Costing and Pricing Food in the Restaurant Industry

In the restaurant business, the art of pricing food starts with the science of costing food. In simple terms, most restaurants spend about 32 percent of their budgets on food, beverages, carryout supplies and condiments. Of course, restaurants sell service, companionship, camaraderie and food, so pricing menus is both an art and science.

The costing and pricing process differs for various restaurant services because one-time events create their own special costs, and restaurateurs often need to make more money to justify the time and effort of supplying alternative services.

Costing Your Food with Automatic Updates

Profitable restaurants usually keep food costs within 28 to 35 percent of gross income. This applies to the cost of food and waste, employee meals and theft. When you cost food, you analyze how much it costs to make each item on your menu. When you determine overall food cost percentages, you have to include waste.

Automatic inventory control systems and software make it easy to cost your menu items, update wholesale food costs and adjust menu prices. Food costs are tremendously volatile, depending on market conditions. Food that’s profitable one month can easily become unprofitable due to price increases, so restaurateurs need to update their costs regularly. Automatic systems can update prices after each delivery so that you always have an accurate profile of the costs of everything you sell in the restaurant.

Best practices for setting your menu prices include:

  • Adjusting prices for seasonal ingredients
  • Pricing highly volatile foods on the menu at market prices
  • Mixing low-cost and high-cost items on the menu
  • Using all produce and ingredients in multiple dishes to prevent spoilage and ensure maximum freshness
  • Setting specific times to review costs and prices
  • Considering non-monetary factors when pricing items
  • Remembering to include inventory when calculating total food expenses

Non-monetary factors include making your rates competitive with other restaurants, pricing menu items based on preparation difficulty and charging more for items that are popular or typically command higher prices at other restaurants. You must also consider your customers and whether they will pay the prices that you set.

Formulas for Pricing Foods

You can add all your expenses and subtract your inventory to determine total food costs, but pricing foods is a bit trickier. Once you’ve analyzed all the ingredient costs that go into a dish, you can divide the total by 0.35 to get the minimum cost that you need to charge. For example, a filet mignon might cost $6.00. The ingredients for the salad, baked potato and vegetable might total an additional $3.00 for a total cost of $9.00.

When you divide $9.00 by 0.35, you get a minimum cost of $25.71. You might charge $25.99 for a filet mignon entrée or more if similar restaurants get higher prices for a comparable meal.

Portion Control and Alternative Serving Sizes

Portion control is critical because all your costs are based on exact quantities of raw ingredients. If your costs seem too low or too high for your customers, you can adjust prices by changing the sizes of the portions. Restaurants often offer optional smaller portions, but you should charge a higher percentage for a smaller serving. A half-sized meal might command 75 percent of the full-sized entrée’s price.

  • Measure or weigh everything precisely when figuring prices.
  • Train cooks and chefs to measure ingredients when cooking and portioning food.
  • Consider pre-portioning expensive ingredients to limit waste and overusing ingredients.
  • Periodically test food that comes from the kitchen to ensure that portioning is accurate.

Balancing Your Menu

It’s impossible to plan for every price fluctuation, so that’s why it’s important to balance expensive ingredients with lower cost items. Balancing your menu includes choosing foods that have stable prices to counter the prices that fluctuate frequently. This strategy will protect you from the temporary price surges that every restaurant experiences.

Pricing for Catering Jobs and Special Events

Pricing for catering and special events is more flexible, but it can be more challenging. Typically, your restaurant has certain fixed expenses, and the 28-to-35-percent food costs automatically make allowances for restaurant operating costs. Catering jobs and special menus, however, often take more planning because they generate additional expenses.

You must consider these extra expenses and your time when calculating costs for these jobs. Big events might have a lower cost per person than a small catering job because you have to cover the fixed expenses of preparing food outside of normal working hours, delivering the food, possibly serving the food, and cleaning up after the event. If you use your restaurant’s dining room, you need to cover your average profit margin. The types of pricing for special events include:

  • Fixed pricing: A fixed-priced system sets prices based on specific foods and quantities, such as a gallon of potato salad, an hors d’oeuvres platter for 10 people or prime rib for 25 guests.
  • Tiered pricing: Tiered pricing varies depending on how many people. The more people, the lower the costs per person.
  • Custom prices: You can charge custom prices for jobs where conditions and menus vary tremendously. It’s important to gather all the information before setting your price. The job might require service staff, long-distance transport, holding tables, off-site refrigeration and other details that will affect your price.
  • Other factors: Unlike restaurant pricing, you must consider labor costs, disposables, use of your equipment off-site and delivery charges when figuring your costs and pricing strategy.

You should mark-up every expense instead of just passing along costs because something always goes wrong or the unexpected happens. Caterers are often expected to provide an array of services for increasingly demanding customers. Depending on the cuisine and menu, you should also add a tariff for preparing special diets and using specific brands. Each job needs to pay for itself and generate a reasonable profit for your time and effort.

Many people in the food industry fail to calculate their costs correctly or keep their costs updated. Once you have a basic formula for determining food costs, inventory and costing software can keep your prices updated automatically. However, software can’t control cooks who don’t portion accurately or staff members who eyeball ingredients or change recipes. Servers and bartenders can also ruin your calculations by serving overly generous desserts and bar pours or giving customers handfuls of condiment packets, napkins and other peripherals.

Costing & Pricing in Real World Conditions

After items have been priced, you have to pay attention to sales to see if the pricing works in real-world conditions. While your flexibility is limited, if a menu item won’t sell at a particular price you might have to take some kind of action, especially if the menu item is something special. You could of course drop the item from the menu or lower the price. Lowering the price can either involve adjusting the portion/ingredients or deviating from your costing-pricing formula. Obviously, every menu item is different and receives a wide variety of responses in various restaurants. Restaurant owner have to be proactive and systematic in solving pricing problems, when one important menu item is underperforming.

These adjustments and fine-tuning is how a restaurant owner masters the art of pricing and sees how to balance expenses with the tastes of his or her customers.