So, you’re opening a restaurant. One of the most important factors in whether or not your restaurant will succeed is how you price the food on your restaurant’s menu. Whether you have a food truck or more traditional restaurant space, deciding how to price the food you serve is a crucial part of your business’s operations.
There are many different facets involved in learning how to price food on a menu, some of which is predictive, some of which is more exact, and some of which is comparative. If the process seems involved, it can be—but putting in the work to learn how to price restaurant food will be a big factor in whether you make money—and how much.
We’ll go through how to price food, including what you should consider, the equation, and how to make adjustments. You’ll be able to apply some math to make the basic calculations you need to begin and have a sense of the “strategy” to use to keep your margins high.
Learning how to price a food menu is both an exact science and, well, not. That’s because there is a formula you can use, but there also are several different variables that keep the numbers within the formula constantly moving.
With that in mind, here’s what you need to know about pricing food menu items.
Before we get into pricing the menu specifically, you should understand the concepts of gross and net profit margins.
Your gross profit margin—what you have left after you cover all expenses related to selling your product—is hugely important, and what you should be looking at to understand your restaurant’s success. Your gross profit margin will include the cost of goods (raw food, delivery fees, contracts with suppliers, labor, etc.)
For the restaurant as a whole, you’ll want to aim for a gross profit margin target of 35% to 40%.
Your net profit margin is what you actually make after all expenses including overhead, marketing, printing materials, etc. are accounted for. The formula for net profit margin is:
Gross Profit – (Labor Cost + Operating Costs) = Net Profit (or Loss)
In the restaurant world, the ideal gross margin that you want to make on each dish is 25% to 35%. Of course, you can always aim for a higher profit margin, but you’ll have to be cognizant of whether your customers are willing to pay that much and how it stacks up to your competitors.
Put simply, the way to calculate the menu price is to take your raw cost of goods (raw food costs including labor) and mark it up by the profit margin you’d like to make on the dish.
When deciding how to price food for your menu, then, use this equation:
Menu price = Raw food cost / Profit margin
Here, the ideal profit margin will be represented as a fraction, such as 0.25 or 0.35.
Be mindful that if you’re trying to price menu items before actually knowing what your true raw costs are, then you’ll want to make sure you adjust your prices based on reality versus expectations. There can be a big gap between what you think something will cost versus what it actually will cost.
Another major consideration for how to price food for your restaurant or food truck is to pay attention to your competitors. For instance, do your prices keep you competitive? Are they lower to attract more diners? Are they higher to reflect a certain type of dining experience?
The answers to these questions aren’t always straightforward—it might be the case that you want to be more expensive to hint toward being a higher-end, more refined establishment relative to your competitors. Or you want to be lower to undercut your competitors.
As you price your food relative to competitors, don’t forget to be aware of your gross profit margin on all dishes. You want to be competitive—but you also want to make sure you’re making money.
If you change elements of your dish, or your food cost changes, then your gross profit margin will change, too. If you want to retain the same gross profit margin, or hit your minimum of 25%, you’ll need to update your menu price to reflect that.
Let’s go through an example using the equation above. We’ll show a few different ways to come to the conclusion using different missing variables.
We’ll begin with a dish whose raw ingredients total $4. Labor costs are $1. Therefore, the total raw food cost is $5. Here, we’d like to hit a 30% profit margin. Let’s calculate the menu price:
Obviously, you wouldn’t want to price a dish at $16.67! Here, you’ll likely want to round up to $17. This ends up giving you a gross margin slightly higher than 30%.
Or, say you want to find out the profit margin of a dish that you’ve already priced at $20, with costs of $13. Here’s how you’d find the profit margin:
That’s right in your sweet spot!
Even once you’ve found a price point for your menu items that you feel comfortable with, it’s important to know that there are several factors that can affect your pricing—if not now, then in the future. Here’s what to consider.
As you take food costs into account when you price menu items, you won’t be surprised to hear that raw food costs can change the calculations. For instance, as costs for components of dishes increase, so too will your cost per dish, which means lower margins if you keep the price the same. If your costs increase, you may need to consider adjusting the price of your dishes to keep your margins.
Portion size will also affect your restaurant menu prices. Obviously, the more food you serve on a plate, the higher your costs will be, even if the price your customer pays is fixed. Smaller portions will give you higher margins but, of course, you’ll find trade-offs for smaller portions, too. We’ll cover this a little more below as we discuss customer attitudes.
Labor is a massive part of your expenditure—front of house, back of house, and everything in between. Your costs for a dish aren’t just the ingredients, but the labor needed to source, prepare, and serve it. You may need to raise costs if your labor becomes more expensive in order to retain gross margins.
If raw costs change, you’re not powerless. Consider some of these strategies to bring down the cost of menu items—or raise margins when you need to.
If you’re simply not making enough money on a dish, it might be the case that you should get rid of the menu item altogether. It might not make sense for you to keep the item on your menu when you can offer something with a higher gross profit margin.
If getting rid of a dish isn’t the right move, consider changing the raw ingredients in the dish. Because the raw cost of food dictates your profit margin, you might want to look into less expensive ingredients that keep the soul of the dish intact and still satisfy customers, but also lower your raw good costs. These adjustments can be simple—swapping broccoli rabe for broccoli, for instance—but can make a serious impact on margins.
Your raw cost of a dish is, of course, contingent on how much you’re serving: Cost of goods will go up if you’re serving an eight-ounce piece of fish, say, versus six ounces of the same ingredient. Again, calculate the margin with the adjusted cost of goods to figure out how much you’d have to scale back your portions to retain your ideal margin.
Consider what your customers want—and what they’re willing to pay for. One consideration is sourcing local food for your dishes. Not only are some consumers willing to pay more for food that was grown or raised in the area, but you may also save on some of the transportation and other costs associated with obtaining these ingredients. Another strategy may be raising the price of your most popular dish by a nominal fee—not so much that you scare off your customers, but even a $1 increase can help your gross profit margins.
Your starting point for how to price food is simple: You want to multiply the raw cost of your dish—including labor—by the gross profit margin you’d like to earn. That target is generally around 25% to 35% percent, but can obviously go higher if your customers respond well to the corresponding prices.
Don’t forget to also factor in things like customer demand, raw food cost, labor, and more as you’re putting together your menu prices. And, of course, if you make a mistake, or are not realistic in calculating your costs per dish, you can always make adjustments.
Sally Lauckner is the editor-in-chief of the Fundera Ledger and the editorial director at Fundera.
Sally has over a decade of experience in print and online journalism. Previously she was the senior editor at SmartAsset—a Y Combinator-backed fintech startup that provides personal finance advice. There she edited articles and data reports on topics including taxes, mortgages, banking, credit cards, investing, insurance, and retirement planning. She has also held various editorial roles at AOL.com, Huffington Post, and Glamour magazine. Her work has also appeared in Marie Claire, Teen Vogue, and Cosmopolitan magazines.