How To Price Your Menu
When margins are tight, operators who understand their numbers and react to them with speed and subtlety have a powerful advantage. Footfall may be healthy, but each business is nevertheless caught in the same vice with costs climbing relentlessly on one side and, on the other, increasing customer price sensitivity. The balancing act between what you need to charge and what customers are willing to pay has always been baked in to the very nature of running a restaurant, except now the tightrope is thinner than ever, and the fall is potentially lethal.
It is a truism that it does not matter what you charge: it could be a fiver, or five hundred pounds. What matters is that your audience perceives that what they receive is appropriate value. That value comes from the whole ecosystem of a room - the service, the ambiance, the weight of the cutlery - but it is made material by the numbers on your menu.
From within the grip of that vice there is deep, important work to be done around educating the public about the true price of what they’re eating and where they’re eating it; but cultural shifts do not happen within the timelines required by your P&Ls. So here we are talking about quicker fixes: getting your costings right by factoring in both the hard maths and the human psychology.
Be smart with that balance and customers will feel that every plate is worth their spend, every visit inspires a return... and as you tiptoe along it, the tightrope becomes a nice wide bottom line.
The TL;DR
Work towards a 74% GP overall.
Since costs will inevitably fluctuate, this won’t be possible to hit on every dish.
It’s important therefore for some dishes to have a higher GP, to create a buffer.
Use menu pricing software (or this spreadsheet) to ensure that the higher and lower GPs balance out
Customer perception can be managed through menu descriptions and good price balancing across your entire offering.
How much GP should you be making?
GP means Gross Profit. That term is 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. For a long time the ideal GP sat at 72%, but with the rising costs of staffing, rates, utilities and more, this has increased.
The usual aim now is to work towards 74% GP. That means 26% of the listed menu price is spent on raw ingredients only, and you have 74% 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 ingredients by the difference between 1 and the desired gross profit margin (expressed as a decimal). In this case, the GP is 74%, so the decimal value would be 0.74. You’re left with the 0.26, 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 / 0.26) x 1.2 = £46.15
Rounded for practicality, the selling price of the dish would be £46.50, or £46.00
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 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 can still be made to 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.
Make sure there aren't too many 'Puzzles' on the menu, and that it is built to encourage adding a 'Star' or a 'Plough Horse' on to each order - for example, a side of fries with every steak.
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 raises the overall GP and creates a buffer when (for example) 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 beef - and enjoying a delicious add-on as a bonus!
You can use this costing 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 weekly to reflect popularity, supplier price changes etc.
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 (e.g. potatoes) with a process that they can do themselves at home (e.g. mashed), then you may struggle to charge a premium. So...
Descriptors matter. 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, placing 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.
Always be aware of value: put simply, making sure that people feel that what you’re DELIVERING equals or exceeds what you're PROMISING. 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 74% may seem harder and harder as our industry’s rising costs clash 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 - without alienating your customer base.
With thanks to Hussein Ahmad of hospitality accounts specialist Viewpoint Partners for editing and contribution.
