8 Restaurant Menu Pricing + Ingredient Costing Tips

8 Restaurant Menu Pricing + Ingredient Costing Tips
Amanda McCorquodale

By Amanda McCorquodale

Was your carne asada was so wildly popular with friends and family that you set out on a path to open your own restaurant? Then you’ll need to get your menu pricing and ingredient costing right.

A food truck may be able to get away with serving only one or two menu items, but a restaurant cannot. In the early planning stages, you must decide what you will put on your menu besides that deliciously seasoned grilled steak. Since you will already have the grill fired up, should you also serve grilled fish tacos with creamy chipotle sauce? Mexican-style roasted corn? Is it worth it to add sweet treats such as churros?

Regardless of the restaurant concept and type of cuisine you settle on, there will be an overwhelming number of dishes, ingredients and menu variations for you to sift through. There are however quite a few factors to consider to narrow down which menu items will work best in your new business.

Restaurant Menu Pricing Starts With The Market

As with any new business venture, you must do your market research. We’ve written extensively on this before, but the bottom line is that you need to identify and understand both your target customer and your target market. Hone in on who is most likely to frequent your business as well as their tastes, income, and eating habits.

With the target customer identified, move your lens to get a picture of the local market. Is it overly saturated? Or is there room for your type of concept? Ultimately, you need to identify your unique selling proposition, that is, what you offer customers that the competition can’t.

For instance, say there’s room in the local market for a restaurant serving entrees like your delicious carne asada. Do your research to find out if a specific cuisine such as Mexican would be more or less successful than a general cuisine like Latin American. Dig deep into the concept by also figuring out if authentic fare – i.e. spicy! – will resonate more with customers than a more Americanized menu.

According to Certified Public Accountant (CPA) turned restauranteur Roger Fields’ 4.5 star-rated book Restaurant Success by the Numbers, the end goal of market research is to find a unique selling proposition that matches your target customers’ tastes and is broad enough to attract them to make your restaurant profitable.

1. Know Your Kitchen Inside Out

Along with your signature carne asada, your restaurant dream probably also started with the perfect location in mind. Whether you are building an entirely new restaurant from scratch or retro-fitting an existing space, take a good (realistic!) look at your production space.

Note the size as well as the details of the utility hook-ups. What kind of floor and counter space, and energy sources to do you have and what kind of equipment will you be able to include? Of course, your initial capital will also dictate the size and range of your production space.

Regardless of your cuisine, kitchens typically include refrigeration, freezers, shelving, dry storage, prep tables, dishwashing machines, a gas range, a commercial oven and a flat top grill.¹  With the space and money that is left, consider what you would need additionally to prepare specific dishes such as a larger grill, a deep fryer, a press, and/or a double boiler.

2. Get Ingredients from The Source

If you’re focusing your food business on a one-of-a-kind carne asada dish, you better work out how, where, and when you will source your steaks. And that goes for everything else you intend to put on your menu.

According to Online Hospitality Training company Typsy, it’s a good idea to make a list of vendors needed for each ingredient and keep track of their company history, whether they’ve had product recalls, their storage facilities, and specifics on how orders and deliveries are executed.² Typsy also recommends using as few third-party suppliers as possible to minimize risk and cost.

Fields advises taking note of seasonal changes in ingredient prices. For example, meat and poultry are almost always more expensive in the late spring and summer while this is when fruits and vegetables are at their lowest price point of the year.

And if you’ll be sourcing anything unusual – say lengua (beef tongue), piloncillo (unrefined cane sugar) or Oaxaca cheese – make sure you have a primary as well as secondary source just in case, especially if this ingredient is a central player in your business’s unique selling proposition.

3. Time Is Literal Money

This one comes back to knowing your target customer. Take a minute to consider how long these customers will typically be spending in your restaurant. Are they catching breakfast before work? Trying to dine and return to work before their lunch hour is over? Are they enjoying a relaxed Sunday brunch?

Fields points out an early mistake he made with timing in his own restaurant. His chef came from a fine dining restaurant and created the menu around a typical 2-hour seating. Yet, Fields’s customers were headed to the theater and only had an hour and 15 minutes to eat. “As a result, the kitchen staff was not able to cook and plate these items fast enough for the service staff to sell all three courses,” he writes. “The result: we missed out on valuable sales.”

4. Get the Right Staff on Your Crew

Of course, it wouldn’t take much to transition a fine-dining chef to one who can prepare food for a more rushed theater-going crowd. But it is a good reminder to make sure you have the budget and positions to have the appropriate staff to execute your intended menu and service.

Will you need a cook or a chef? Does your menu require that you also hire a pastry chef? Read our post on Finding the Right Type of Chef for Your Restaurant to work out all the details. If you don’t have the room or budget for specialized staff, make sure your menu can be executed by the kitchen staff you can employ.

5. Yes, Menu Size Matters

When is a menu sufficient in size? Online hospitality training company Typsy recommends keeping menus under 32 items for optimal productivity. Typsy also recommends minimizing the possibility of confusion and anxiety among your guests, by giving customers the option to make their ordering decisions in under two minutes.³

This is another place where your market research will come in handy. As Fields points out, when he switched a limited menu soup restaurant to one selling a variety of wrap sandwiches, the business boomed.

