How to Correctly Calculate Menu Pricing and Boost Profits

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Many factors influence how you price your menu, balancing your overall costs with your customers' needs.

But what are the real factors eating into your profits that you need to consider in pricing your menu? It's not only food waste and inventory variance, which can be easily addressed for food costing.

Pricing out your restaurant menu is a combination of marketing (positioning) and math (knowing your numbers). When you tackle both together, you'll set up your menu to succeed and beat the competition.

Here are three things to research when pricing your restaurant's menu.

1) Assess the competition

You're one step closer to becoming included in the yearly statistics of restaurants that fail if you don't take the time to analyze the market.

Many restaurants don't research competitors because of what psychologists call illusory superiority. It's a cognitive bias that causes people to overestimate their abilities, relative to others. Meaning, you think you're smarter than other restaurateurs, and you price your restaurant menu often without data supporting your decisions.

Do your research. It's not hard or complicated to gather information on local restaurants that directly compete with you. You can see how you compare by recording this information in Excel.

Say that you're a Mexican restaurant. You probably have tacos on your menu. Google "Mexican restaurants near me," look at your competition's menu, and record their menu item prices in Excel. Start comparing your taco prices to theirs: Are you the highest price, the lowest, or somewhere in the middle?

Wherever you are right now pricewise, keep on going with your research and don't jump to conclusions. Price alone isn't what you want to base your decisions on, just like price isn't the only reason for a customer picking your restaurant over another. You're aiming for the sweet spot in marketing known as successful positioning.

2) Position Your Restaurant

Identify whether your market is either demand-driven or price-driven so you can position your restaurant in the market.

Demand-Driven Market: If you're in a smaller market, your restaurant might be pretty unique – like being the only Chinese restaurant for miles around. The supply is low, while demand is high. With few competitors and a menu that stands out, you should be able to price your menu at a more premium price.

Price-Driven Market: Inversely, let's say your menu offerings are fairly common. Perhaps you sell burgers – so do a lot of other restaurants. Your research of the competition reveals that $10 is the most expensive burger in your market. Because there is quite a bit of competition, you'll find it difficult to justify a price of $13 for yours. The question here is: What will your market bear?

3) Identify What Makes You Different

Just because the local average price for a burger is $10 does not necessarily mean you can't charge $13 for yours – particularly if your burger is specialized (or differentiated) in a way that makes $13 seem reasonable. Maybe your burger has high-quality Vermont cheddar or premium bacon.

Let's continue our conundrum about the price of your tacos in the example earlier. You find a taco in your market has an average price point of $4. But you yourself want to price yours at $6. Should you go for it? Answer the below questions below to find out.

Do you use superior ingredients?

Papa John's made their brand stand out from all the other pizza places by marketing the famous "better ingredients, better pizza" tagline. If you're using the very best ingredients that you can source, you should charge a premium price.

Here's the catch: if you want to charge for it, you'll need to market it.

  • Do your guests know you use the most high-quality ingredients?
  • Are you marketing the fact that you use locally grown tomatoes for your salsa, and your tortillas are handmade in-house every day?
  • Do you provide social media proof with guests' testimonials, saying your tacos have changed their life?

What is Your brand?

Each restaurant type, such as fast casual and fine dining, carry a price perception with them. It doesn't matter if your taco is the best in your market. If you're a quick-service restaurant at a food court, you won't be able to charge the same price as a fine dining restaurant with full service, tablecloths and a classier atmosphere. Defining your restaurant brand is key to success.

Is your menu profitable?

Here's where those quiet food cost killers can sneak up. On the first day, you created a recipe card for your carne asada tacos. It looked like the food cost was just right.

Then, you or your cooks start making tweaks. After adding a couple extras, the incremental cost per serving goes up, which leads to inaccurate menu pricing and inventory reporting.

When the theoretical food cost becomes weighed down with costs that you never put into the recipe, your price becomes a killer of profits.

To help with this, you can leverage the integrations between US Foods®, Avero and Toast. Avero offers restaurant software that allows you to track inventory and make a US Foods order. Avero's integration with Toast also has your Toast POS sales data flow into Avero, to automatically generate your COGS and food cost percentage, helping you make more informed decisions for your business. And as part of CHECK Business Tools®, US Foods customers can take advantage of exclusive offers from Toast and Avero!

Menu Costing for Profitability

The real menu profitability killers are hiding in the shadows of bad marketing, pricing by intuition (not data), poor restaurant positioning and not noticing all those "extras" that get put on the plate.

Of course, if you don't even have the fundamentals down (like costing out your menu completely), then you shouldn't even attempt to price out your menu and expect to make money.

If you can show why your restaurant menu is different, menu costing becomes much easier – and drives revenue for your business.

About Toast: Toast, a CHECK® Business Tools partner, powers successful restaurants of all sizes with a technology platform that combines restaurant POS, front-of-house, back-of-house and guest-facing technology with a diverse marketplace of third-party applications. By pairing technology with an unrivaled commitment to customer success, Toast helps restaurants streamline operations, increase revenue and deliver amazing guest experiences. Toast was named to the 2019 Forbes Fintech 50, 2019 SXSW Interactive Innovation Finals, 2018 Forbes Cloud 100 and recognized as the third fastest-growing technology company in North America on the 2017 Deloitte Fast 500. Learn more about Toast by visiting POS and Restaurant Management Platform.

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