Restaurant Menu Pricing: Use Math and Psychology to Increase Profit

Ever wonder how restaurants hit the pricing sweet spot? It's all about menu pricing — the roadmap to profitability. 

Menu prices aren't random guesses. They're carefully calculated based on things like how much ingredients cost and what customers like. This way, each dish not only pays for itself but also helps the restaurant make more money.

But it's not just about costs. Menu pricing considers your competition and what your target customers expect to pay. The key is to find the perfect harmony between your restaurant's concept and your customers' wallets.

If you're interested in figuring out how to set prices for your menu in a smart way, keep reading. I'll share some simple formulas and examples to help you, along with tips to make the most of your strategy and increase restaurant sales by choosing the right pricing method.

Start By Calculating Your Food Cost 

When beginning your menu pricing strategy, start with your food cost percentage. This is arguably the most important cost to watch since restaurant profit margins are so small — these costs can be the difference between being super profitable and losing business. 

So, what is the food cost percentage? 

Food cost percentage is a cost-based pricing model that can help you understand how much your restaurant spends on ingredients compared to your revenue. 

Ideally, the resulting percentage will fall within a specific range to ensure healthy profit margins. I like to split these ranges up into categories. For example, 

• Appetizers should have a food cost percentage of around 10% and no more than 20%
• Entrees should fall in the 25% to 40% range 
• Beverages should be around 15%

Here’s the easy formula to calculate for all sales — take how much you spend on food in a period and then divide it by the sales from the food you sold in that same period. 

I’ll walk you through an example below.

Food Cost Calculation Example

So let’s say you purchased $2,500 in food this week and sold $10,000 worth of food. To calculate your food cost percentage you would: 

• Take the $2,500 and divide by $10,000, which would give you .25 
• Multiply .25 by 100 to get your food cost percentage, which would be 25% 

The formula changes slightly to calculate food costs for your menu items since you add up the ingredients that make up each menu item to determine the cost. This is also known as the cost of goods sold (COGS). 

For example, you would take the total ingredients cost and divide it by the menu price, then multiply it by 100 to get the percentage: 

So if it costs you $5 in ingredients to make a pizza dish and you decide to price it as $15 on your menu, your food cost percentage for this menu item would be 33%. This falls into the healthy profit margin range of 25% to 40% for entrees that I mentioned earlier. 

How to Use Food Cost Calculation In Your Menu

Now that you know how to calculate your overall and menu item food cost percentages, how do you apply them to your menu? Here are some of my favorite restaurant marketing tips that I recommend you keep in mind when applying this to your strategy: 

Design your guest experience around money-makers. These "money makers", like fries, drinks, and desserts, cost barely anything to prepare, unlike pricier main courses. Restaurants often use them strategically — think high-end spots offering affordable wine and appetizers to balance out expensive steaks. 

Follow suit by suggesting "commonly paired" items within online ordering checkout, just like The Sombrero Tacoria. It's a win-win — customers get a complete meal, and you score extra sales. 

Made with Owner.com.

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‍Try using promotion ideas to boost sales. Once you've finalized your prices, consider implementing loyalty programs or special offers like "buy one, get one" deals for items priced at 20% or less. For instance, offering free onion rings ($8 for customers, but only 5% food cost for the restaurant) can attract more customers while saving money.

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To get into food cost calculations further, check out my YouTube video:

 Calculate Gross Profit Margin to Create Menu Prices 

Now that you understand the food cost percentage formula, let's take it a step further with gross profit margin. This tells you how much money you actually make from each dish after accounting for the cost of ingredients.

Check out the simple formula to calculate this: 

‍Gross Profit Margin Example

Let’s break it down with an example:

Imagine a pasta dish sells for $15 and the ingredients cost $4 (pasta, sauce, etc.).

• Menu price = $15 
• Cost of Goods Sold (COGS) = $4 (ingredient cost)

Step 1: Calculate Gross Profit: Gross Profit = $15 (menu price) - $4 (COGS) = $11

Step 2: Calculate Gross Profit Margin: Gross Profit Margin = ($11 / $15) x 100% = 73.33%

This means for every $1 you earn from selling this dish, $0.73 comes as pure profit after covering the ingredient cost.

How to Use Gross Profit Margins to Price Menu Items 

When using the gross profit margin to determine your profit margins, here are some things I recommend doing: 

• Set your target gross profit margin: Industry standards suggest around 70%, but this can vary depending on your location, cuisine, and overhead costs.‍
• Calculate your COGS per item: Add up the cost of all ingredients needed for the dish you want to price.‍
• Use the formula to find the ideal price: Here, you'll need to play around a bit to find the right price that meets your target gross profit margin while still being attractive to customers. For example, premium ingredients like steaks might need a slightly lower target margin to stay competitive.

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Look at your current menu items for dishes with high food costs and low gross profit margins. Consider these options:

• Raise the price: If the market allows, increase the price slightly to reach your target margin.‍
• Reduce portion sizes: Maintaining the price while slightly reducing portion size can improve profitability.‍
• Adjust the recipe: Explore substituting some ingredients for lower-cost alternatives without compromising quality.

Look for dishes with high gross profit margins (above your target). These "money makers" can help offset lower-margin items:

• Promote these dishes on your menu or through special offers.
• Consider offering larger portions for these items to incentivize sales.

