When you are a restaurant owner, operator, or chef, creating your restaurant’s menu is almost a passion project itself. You get to list out all of the amazing dishes that you are excited to share with your customers. With the creation of your menu also comes the need for you to also price the menu, which many businesses struggle with even though it is extremely important to your restaurant’s success. To effectively price your menu, you first need to start with your own costs for not only the ingredients for your dishes, but also everything else from the tables and chairs they sit on, the air conditioning they cool themselves with, and the lights that shine above them.
Your overheads may not fluctuate much from month to month, however, perishable food does. And unfortunately, that’s the whole reason for a restaurant’s existence. Hence, tracking of your food cost is crucial in determining your profits, and eventually the success of your restaurant. *cue dramatic music!*
Calculate Your Food Costs
The costs your restaurant will spend on food is one of the biggest determinants you will use when you are pricing your menu. It’s essential you accurately calculate food costs you have, then use that number to guide your menu pricing. A food cost formula to use as a guardrail for your expenses is to ensure you are dedicating no more than 25-35% of your profits on food. Remember – food isn’t your only cost, which we’ll dive into later.
The way you price your menu items should directly align with the cost of that food to bring more than 35% of your profit. To use a simplified example, if you purchased ingredients for RM5, you should price that dish at RM14.25 to ensure your profit margins are what they need to be. That said, using the food cost formula will not always guarantee you a competitive menu price. After you do your calculations with each of your menu items, check the prices of your competitors to ensure you don’t over (or under) price your dishes.
Tracking of Food Cost
How do you track your food cost? Do you use excel to manually track your costs, or are you the artsy type that feels your food costs? And by that I mean you don’t actually track your costs, but you just “agak-agak” (estimate) and go with the flow because it’s just too much of a hassle to track the costs?
Well, we understand your struggles. Time is money, and spending too much time on tracking costs is an opportunity cost for doing tasks that are actually value-adding to your restaurant. Hence, automating this process by utilising a tool that can track your purchases and price history is important for restaurants to come up with an accurate P&L statement.
This will also help you to decide when is the best time to include promo’s in your menu. For example, when it’s sunny and bright for an entire week, vegetables are usually grown and harvested more compared to rainy seasons. Hence the price of vegetables are lower on sunny days, allowing restaurants to afford a 10-20% discount on their food since food costs are lower than usual. This way, restaurants are able to boost sales, or increase your profit margin, if a discount is not made.
Calculate Your Business Expenses
Beyond the costs of the food you serve at your restaurant, running a business comes with additional expenses that take away from your total profit – by around 30%, in fact. You have employees to pay to cook, plate, serve, and clean every dish you serve to your customers. Additionally, you need a restaurant space, electricity, heating and cooling, and everything else that comes with running your business. Your profit margin formula directly hinges on food and business expenses. Adding them both up, you’ll see that at least 60% of your income is taken up by expenses (so long as you priced your menu appropriately).
You certainly have a lot of expenses to cover as a restaurant owner, operator, or chef, so your menu pricing should ensure that you can manage your expenses, and turn a profit, while offering your customers a price that keeps them coming back for more.
It is so exciting getting to go through the process of creating the menu you have been thrilled to share with your customers. Pricing the menu that you’re proud of doesn’t have to be intimidating or stressful! As you learned today, with a bit of math, and a lot of mindfulness, you can ensure you are pricing your restaurant menu in such a way that you can both earn a profit, and entice customers through the door. By closely monitoring your food costs, overheads, as well as your competitors’ pricing, you can effectively determine the best price and profit margins of every serving in your restaurant! You be the boss of your restaurant.
Now we know how having the right tools are important for your restaurants. Here is a list of tools and systems that you must implement to stay competitive in today’s era! [link our blog below]. Also, have you heard of Food Market Hub? Well if you haven’t, you’re missing out! But it’s never too late to want to modernize your F&B business.
Food Market Hub is a procurement and inventory management system that centralizes and digitizes your back end operations. Save time in data entry, unravel hidden food costs and eliminate food wastage just by using our app today!
Log on to www.foodmarkethub.com to find out more!