You lot are juggling with a delicate balancing act which can feel pretty overwhelming right now, with costs rising and margins squeezed. On the one hand there’s the money you need to take to cover your ever-increasing outgoings and (ideally) end up with a little profit, on the other hand there is that tricky customer perception of value. Your own costs are skyrocketing: yes it’s the obvious stuff like meat, eggs and dairy, but it’s also the staples which are invisible to customers – the cooking oil, the Covid recovery loans, the utilities. Add to this the fact that diners are increasingly price sensitive themselves as they struggle with their own cost of living, and it becomes a real minefield. 

Of course there is some deep work to be done around educating the public about the true value of what and where they’re eating, but in this article we’re just going to talk about how to get your costings right, taking into account both the maths and the balancing act. With margins squeezed to breaking point, getting a handle on those equations can mean the difference between the success and failure of a business. So let’s get into it.

HOW MUCH GP SHOULD YOU BE MAKING?

GP means Gross Profit. It’s a little misleading, because (contrary to some public perception!) the money left over isn’t ‘profit’ that sits in the owners’ bank account. It’s the money you have to spend on all the other stuff – utilities, rent, labour, loan repayments, maintenance and more. That makes it important to get right.

The usual aim is to work towards 72% GP. That means 28% of the listed menu price is spent on raw ingredients only, and you have 72% to cover everything else.

HOW DO I CALCULATE THE COST OF A DISH?

First you need to cost up all the elements that directly go into your dish – that’s ingredients, condiments, packaging, cooking oil etc. Everything should be counted. For this you have to weigh up how much you’re actually using, and divide the bulk cost with the quantity used.

Now you’re ready to calculate your menu price. The equation is as follows:

(COST OF DISH / (1 – DESIRED GP DECIMAL) ) + VAT = SELLING PRICE

For example, let’s say the actual combined cost of all the elements is £10. Divide the cost of producing the dish by the difference between 1 and the desired gross profit margin (expressed as a decimal). In this case, the GP is 72%, so the decimal value would be 0.72. You’re left with the 0.28, so that’s the number you divide by. You then need to add VAT at 20%, which you can do by multiplying by 1.2

So here’s what your equation will look like:

(£10 / 0.28) x 1.2 = £42.85

Rounded for practicality, the selling price of the dish would be £42.90.

HOW DO I MAKE THIS WORK ON A MENU?

• As you probably know, applying this as a blanket formula across everything that you do will be unworkable. You’ve got fluctuating supplier prices, wastage and that tricky matter of customer perception to juggle again, and that means you’re going to have to build in buffers and balances. This is called MENU ENGINEERING.
• Menu items are classified into four categories, which are sometimes named as follows: Stars (high profitability, high popularity), Puzzles (low profitability, high popularity), Plough Horses (high profitability, low popularity), and Dogs (low profitability, low popularity). You need a mix of all of these on your menu.
• ‘Dogs’ may seem counterintuitive to include – why not just ditch them!? You definitely should, in some cases. But the argument against getting rid of some of them is also a great example of why menu engineering is important, and how to really use it to your advantage:
  • You might have a core loyal base who always want this dish, or maybe it has cultural or nostalgic significance for you or for your customers. Removing it might annoy your super-fans, send away your regulars, or compromise your reputation or your identity. Plus, those customers who come just for this item might spend money on alcohol and other dishes, so it balances out.
  • The dish might create by-products which are used in other Star dishes – for example asparagus risotto made from asparagus trim, where the tips have been used in a low-GP dish.
  • A ‘Dog’ might be low-profitability because you’ve decided to make the price particularly low. By keeping a few lower-priced dishes on the menu, some restaurants can use the opportunity to then encourage customers towards more profitable items, or encourage additional orders.
  • Keeping low-priced items that few people actually order means that the menu is subconsciously perceived as being well-priced, but you are cushioned from too many people ordering it!
• Another example we like to bear in mind is the Smashed Cucumber Paradox. Right now, the going price for a bowl of smashed cucumber is about £8. Reverse pricing this, does that mean the raw ingredients cost almost two quid?! No. This is a Star dish, which can be up-sold to every table as an addition to the main order. It creates a buffer when e.g. meat prices soar, meaning that the customer is protected from those rising costs. Instead of customers baulking at having to pay almost a tenner for some raw cucumber, they should be thrilled that they are being shielded from a 50% rise in the cost of their steak – and enjoying a delicious add-on as a bonus!
• You can use THIS SPREADSHEET* to input all your dishes and then tweak that balance, find the weak spots etc, so that you reach an overall picture which works for your establishment. This should be updated regularly to reflect popularity, supplier price changes etc.*NB: Please note the spreadsheet has a time limit – download as soon as you can, or if you miss the date just send us an email at service@countertalk.co.uk and we’ll email it over.

MANAGING CUSTOMER PERCEPTION

• As with the Smashed Cucumber example above, it’s hard to balance how people SHOULD feel about dishes with how people ACTUALLY DO feel about them. Roughly speaking, if people see an ingredient that they associate as being low-cost (eg potatoes) with a process that they can do themselves at home (eg mashed), then you may struggle to charge a premium. This can however be offset with menu descriptors.
• If you have items which you need to price high, but are perceived as being low-cost, then think: how can I describe this? Can I mention the rare potato variety, or the supplier, or the type of butter used? Is there a low-cost element that I can add to charge a premium, for example confit garlic bulbs roasted off while the oven is already on for something else? Is there a way that I can cook low-cost ingredients that will seem really exciting and therefore more valuable?
• Get smart with your menu formatting – place those high-profit items strategically to attract the most attention! That could mean placing them high up the menu, or in their own highlighted box, or on an enticing board, or thinking about creating set menus where spend is increased, and an enticing but lower-GP item is offset by an item with higher GP.
• Make sure that people feel that what you’re PROMISING adds up to what you’re DELIVERING. This is quite subtle and feeds in to everything that you do, even beyond your menu – for example portion size, quality and style of service, design of the space and more. They all play into each other – and the place that perception manifests itself in the minds of the customer is in the prices on the menu.
• Start upselling! Make sure that all your staff know the dishes that they should be pushing to add value to the spend per head. If you’ve got a lovely menu and great staff then this won’t feel pushy – it’ll feel all round like the customers are getting a better experience.

THE TAKEAWAY…

Hitting that golden 72% becomes harder and harder, with our industry’s rising costs seeming incompatible with our customers’ need for prices that are sensitive to their own cost of living issues. But with careful management of both costs and customer psychology menus can be written which will create an overall profit at the end of the day, without alienating your customer base!

With thanks to Hussein Ahmad of Viewpoint for editing and contribution.