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How To Determine Food Costs For A New Menu

Deciding food costs on a new menu

Deciding Menu Prices

You may ask yourself the question “how to figure out food cost in my restaurant?”. No matter what kind of restaurant you own, menu prices are a crucial component to maintaining the financial well-being of your business. They will largely determine whether or not you are successful, since they are your primary source of income and the main way of communicating with potential patrons. If your prices are too high, you will drive those possible customers away, pushing them into the welcoming arms of your competition. If prices are too low, you will not be able to make a profit, or, in many cases, even cover your expenses. Accurate prices will communicate to the consumer that you are not trying to take advantage of them while simultaneously showing that your business is not on the lower quality end of the spectrum. The beauty of owning your own business is getting to make all the decisions yourself, however, the burden of doing so is often struggling to make the right one. In the fast-paced world of today, one seemingly small error can cost you big time, so read on to learn the simplest, most effective way to determine how to correctly price your new menu.

Be Aware of Inventory Costs

The first, most important part of this process, is to be conscious of what you are buying. As a restaurant, knowing the amount of money spent on the ingredients and preparation is essential. Make sure that the supplies you order are proportionate to the number of customers you have (or expect to have), so you are not overspending by buying large quantities of things you don’t need. Always heir on the side of caution and leave a small cushion of inventory for the rare occasions you need a surplus.

Inventory

Once any necessary alterations have been made to your budget, add the total value of your purchases and keep that number in mind for the next step.

Determine Food Costs

Food Prices

Food prices today are very steep. Now that you know how much inventory you have, you need to know precisely how much of it is used for each item you serve. Everything from the popular favorite to the most obscure dish on the menu needs to be calculated down to the serving. Each number will be a bit different but, there shouldn’t be a lot of inconsistencies between similar items. This is a decent amount of work if you have a large menu, but it will be well worth it in the end. In order to gauge the correct prices for your meals, you must first know how to cover the basic cost of them to ensure that every time the item is purchased, you are profiting. Familiarizing yourself with the list of food prices may help you calculate the precise amount of your restaurant’s food costs.

Determine Labor Costs

Labor costs are completely subjective and left to the discretion of the owner. When thinking about how much to pay your employees, specifically your chef(s), consider these two questions:

  1. Do you serve specialty food that not just anyone can prepare?

A more experienced or specialized chef will require you to pay them more than a beginner trying to gain experience, so make sure you think about the skill level you require them to have before you determine their wages. Don’t try to skimp on quality to save money, just be aware of the possibility that you may need to spend more than you originally intended depending on the nature of your food.

  1. What is the average chef in your area making each year? Where on that pay scale can you afford to put your employee(s)?
Labor cost affecting food costs

This is an important point to consider because the market is everything when determining how much or how little to offer in terms of salary. You must know your area and the average figure your employee should be paid according to its norms. A person working in the busy streets of London would obviously make more money than someone working in a rural part of the countryside. This is because there is more business competition in London, and the market value of everything is increased. Compared to other countries, things are higher priced in London, which means employees working there will need to make more money to maintain the standard living conditions of the area. Do your research and know your location before you settle on an amount!

Once you know the correct wage to pay your employees, remember the total cost it will have on the business. This number will be important later on when determining the final prices of things. Research also about how to use the labor cost % formula, it will help you further understand your restaurant’s cost of labor.

Profit Percentage 

Profit Percentage of Food Costs

Next, you must decide what percentage of profits you would like to set. This is fairly easy because there is already a standard. Most restaurants decide to go for an average profit of 28%-35%. Some choose to have the percentage change throughout the day, increasing from breakfast to dinner items; others elect to use one percent value as a flat rate across all their dishes. Ultimately, it is your decision, so choose the number you feel is most beneficial to you.

The Minimum Food Costs Equation

Congratulations! If you have made it this far, you possess all the numbers you need to start calculating! This part is very easy and almost the last step you will have to take in the journey of menu creation.

Also known as the basic food cost formula, the formula we will use to get our minimum price is as follows:

(Cost of one individual dish) / 1 – (Decimal form of your profit percentage) = Minimum amount charged

An example of this formula at work:

Let’s say a cheeseburger meal costs £4.55 to make, and you have decided on a 35% profit percentage, the equation would read

(4.55) /1 – 0.35 =7

As you can see, the minimum amount you can charge while still maintaining a 35% income is £7.

From here, you can recall the cost of your labor and determine if the income provided by the minimum price is enough to cover it.

Comparisons and Finalizing Questions

Questions about Food costs

Embellish your prices as you wish, but keep in mind what other businesses in your market are charging. Make sure to look at as many menus as possible before you set anything in stone, even if you are sure about how much you want to charge. Comparing your menu prices to a variety of other local restaurant menus in your niche is helpful because it shows you where you rank in relation to them. If your prices come out well above the average, see where you can deflate them, and if they are drastically lower, raise them slightly. The idea is not to copy your competition, but rather to use them as a gauge for your own business. Every restaurant is different, so small differences are to be expected.

The last thoughts to have when setting your prices are about their sustainability.

Can they hold up to fluctuations in the local market?

 

Money bag

In order for your business to last the test of time, you must make sure that your prices are flexible. Leaving a small cushion of excess income will be helpful to ensure your longevity, because if the economy is not doing so well, you can decrease prices without having a net loss. Try your best to stay informed with economic changes and current events that may influence your business.

Will you have enough customers to turn a profit at your current prices?

Restaurant without customers

An important point to consider is the size of your customer base in relation to your prices. If your location is near a high school or college, your prices will need to be on the lower end to appeal to the masses. If they are too high for your target audience, they may look elsewhere for a cheap alternative. However, if you become the cheap alternative to someone else’s business, you can attract enough customers to still have a net profit at the end of the day, despite your prices being lower than expected.

Do you honestly feel your prices are fair to your customers?

Customers react to menu prices

This is the most relevant question to ask because it deals with matters of ethics rather than monetary value. Although this may seem small to some, I encourage you to consider your motivations behind how much you charge. Yes, your first priority in business is to make money, however, income and greed are two different things (that may look the same at times). Really take a look at how much your prices were inflated from the minimum value and ask yourself if it’s all necessary. If you find that it is, carry on guilt free, but if it is not, your conscience and customers will thank you for adjusting it to a more reasonable figure. Restaurant businesses is not about maximizing menu prices, it is about maximizing the flow of customers while maintaining a profit.

Euro

If the answers to these questions are positive, then your menu prices are set and ready for printing! As a parting tip, leave out the pound or euro sign when listing your prices. It is said that if there is no unit or decimal attached to your number, people are more likely to buy expensive items. Thank you so much for reading, I wish you infinite success in your endeavors!

 

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