up all the time. When is the last time you updated your menu item costs? Without knowing exactly what a menu item costs you to make, and how many dollars you need to add on to the price to pay for the ingredients, you can’t possibly come up with prices you KNOW are going to make you money.
The easiest way to track recipe costs (menu item costs) in my opinion is with Microsoft Excel spreadsheets. While there are many commercial food costing and inventory programs out there that will help you cost out your items, many use costing formulas based on valuation methods I don’t endorse, or require too much input to keep prices up-to-date.
Some do have the capability of linking directly to broadline vendor’s invoicing systems to update prices automatically, but most smaller vendors don’t have this capabibility and you’re still left doing a lot of extra manual input. For my money, there is nothing simpler, less time consuming and easier to use than Excel spreadsheets.
That doesn’t mean you shouldn’t use other inventory and costing tools. Any effort you make toward calculating recipe costs and inventory is going to pay off. Even the more expensive softwares will make you money in the end.
Don’t make the mistake of getting lazy with your recipe cost tracking. Many operators only price out menu items when they’re making a menu change (which are normally too few are far between). Between changes, they don’t see how the cost of ingredients is impacting certain menu items, and without that information they don’t have the urgency to make the necessary pricing changes needed when they are needed.
Needed Gross Profit
This is the most important consideration in setting menu prices. You must know what your guests cost you to serve. Without knowing what they cost you to serve, you can’t know how much money you need from each of them to pay all your bills and make a profit.
Look at your financial picture this way. Your food costs make up anywhere from 20-35% of your financial picture in most restaurants. Depending on your labor costs, your food cost could be the largest expense of running your business, and it needs consideration when forming menu prices.
BUT……
What about the other 65-80% of your financial picture? It’s not all profit. Most of that picture is expenses other than food cost, and if you’re lucky a little profit left over. Doesn’t it go to reason that you have to include those costs in your pricing? Of course it does. Without knowing those costs are covered, you can’t know you’ll make money.
Before you can know how to add gross profit into a menu price, you have to know how to calculate it. Here are some explanations to try and illustrate how to calculate a needed gross profit per person. The needed gross profit per person is what you add to your recipe cost to arrive at a menu price. Unlike the menu price, the needed gross profit per person is a fluid number.
Since it is important to keep menu items within the price point of your market, you will likely have to increase the gross profit you add to some items, while decreasing it on other items. It’s only important that the end result gives you an average gross profit per person that delivers enough gross profit to pay the bills.
You can start to calculate your needed gross profit by looking at your financials and customer count records. It’s best to use financials from months where you achieved as many of your financial goals as possible to establish your needed gross profit numbers. You can use an average of all months by using a year-end profit and loss statement.
From your P&L, you need to find how much all your operating expenses for the year were without including product costs. This is your overhead. To this, you’ll add the ideal profit you should have made during that time period.
Total expenses for year - product costs + ideal profit = Total needed gross profit
Once you know how much gross profit you would have needed to collect during the last year to make the profit you should have made, you have the beginnings of your pricing method. Before we go any further, you need to take into consideration any inflation or cost increases you can assume for the following year.
Operating costs will always go up, and you need to price for those cost increases. If you’re smart, you’ll re-price your menu every 3-4 months to make sure those costs are covered, but that is another article. To be on the safe side, I add a 5% cost increase into the total needed gross profit to come up with a target for the next year.
With the ever increasing cost of gas, you could either add in a higher buffer, or do what I suggest and evaluate your pricing every 3 to 4 months. It’s much better to do regular, small increases to some menu items than annual large increases to all of them.
Total need gross profit x cost plus increase (105%) = Total needed gross profit (adjusted for next year)
Now that you have your new needed gross profit, it is very easy to figure out how much of it you’ll need to collect from each person to cover all your expenses. That is, assuming you track how many people come into your restaurant. If you don’t, you need to start doing it now, and you’ll need to estimate how many covers you did for the previous year. Estimate low to be on the safe side.
To find out how much you need to collect from each person, simply divide your total neeeded gross profit for the upcoming year by your total customer count for the last year.
Total needed customer count ÷ previous year customer count = Needed gross profit per customer
This number is simply the amount of gross profit you would have had to collect from each of last year’s customers to achieve your financial goals for the upcoming year. What this gives you, is a target gross profit to collect from every person this year to achieve profit. That profit will be achieved if you can meet or exceed your customer counts from the year before, or you can exceed the gross profit average per customer.
Gross profit per customer x customers per year = Actual gross profit
If you can exceed your total needed gross profit per year with your actual gross profit, and you do a good job of controlling your expenses, you will exceed the profit you budgeted for.
Remember in all this that your budgeted food cost percentage hasn’t entered into the equation once. You are adding the actual cost of your menu items to the needed gross profit per customer to come up with a selling price. That’s all it takes.
There are a few other things to consider though. Your needed gross profit per customer is collected from a few different sources. You don’t have to mark up every menu item by your needed gross profit. Your needed gross profit per customer is collected by combining gross profits from everything a customer buys.
The markup on entrees, appetizers, desserts, soft beverages, alcohol and merchandise all contribute to gross profit. If you need $7 in markup from 30,000 customers per year to make your total needed gross profit, you have many different avenues to get it from and don’t have to mark up every menu item by $7.
Another factor that majorly affects these averages is your customer count.
If you’ve determined that you need $7 gross profit from each of 30,000 customers that walks through your door to reach your total needed gross profit, then you can also reach that number ($210,000) by serving more customers at a lower gross profit markup.
If you could double your covers to 60,000, you could theoretically collect $3.50 in markup from each to collect the same total gross profit. Whenever considering cover changes however, you must also consider how serving more people will change your overhead.
