How Do They Come Up With Those Restaurant Menu Prices?

How Do They Come Up With Those Restaurant Menu Prices?

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Have you ever wonder how a restaurant owner goes about deciding on his restaurant menu prices?  Aside from the obvious cost of the food and labor and such, how in the world does he decide that the hamburger costs $6.00, while the buffalo chicken wings are $5.50 for half a dozen.  In truth there are several different methods that can be used, and I’ll explain them in more detail below.

 The Ideal Food Cost Method

This is one of the most popular and easy to use methods.  Also known as cost plus pricing, the ideal food cost method uses the actual cost of the menu item (ingredients plus labor and other indirect costs) to determine what the menu price of an item will be.  He does this by deciding on his ideal food cost percentage and then dividing the cost of the item by that percentage.

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As an example, let’s suppose it costs Luigi $5.00 to prepare his veal parmigiana.  He would like to keep his food cost at 35% and is pricing his menu items using the ideal food cost method.  With this method he would simply take the cost of the dish and divide it by the ideal food cost like this:

$5.00 / (100/35) = $14.28

This means Luigi should be charging at least $14.28 for his veal parmigiana.  Since that’s an awkward amount he would likely round it up and charge $14.50 or more.

Ideal Food Cost with Competition

After using the ideal food cost method to determine how to maintain a 35% food cost on his veal parmigiana, Luigi may also want to factor in his competition prices.  Since there are several Italian restaurants in the area, Luigi needs to make sure his price isn’t too high or too low.  If his price is already too high he needs to find a way to lower the price, maybe by changing ingredients or perhaps by simplifying the recipe.  If he can’t do this he might try selling at the higher price, but if this isn’t successful he’ll have to decide if he can accept a higher food cost on this item, or if he should simply remove it from the menu.  If on the other hand his competitors are already charging more than him he has some room to raise his price closer to that of his competition, thus making the menu item even more profitable for his restaurant.

The Restaurant Owner’s Opinion

Some restaurant owners decide on their restaurant menu prices using their own opinion or what they think it should be worth.  This might be from extensive experience in the restaurant industry, or it could just be an educated guess based on prices they’ve seen at similar restaurants.  This is rarely a good method for deciding on the prices of menu items as it introduces too much guess work and uncertainty.  The restaurant owner who decides on menu prices using this method often doesn’t last long as a restaurant owner.  While it may be more work, it is much better to take an objective approach and calculate the cost of all items and then come up with prices based on an ideal food cost.

[20060803 (LA/C1) -- SLOWING TRAFFIC: Cheesecake Factory has seen same-store sales slide by about 1% in each of the last two quarters. To help increase sales, it is offering smaller portions of popular menu items for a lower price. Above, it's lunchtime at an outlet in Sherman Oaks. -- PHOTOGRAPHER: Myung J. Chun Los Angeles Times] *** [Chun, Myung J. -- - A waitress carries an armful of food during lunchtime at the Cheesecake Factory in Sherman Oaks on Friday, July 28, 2006. High gas prices have caused people to spend less at restaurants but the Cheesecake Factory has felt the trend for the last two quarter and is now launching a new menu and selective advertising to attract customers.] ORG XMIT: j34zmrnc

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