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The only certain thing is that continuously rising costs will eventually force you to increase your menu prices. The good news is that you're not alone; your competitors are facing the same thing. Another ray of hope: Most diners are accustomed to increased prices.
The pandemic affected many parts of the food supply chain, including production, processing, and retail. With restaurants closing, demand at grocery stores skyrocketed. At the same time, new health protocols and increased labor turnover caused food production costs to rise.
The war in Ukraine further disrupted the supply chain for products like wheat, as Russia and Ukraine produce 30% of all wheat exports worldwide. But food shortages don't end there. Chickpeas, sugar, avocados, eggs, and meat are some of the other items that may become harder for restaurant operators to obtain.
All these factors contribute to restaurant inflation and consequently rising restaurant menu prices.
Menu pricing is exactly what it sounds like: calculating prices for individual items on a menu. Individual dish prices are typically calculated through various factors such as ingredient costs, labor, and profit margin.
Your menu pricing strategy is how much you'll charge while taking into account your entire menu and other considerations. After all, atmosphere and experience are also important elements when visiting a restaurant, so you may want to consider these when calculating your prices. This can create an overall strategy based on more than just your food cost percentage. This may mean pricing certain items higher or lower depending on the amount of profit you want to see.
The truth is, diners are starting to notice higher menu prices. This means restaurants need to be strategic about their menu pricing strategies and the changes they implement.
The most obvious solution to help you cope with rising food costs is to increase your menu prices overall. However, as a savvy restaurant operator, you know that some of your guests may not respond well to seeing higher restaurant prices on your menu.
You'll need to get creative to increase your restaurant menu prices without giving your guests sticker shock. A smart way to do this is to offer highly seasonal products like seafood at market price rather than a fixed price. This strategy also applies to imported products.
If the price you pay for a particular product fluctuates wildly from one week to the next, using a market price can help reduce food costs.
All experienced restaurant operators know that restaurant menu design can affect your bottom line. Therefore, instead of raising your prices, you can try using menu psychology to highlight your highest-margin dishes and specifically boost sales of these items.
It's as simple as using a slightly larger font or an eye-catching box, illustration, or photo to highlight specific menu items. This technique can translate into a higher average transaction size at no extra cost to your customers.
Encouraging guests to order more items to increase your restaurant's average transaction size can also help offset higher ingredient costs.
For example, if your menu includes steak, you can keep the main course price the same while completing your menu with extra side options. Or try offering guests more ways to customize their salads or bowls, such as adding grilled chicken breast or smoked salmon for an additional fee.
The primary factor to consider when choosing how much to charge for items on your menu is cost. To do a very basic costing of your menu, you need to calculate your food cost percentage.
The basic formula for calculating your food cost percentage is:
Food Cost Percentage = (Beginning Inventory + Purchases - Ending Inventory) ÷ Food Sales.
Direct costs are the costs of ingredients, which can include:
The higher your direct costs, the higher your potential menu prices will be.
Indirect costs include all costs related to food preparation that are not involved in preparing the ingredients. These can include:
Having too many indirect costs will push your prices even higher.
Overhead costs are costs you only incur while operating your restaurant. These can include:
It's very easy to let your overhead costs get out of control. Make sure you manage these costs, otherwise you may have to raise your prices.
The restaurant industry is incredibly vulnerable to seasonality. Seasonal costs can include:
Paying attention to your seasonal costs will allow you to thread the needle by purchasing seasonal ingredients at lower prices.
How you price your menu will depend on the type of customers you want to attract. The prices you set will need to be appropriate for the customers walking through your door. If it's too high for people in your area, you might drive away potential customers.
Once you have a general idea of your potential customers, you can develop appropriate dishes to attract them and calculate prices they'll likely be willing to pay. For example, if you set up a restaurant in or near a university campus, your main customer base will probably be students, so you'll want to develop a fairly affordable menu since students don't have a lot of disposable income.
Or if you've decided to open a restaurant in a fairly affluent neighborhood, you might want to develop a menu that caters to higher and more sophisticated tastes with a price tag to match.
Most restaurants will have a range of dishes offering various price points. This way the restaurant offers something for everyone: higher-priced items for those who want to splurge and lower-cost items for those looking for something both tasty and affordable.
It's important to strike a good balance between high and low-cost items on your menu. You want to offer a good selection while keeping your pricing consistent with your brand. Use your judgment to ensure the right balance.
If you want to maintain your restaurant's profit margins, you need to understand your numbers. Data can help you make strategic decisions about your menu, such as raising restaurant prices only for specific dishes or eliminating low-margin dishes altogether, to optimize your profits.
By analyzing sales data, you can learn which menu items were the best and worst sellers over a certain period across various categories such as appetizers, main courses, and desserts. You can then highlight well-selling items on your menu as "most popular" and cut poor sellers or adjust menu placements.
You may have found the best menu pricing strategy in the world, but if it's not giving you the right profit margin, it's useless. Therefore, you must closely monitor your sales to make sure you're implementing the right strategy.
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