Menu pricing is an incredibly important aspect for any restaurant that is looking to be competitive in an already crowded industry. The goal is to attract customers and ensure they remain loyal going forward.
With Australia’s F&B landscape having changed dramatically over the last few years, menu pricing will continue to be a vital area restaurants and CloudKitchen® delivery kitchens have to keep a close eye on.
To give you a push in the right direction, we at Chef Collective have prepared an in-depth guide to ensure that the prices on your menu entice the people of Australia to keep frequenting your eatery.
How is menu pricing done?
Pricing your menu can’t be done overnight. It requires an intricate process where you have to calculate certain things that will ensure you make a good profit on every dish you offer.
- Food cost percentage
- Gross profit margin
Start with the food cost percentage
It is critical that you know the food cost percentage for every item on your menu. For example, if you were running a burger shack and one of your star delicacies were to be a juicy chicken burger, you would have to decide what your food cost is going to be and abide by it. In this case, let’s put the food cost at 25%.
Work out the cost of goods sold (COGS)
Since you know now what your food percentage cost will be, you need to work out how much it will cost to prepare that chicken burger from scratch. From the raw ingredients to the sauces used, it all has to be included. To make it simple, we’ll assume it costs AU$5 for every burger. Using the following formula, you can figure out how much the chicken burger should be priced at.
Use this formula
You can use this formula to conduct your menu pricing:
Price = COGS / Ideal Food Cost
Price = AU$5.00 / .25
Price = AU$20
This formula shows that to hit your food percentage cost goal of 25%, you need to price your chicken burger at AU$20.
However, this isn’t the only way menu pricing can be done as another method is available.
Using gross profit margin to determine menu pricing
You might be wondering what gross profit margin is. Essentially, it’s the percentage of total sales made from one dish that is profit. If we carry on using the chicken burger and say it has a profit margin of 30%, what this means is that 30 cents out of every dollar spent creating this item is profit.
How to work out your gross profit margin
To ascertain what price any dish should be priced at on your menu and the gross profit margin it will earn you, there is a formula you can use.
What you need to know is:
- the price of each dish,
- the raw food cost and
- the amount of gross profit margin you are aiming for.
In the case of our chicken burger, let’s say you want it priced at AU$15 and the cost to make it is AU$5, as noted before. As for the gross profit margin, you might be thinking in the range of 60%,
If we put all this into the formula, it will look like this:
Gross Profit Margin = (Menu Price – Raw Food Cost) / Menu Price
Gross Profit Margin = (15 – 5) / 15
Gross Profit Margin = 66.6%
With a price of AU$15, you will make a gross profit margin of almost 67%, which is undoubtedly an incredible achievement.
Pricing for a buffet menu
Buffets will need to be priced a little differently as there are a couple of things you need to consider, including:
- Diners will usually eat around one pound of food
- The overall cost of raw materials required for that one pound of food (COGS)
- Your target food cost or gross profit margin
Let’s assume one pound of food has a COGs of AU$10, which will include everything from the meats to the side items like french fries. If your target food cost is 30%, you can use the following formula to see what price is needed to achieve it.
Price = COGS / Ideal Food Cost
Price = AU$10 / .30
Price = AU$33.3
Should you be aiming for a gross profit margin of 80% and put the buffet pricing at AU$20 on your restaurant’s menu, you can use the following formula to check whether you will hit that mark.
Gross Profit Margin = (Menu Price – Raw Food Cost) / Menu Price
Gross Profit Margin = (20 – 10) / 20
Gross Profit Margin = 50%
It’s obvious from this that you need to raise your prices to attain that 80% target. To do so, your buffet should be priced at AU$50.
What else can influence your menu pricing?
Numerous other factors can significantly impact the way your menu pricing is done. The possibilities are virtually endless, from the varying costs for different ingredients to what your competition is charging. That being said, to ensure your menu hits the spot and brings in the profit you need to keep your business operating, here are a few factors to keep in mind.
1. Direct costs
Direct costs are what is paid for raw materials and include a few key components, including:
- How much is paid for the raw materials, but this doesn’t include labour and transportation
- The costs associated with food waste, including the cost of any food and raw materials that fail to be used or eaten
- The costs for the portion of each dish, will differ between each item on your menu
Should your direct costs be high, your menu pricing must reflect that to maintain a solid profit margin.
2. Indirect costs
When it comes to indirect costs, the first thing that should pop into your mind is labour costs. If you operate a traditional restaurant, this will be significantly higher than F&B businesses that work out of a CloudKitchen® delivery kitchen.
In addition to labour costs, the indirect costs include anything and everything needed to prepare the items on your menu, except for the raw materials. So, make sure to add pots, pans, cutlery, lighting, gas, water, etc. to your list of indirect costs.
3. Customer perception
This is incredibly important for menu pricing as you want to ensure your customers think they are getting value for money. If your dishes are overpriced, they will ignore your eatery and go to one of your competitors.
On the flip side, if items are too cheap, it gives the impression that your food isn’t up to the best standard and may not be hygienically prepared. As a result, the right balance is needed when it comes to pricing food on your menu.
4. Menu engineering
Menu engineering is centred around making as much profit as possible from your most popular dishes.
Simply put, you want to accomplish two main things through menu engineering:
- Lower the food costs used to prepare the biggest hits on your menu
- Have those dishes be more visible on the menu with the use of promotions and discounts that catch people’s eye
Achieving this will require you to delve into your costs, profit margins and sales records. Even though it sounds like a hassle, it will be worth it if you get it right!
5. Competitor prices
Whether you run a traditional brick-and-mortar restaurant or operate out of a CloudKitchen® delivery kitchen in Australia, you are bound to have competitors. With that in mind, it is essential to know how much they are charging for their dishes to ensure your prices match that or are lower.
If your food is much more expensive but lacks a unique selling point, your customers will disregard your business and go straight to one of your rivals. But, if there is something truly magical about the food you produce, then a heftier price might be warranted.
At the end of the day, it all comes down to making sure you are getting enough profit out of each dish to keep your business running. If your menu pricing is higher than your competition, you will have to get creative and find ways to bring it down without cutting back on the quality.
What’s your price?
Menu pricing is integral to any restaurant or CloudKitchen® delivery kitchen as it can spell the difference between soaring profits and potential closure. To reap the rewards, keep a close eye on your direct and indirect costs, and competitor pricing. If you need more guidance on creating an appetising menu, feel free to check out our blog.
Should you be interested in opening your own CloudKitchens® delivery kitchen in Australia, fill out the form to contact us today.