How to Set Restaurant Profit Margin and Determine Menu Prices

Any chef or culinary student can tell you, knowing the average restaurant profit margin is vital to the success of any restaurant. But pricing your menu items involves more than simple math. Here's how to determine how much your food should cost.

Understanding Food Costs and Production Efforts

Keeping track of food costs is one element of pricing an item on the menu. If the raw food item is pricier (for example, a prime cut of beef), it's common sense to charge more for the finished dish. But the process of choosing a menu price will take into consideration the production efforts, too, like when you add in other touches to that same steak. Wrap it in bacon or top with a compound butter, and the overall price goes up.

When determining the mark up of any dish, consider the steps that went into making the meal. How long does the dish take to prepare? What kind of prep is involved? Simple items with only a step or two to complete before it gets to the customer have a low production effort. Dishes with many steps or that require the waiter to finish it at the table are considered high production effort items. The prices should reflect that, no matter the food cost.

Pricing and Customer Involvement

Another factor in determining a menu price is knowing a customer's involvement with the item. Don't just consider the maximum dollar amount you think your customer is willing to pay. Look at the perceived value, or what the customer appreciates in the food, when figuring out the prices, as Smart Marketing Solutions describes. For example, nightly specials are typically made up of higher-priced menu items. Offering a slight discount makes customers feel that they are getting a deal, while restaurant owners can sell more of these dishes at a still relatively high profit margin. The National Restaurant Association recommends polling your staff about how much to price an item for and researching your customer's spending habits and income, too.

The Importance of Beverages to Profits

Beverages are a big part of the meal — and the check. A typical restaurant profit margin at the bar is about 70 percent (compared to 60 percent on food), according to U.S. News & World Report. Wine markups are typically high for several reasons. As Wine Enthusiast explains, state taxes and wholesale costs are among the biggest things to consider when pricing wine. Having a sommelier certification in place for the staff lets patrons know that your restaurant places a high value on wine, too, enabling a higher price point.

Special attention should be placed on nonalcoholic beverages such as soft drinks, coffee and tea. These drinks can be the most profitable items in the restaurant. They are cheap to buy and have low production effort — in the case of tea, you can buy in bulk and spend mere pennies per tea bag, then allow the customer to brew it themselves at the table. Syrups for soft drinks are inexpensive and easier to store than wine and spirits, and with the relatively small costs, offering free refills makes it a premium value to the customer.

While the tendency is to focus on the star items that sell and remove the ones that don't, attention should instead be placed on the menu items that have a highest contribution rate. A great, profitable menu item balances a low production effort and food cost with a high price point and customer value. If any of these factors don't work in your favor, rework the menu until you're satisfied and paid.

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