Restaurants have fairly tight profit margins. How they price their menu items can have a large impact on its profits. This post will describe three ways to price your menu items profitably.
The Prime Cost Method
A restaurant’s prime costs are its food, beverage, and labor costs. These costs are referred to as prime costs because, in the short term, they are the only costs a restaurant owner can manage. The Prime Cost method is based on the menu item’s cost and the desired food cost percentage of the restaurant. On average, restaurants have a 38% to 42% food cost margin—for example, a restaurant with $10 in sales will have a $3.80 to $4.20 food cost.
Under the Prime Cost method, the food cost of the item is divided by the desired food cost percentage.
Pomo D’oro Bros wants to price an entrée consisting of 4oz of chicken, a baked potato, green beans, and a salad. The total food cost of the items is $6. If Pomo D’oro Bros is aiming for a 40% food cost, it would divide the food cost of $6 by 0.4 and come up with a $15.00 menu price for the entrée.
The Peanut Butter Method
This method takes a restaurant’s projected labor, non-food expenses, and desired profit and divides the amount by the number of meals the restaurant estimates it will serve during a year. It then adds this amount to the cost of each food item.
This method only works if a restaurant has menu items that are similar in cost, otherwise each menu item will have the same markup.
Projected Labor Costs $60,000
General Expenses $40,000
Desired Profit $10,000
Total $110,000 (1)
Meals to be Served during the year 30,000 (2)
Required Markup Per Meal $3.67 [divide (1) by (2)]
The restaurant owner adds $3.67 to the cost of each menu item to determine the menu price.
Again, this method works best when all menu items have a similar cost. Under this method, a hamburger with a cost of $2 with have a $5.67 price for a 35% food cost (good) and a steak with a cost of $6 will have a $9.67 price for a 62% food cost (not so good).
Multiply Food Costs by 3
This method is the same as the Prime Cost method above if the target food cost is 33%. If your menu items cost $4 and you multiply this by 3, you would get a $12 menu price. This is a 33% food cost ($4 cost divided by $12 price).
A few points to consider:
- If you have menus printed only once a year, you may want to increase the menu prices for inflation over the next year. For example, if you come up with a $15 menu price, you may want to figure in a 3% (give or take) inflation rate and increase the menu price to $15.45
- The price you come up with must be compared with what your competitors are charging. If your competitor’s prices are slightly less than the amount you came up with, you may want to beat her price. If your competitor has substantial cost advantages like a low-cost lease you may not be able to beat her prices. In this case, you may want to stick with the higher price and focus on differentiating your restaurant from the competition.
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.