Even in a city as densely populated as New York, a one- or two-item menu just does not offer enough options to attract the required amount of repeat customers to be viable. A more diversified menu allowed me to appeal to a broader market and attract a larger number of customers. –Roger Fields, Restaurant Success by the Numbers

6. How Do You Cost out A Menu?

A large part of deciding what to put on your menu is figuring out what your target customers will be comfortable spending on meals, and whether that price will adequately cover your costs while also turning a profit.

Your goal then, when pricing your menu, is to create a mix of price points and profit margins that will come together to allow you to maximize your profits and at the same time give your customers the best value for their money.–Roger Fields, Restaurant Success by the Numbers

In order to come up with a profitable price structure for your menu, and decide which menu items are worth selling, you must first figure out your restaurant’s food cost projections and expenses including labor and overhead. With these expenses outlined as part of your feasibility study, you can figure out how to price your menu in order to achieve a certain profit. Typically table service restaurants spend between 28 and 35% of their revenue on food in order to stay profitable. This figure is referred to as the food cost percentage.

Download our free food cost percentage template now:

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Let’s break our example down using real numbers. First figure out a menu item’s cost of sales, that is, the cost of groceries in your freezer and on your storage shelves that you will use to make your menu items.

In this case, say it costs $4 to make each carne asada order and you hope to keep your targeted food cost percentage at a conservative 27%. Those in the industry use the cost ÷ cost percentage formula to work out the menu price. Using the equation $4 ÷ 0.27,  your carne asada could be priced at $14.80 and your operation could make a profit. In other words, for every dollar in sales from the carne asada, 27 cents would cover food costs and the rest would cover all your other expenses.

Once you’ve been open for some time, you can check to make sure you’re achieving your targeted food cost percentage by dividing your total food costs by your total revenue. You may find you need to cut down on some food expenses or raise prices to stay on target and generate more profit.

7. How to Cost Ingredients

Now that you know the big picture strategy of food costs and profit, let’s unpack how exactly you can find out a menu item’s cost of sale.

Once you’ve worked out exact recipes for a menu item:

  1. Break down the cost of each ingredient using a spreadsheet
  2. Each row lists one ingredient in the recipe
  3. Column track the following:
  • Ingredient
  • Unit of measure (teaspoon etc.)
  • Purchase cost (e.g. price of mayo jar)
  • Cost per unit (mayo price per cup)
  • Serving size (how many mayo cups used in each serving)
  • Serving cost (unit cost x serving size)

Smart restaurant owners and operators always adjust the total menu item cost by a small percentage to account for waste such as spilling, trimming meat and vegetables, and other forms of waste.

Here’s a sample recipe costing form for elote (Mexican grilled corn, yum!):

Ingredient Unit Purchase Cost Unit Cost Serving Size Serving Cost
Chilli powder teaspoon $14 $0.07 0.125 $0.56
Cayenne powder teaspoon $14 $0.07 0.0625 (Less than $.01)
Corn each $0.50 $0.50 1 $0.50
Mayo cup $10 $0.63 0.03125 $0.02
Cojita Cheese cup $3 $2.40 0.0625 $0.15
Lime each $0.40 $0.05 0.125 $0.05
Total $1.28
Waste Factor (10%) $0.13
Total Cost $1.41

Adjusting for waste, each order of elote will cost you $1.41 to make. Again to find out how to price it on your menu, divide that cost of sales ($1.41) by your targeted food cost percentage (30%) and you will find out that you should price elote around $5 to stay profitable.

8. Dig in To Your Contribution Margin

By now, you know how to find the costs of sale of your menu items as well as how to price them. With those two figures, you can figure out each menu item’s contribution margin: the selling price of a menu item minus the food cost of the item.

When deciding whether to add an item to your menu, you’ll want to compare that item’s contribution margin to the average contribution margin (the total contribution margin divided by total numbers of items sold), according to Basic Kitchen and Food Service Management, a textbook developed to support the training of students and apprentices in British Columbia’s foodservice and hospitality industry.⁴  The higher an item’s contribution margin is over the average, the more profitable it is for your business.

Take our example of elote, which has a contribution margin of $3.59 ($5 menu price minus costs of sale $1.41). While that is not a large contribution, the more elote orders you sell as an appetizer or side will contribute to bigger check sizes without affecting seat turnover. You must also factor in how much labor the item involves. In this case, a quick session on the grill and the corn is done, making its contribution margin more worthwhile.

Meanwhile more premium entrees like carne asada will have a higher contribution margin ($16 menu price minus $4 cost of sales =  $12 contribution margin), and should be considered a more profitable menu item to sell even though it is more labor-intensive to prepare.

In the end, as long as your menu’s prices are realistic for your target customers, your food cost percentage is around 30%, and you have a good mix of contribution margins, you should be making enough profits to serve carne asada for years to come.

The Bottom Line

First-time restauranteurs sitting down to write their inaugural menu need to familiarize themselves with all the many factors that should drive their decisions. That entails getting to really know the customers and local market, facing the realities of your production budget and staff, and crafting recipes that generate costs and revenue that make good financial sense on your Profit & Loss Statement.


Sources:

  1. https://www.tigerchef.com/what-equipment-do-you-need-to-get-started.html
  2. http://blog.typsy.com/how-to-develop-a-restaurant-menu
  3. http://blog.typsy.com/how-to-develop-a-restaurant-menu
  4. https://opentextbc.ca/basickitchenandfoodservicemanagement/chapter/describe-the-principles-of-menu-engineering/

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Amanda McCorquodale
Amanda McCorquodale

Amanda McCorquodale is freelance writer based in White Plains, NY.