The food industry often works on small margins, making between 4% - 10% profit. A pricing strategy has to do more than ensure a healthy profit margin; it has to appeal to customers, provide value for money, encourage repeat business and be competitive with competitor pricing.
Most importantly, a pricing strategy has to do justice to the food cost control procedures put in place by your team. To learn more about calculating food costs, read our article, four essential food cost formulas.
Before choosing your pricing strategy, consider your menu's format and how often it can be updated without incurring additional costs. It costs £40 - £75 per 50 menus, not including design costs which can be as high as £2,000. If you opt for a strategy that is subject to change, a digital menu will be more appropriate, saving printing costs and time when updating.
Finally, assess customer demand and recipe popularity. This data will help guide the profit margin required, identify which recipes can withstand higher prices without lowering demand and where to place these items on the menu.
This article will examine food pricing strategies to increase profit margins and menu pricing tactics to increase appeal.
What is menu pricing?
Menu pricing involves calculating the costs of creating, serving and disposing of a menu item. Once calculated, use revenue goals and expansion plans to determine an optimal profit margin that can be combined with the serving cost to create a profitable sale price.
The types of food pricing strategies
Food cost percentage pricing
This strategy uses your ideal food cost. If you need to calculate it, read our article on food cost formulas. This way, the better control you have over food costs, the smaller your food cost variance will be and the bigger your net profit margin.
First, using this strategy, you must set a food cost percentage to determine your prices. Make sure it is achievable, and use past data to help guide your decision.
Secondly, cost your recipe per serving and include all your ingredients and plating costs. For example, a burger would consist of a meat patty, salad leaves, tomato, a cheese slice, a seeded bun and sauce.
Thirdly, calculate the menu item's price with the two figures in steps one and two. The formula is:
price per serving / ideal food cost percentage = sale price
Let's see it in action.
Your food cost percentage is 28%, the burger cost is 3.15 and tax in the UK for example is 20% VAT, bringing the total to 3.78. Divide 3.15 by 0.28, and you get 11.25 as a sale price.
Whilst this is a great strategy, beware, it is contingent on your outlets controlling costs and keeping the food cost variance to a minimum. If done manually, you may find it hard to keep up with constantly changing ingredient prices, and the profit margins will fluctuate.
The best way to manage this is by using ingredient and recipe management software, which integrates with your supplier database. If supplier prices change, so will your cost per serving. These new costs can automatically update a menu item's sale price, allowing your business to constantly maximise profit with dynamic menu pricing using live data sources.
Cost-plus pricing
The cost-plus strategy is a popular choice due to its simplicity. You create a sale price by adding a markup to your cost of goods sold (CoGS) or actual food cost calculation.
Cost-plus accounts for all the costs that contribute to making and serving a menu item, such as:
- Direct costs (food and labour)
- Indirect costs (utilities and waste management)
- Ingredient costs
- Plating costs
Once you have accounted for all the costs, add the monetary value of the benchmarked profit margin you want to achieve.
Whilst this pricing strategy is quick and easy to set up, it does not consider customer demand or price sensitivity and will require updating as the CoGS change.
Value-based pricing
Used primarily by fine dining establishments and luxury hotels, this strategy is less cost-based and concentrates on the customer's perceived value. Famous brands, celebrity chefs, Michelin stars, unique experiences, extremely high demand and premium locations are likely to successfully use the value-based strategy to create higher than average profit margins.
Competition based pricing
This strategy is likely to result in losses. However, it shouldn't be ignored entirely and instead used as a market research exercise you can use to monitor and compare market conditions. Likely, your customers will also look at competitors and consider prices when decision-making.
It is another strategy that is fast and simple to implement but uses little to no cost data, leaving you open to negative profit margins. It will also take considerable work to monitor competitor price changes and react to them.
Discount pricing
This strategy, we recommend only using in the event you desperately need to clear ageing stock. Suppose you need to sell specific inventory items.
We recommend more creative options, such as creating a specials board using the ingredients you need to sell quickly and charging a premium price instead.
Penetration pricing
Start-up businesses and new product campaigns commonly use this strategy to gain traction rapidly and acquire market share quickly by setting the price as low as possible to attract new customers.
Dynamic pricing
Dynamic pricing has several names. It's a fluid pricing strategy that can change in real-time. Triggered by external factors such as ingredient price changes, demand and supply, day and time, or any other scenario the business feels can affect the sale price or presents an opportunity to maximise profit.
Create a high-performing menu with these pricing tactics
Menu model design
There are several menu design models, whether physical or digital. The primary consideration is to ensure it presents the brand properly and has the appearance to generate the intended perceived value.
For example, when dining at a high-end restaurant, customers expect a minimalist menu with a small selection of recipes created using high-quality ingredients. When eating a buffet, diners expect an extensive menu with a vast item selection and purchasing options presented as deals or incentives.
Menu engineering to combat fluctuating ingredient prices
Changing menu pricing too often can confuse and even annoy customers, especially regular ones.
As prices will inevitably change, sometimes weekly. You can combat this by adding cheap-to-make, high-margin menu items to the starters, sides, dessert and drinks sections.
Strategically create expensive dishes
There's nothing like a few big numbers to make all the others around them look small.
Also known as the relative pricing strategy, it aims to create a contrast between menu items to affect the customer's perception.
Try making the menu items that require expensive, highly perishable ingredients the most costly so you can purchase efficiently to limit losses and push customers towards the lower-cost yet highly profitable recipes you can create at scale.
Make the price discreet and out of focus
Firstly, when adding prices to a menu, don't add a currency, just the number.
Secondly, place the price in brackets after the item's description so that the reader first digests the item's name and description to form an opinion before considering the price.
Keep your customer's eyes on the prize
A customer will first scan a menu, and their sight will move from the top-left diagonally through the middle, across to the bottom right.
With this knowledge, try to place all the highly profitable or popular menu items in these areas. Try using borders or imagery to enhance a menu item further.
Use emotion to drum-up desire
Use item naming to provoke an emotional response by using terms such as homemade or someone's name to make it feel personal and unique.
Another way to make a menu item seem unique is by branding a chef's special recipe to give it an exclusive appeal at a premium price.
Be open and honest about prices when they soar
In turbulent economic times outside your control, all the cost savings in the world will not help your profit margins, and you will have no option but to increase prices to survive.
Either provide information or have staff trained to explain the causes. Whilst no customer likes paying more, especially regulars. They will understand you need to make money to stay open and will be experiencing rising food prices themselves when retail shopping.
Final Thoughts
With so many pricing strategies, you'll likely combine two or more to create a final menu price. One thing's for sure, food cost percentage pricing is the most reliable and will promote a culture that helps minimise the food cost variance. You can use competitor pricing to understand your positioning as a brand and cost-plus to gauge a healthy profit margin that will keep the business running and fund expansion.
The pricing strategies will help you create more profitable menu items, whilst the menu pricing tactics will help guide customers' choices when ordering. The pricing strategies and tactics will work together to create an all-around high-performing and profitable menu. Again we suggest using a combination of these as long as they suit your type of restaurant, and don't be afraid to experiment.