3 Menu Pricing Strategies and How to Maximize Them

Ready to turn those food cost calculations into profit? Now that you understand your numbers, let's explore different menu pricing strategies. Here I’ll cover tactics that consider customer demand, competition, and psychology to maximize your profits.

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Demand-Based Menu Strategy

Demand-based menu strategy is when you adjust your restaurant’s menu offerings or pricing based on customer demand and other factors. 

It's being dynamic and responsive to what your customers want and what ingredients are readily available, helping you maximize your profits and making customers happy. 

Below are some ways I recommended using a demand-based menu strategy:

• Track your best sellers: Take a look at your sales data to spot the dishes with the highest profit margin and customer popularity. Consider raising these prices and promoting these items on your menu, especially if they’re below the recommended profit margins. ‍
• Offer flex prices: Offer different pricing or specials for specific times of day (e.g., lunch specials, happy hour deals, Taco Tuesday) to create demand and attract customers during off-peak hours. ‍
• Capitalize on the season: Embrace the seasons — feature fresh, in-season ingredients like lobster dishes when it's prime, allowing you to charge a premium. Seasonal produce is usually cheaper to buy in bulk. So, you can highlight these seasonal fruits and veggies in dishes on your menu with higher prices which gives you more profits since the food costs are lower. Plus, customers are more likely to order items described as “seasonal”.‍
• Promote limited-time offers: These offers create a sense of excitement and encourage impulse purchases with limited-time menu items or promotions. Think prime rib specials — offering a small amount of product quickly also helps you save on food costs since you save on inventory. ‍
• Use event pricing: Increase the menu prices of popular bar food during peak sports season or promote deals for low-cost items on game days to increase profits. 

These demand-based menu tricks let you listen to your customers and what's hot right now. This means happier customers with tastier plates, less food waste, and more money in your pocket. 

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Competition-Based Menu Strategy

As a restaurant owner, knowing your competition's pricing is key. Competition-based menu strategy involves setting your menu prices to what similar restaurants charge for comparable dishes. Here’s how you can do this:

• Price lowering: Undercut competitor prices slightly to attract deal-seekers and build a loyal following. This works best for high-efficiency restaurants with low overhead costs that can still maintain a healthy profit margin.‍
• Price matching: Set your prices the same as your competitors for similar items. This can be a good option if you want to emphasize value and attract price-sensitive customers. This could help if you’re a newer restaurant that needs help establishing themselves.‍
• Price premiums: Set your prices slightly higher than your competitors for similar items. You can charge more than competitors, but make sure you bring something unique and of better value to the table, like offering a larger portion or a side dish included in the price. This strategy is best for restaurants that offer top ingredients or a more upscale experience. 

By using competitor pricing as a guide, you can minimize the risk of setting prices that are too high or too low and position yourself strategically in the market.

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Menu Psychology 

Menu engineering is all about designing your menu to steer customers to the most profitable items subtly. It's a mix of data analysis and psychology, all designed to make those money-makers stand out and get the most out of your menu pricing. 

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Here's how you can do this when creating or redesigning your menu:

• Use price anchoring: The anchoring effect uses strategic placement of high-priced items to influence customer perception. By listing a more expensive dish first, you subtly "anchor" a higher price in the customer's mind. This makes your main menu items, priced slightly lower, seem more reasonable in comparison. It's a psychological trick to nudge customers towards your profit sweet spot.‍
• Know the golden triangle: The golden triangle in menu engineering refers to the three menu areas most likely to be noticed by customers first based on eye movement. So, place high-priority menu items (items that earn your restaurant the most profits) in the middle, then top right then top left.   ‍
• Use the right colors: Using the right colors in your menu can make you more money. For example, the right colors, like red, orange, and yellow are shown to stimulate appetite and attract eyes to the parts of your menu. ‍
• Don’t add too many products to your menu: Having too many options can be overwhelming and give your customers choice overload. Try listing just seven items in each category (appetizers, entrees, etc).  ‍
• Play with premium pricing: Customers often equate higher prices with better quality. A Stanford University study perfectly illustrates this: customers unknowingly tasted the same $5 bottle of wine, but one was labeled $5 and the other $45. Shockingly, the majority rated the "more expensive" wine as tastier. This highlights the power of perception — a higher price tag can subconsciously influence taste buds. ‍
• Create a simple design: Make your menu scannable so that customers have an easier time reading and picking out what they want to eat, which can help reduce feelings of overwhelm. I also recommend against using PDFs since they’re harder to access online — place them directly on your web page instead. 

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These customer psychology tips can be a powerful tool for boosting your restaurant's profits. They subtly guide customers toward your most profitable dishes, increasing your bottom line.

While you're making these menu updates, consider revamping your website design as well. A sleek website design will showcase your delicious food and attract more hungry customers online, maximizing the impact of your menu strategy.

Master Menu Pricing and Take Control of Your Profits 

Now that you've learned about different ways to plan menus and some cool tips, it's time to make a menu that helps your restaurant earn more money. But don't worry, making a great menu doesn't have to be hard.

With Owner.com’s restaurant website builder, you can easily create a beautiful menu that looks great on mobile and makes your food look even better. Plus, it can help bring in more customers and make more sales.