If you serve twice as many people, some of your expenses will also increase. They WILL NOT however, increase exponentially. Additional customers are always cheaper to serve than your primary customers, as they are the ones you are covering your fixed costs with. Add your additional expenses to your year end numbers and start over calculating your needed gross profit.
I hope I’ve laid out this method in a way that you can understand it. While it isn’t complicated, it does go against the principles being taught in classrooms and kitchens all over the country. If you have followed along well though, you can see how this pricing method takes into consideration every cost of doing business, and leaves no guessing as to what you need to do to make money. This method of more effective planning could do a world of good for your profitability.
Article by Brandon O’Dell, the restaurant consultant.
Restaurant Coaching and Consultations, Good Idea?
Every business owner or manager will arrive at a place where they have questions without answers. When that time comes, we seek help outside ourselves. This is often with friends and peers – other business owners in many cases.
But when the amount of attention and knowledge required becomes extensive, it may be time to hire a restaurant consultant or coach to bring new light and expertise to the situation.
Having worked as both a consultant and a consumer of consulting services, I’ve thought long and hard about the issues that are important to a successful coaching program. How can you as a restaurant owner get the information and action needed, at a fair price?
Know what you want in advance
Having open ended and vague descriptions of what you need accomplished will take consulting time and increase cost unnecessarily. The first thing you should do before inviting a third party into a situation is taking a moment to flesh out the details of what you need. From there, spend a few moments to formulate a series of definite, concrete questions that can be answered with specific plans.
In many cases this simple process will bring answers to light that you hadn’t thought about prior.
Simply take a few moments to remove emotions from the situation… relax… and reconsider the possibilities. We can evaluate circumstances with a fresh set of eyes (and rejuvenated brain cells!).
This is what I mean: ask yourself “If I was a consultant coming into MY business, what are the first things I would talk about?”
If you can think of things – perhaps MANY things – than you don’t need a consultant, yet. Write down what comes to mind and then draw up plans to put them into action. Need to set aside time in your day to handle it? Can your staff do it? Do you need additional staff?
Always do as much as you can FIRST, before hiring a consultant, because it will increase your sense of empowerment. Your experience will also skyrocket through this process as you do it over months and years.
The times you should absolutely hire a consultant is when you are asking questions and cannot think of the answers. If the answers require extensive research, you’ll have to decide if it’s worth the time. It may be that a consultant could help you accomplish it better and faster. BUT at least you’ll have specific questions to ask them.
Look for restaurant consultants with real world experience
There are consultants out there who “talk-the-talk” but can’t deliver as promised when it comes down to the wire. And by the time you figure this out, you’ve probably spent money. To avoid these situations, I always recommend getting testimonials and references from past clients – hopefully those who have engaged the consultant for work similar to what you need.
Look for consultants with specialized knowledge
Do you always have to find a restaurant-specific coach or consultant? No.
The reason is that many “restaurant consultants” are entirely clueless about topics that can increase your business and profit margins. Marketing is a great example. Technical subjects are another. Don’t let a generic restaurant consultant fool you into thinking they can handle all topics equally – as mentioned, always look for real-world experience for YOUR needs.
However, if the subject is purely operational, it’s a good idea to find someone who’s run restaurants similar to yours AND been very successful at it.
Make sure the restaurant consultant understands regulatory requirements
When developing the questions you need answered, remember to note if things may be regulated by local/federal government or industry regulations. Ask the consultant these questions in open-ended fashion and see if they are capable of answering them.
Before hiring, CHECK THEIR ANSWERS! I’ve seen it more than once – someone answers questions point blank (like they know what they’re talking about) but when fact-checking comes into play… well… it was all made up. It’s important to make sure advice given is sound across the board, and legal.
Get a detailed written proposal
You have your questions – ask how the consultant intends to deliver their advice, what guarantees are involved and how fees are affected.
Get everything in writing beforehand. Know what you’re buying.
Many consultants will fill their proposals with marketing-lingo (often senseless garbage) and attempt to push things you don’t need. Avoid this. You have specific needs, get specific answers. Only allow up-sells and additions to the proposal after you consider whether it’s actually needed. Do NOT decide on the spot, with the consultant in front of you.
Restaurant consultation prices
There are basically two forms of pricing: hourly and flat-fee. Consultants with hourly fees should be avoided if your questions were difficult to formulate, or if you’re unsure of specific needs. What tends to happen is they can milk the hourly fee.
I recommend offering consultants that get paid by the hour the opportunity to be paid at a flat-rate to address specific situations. If they address the situations satisfactorily, then invite them for their normal rates.
Top consultants are usually paid by the hour (some by 10 minute segments!). If you’re dealing with those widely considered to be the best in their fields of knowledge, that is expected. What also comes with these types of people are satisfaction guarantees.
What should you pay, though?
Rates of $500-$1,000/hour are not uncommon for top professional knowledge. The average consultant is likely to charge in the $100-$200/hour range however, and may be suitable depending on what you need accomplished.
Gut feeling
Many restaurant owners don’t consider the chemistry factor – how they get along with the person they’re about to share intimate details of their business with.
To get the most out of your coaching and consultations, it’s always best to have a good gut-feeling with the person. If there is ANY sense of discomfort, or things just don’t seem 100% during the introductory period, then stop. Move on.
Questions to consider:
- Does the consultant have a personality similar to mine?
- Do they have strong communication skills?
- Do their values match my business?
- Is their jargon easy to understand – are they able to clarify it, if needed?
One very important thing to consider is, would you hire the restaurant consultant to be a part of your team full-time? They are working FOR YOU, remember.
This may seem like common sense, but occasionally you may be impressed with credentials and accept advice from someone even if you don’t like them as a person. What they say can be taken with a grain of salt, but in the end, it’s important to have a sense of trust and comfort.
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