This is more of a craft than a science, so take from this article the basics and a few considerations you need to make to come up with your ideally priced menu. First please let’s clear up a misunderstanding before we commence. Cost is not price. Cost is what the restaurant pays for the menu item, including food, labour, waste and overhead if you want to give it the full treatment. Price is what the customer sees on the menu. For the purpose of today, lets look at price as a result of a set of sums done on food cost alone.

The basic calculation of margin is to take the gross profit element of the dish, before tax, as a percentage of the net price. In the UK, consumer prices are shown with tax. We will take an imaginary dish priced at £23.50, with 17.5% tax and food cost of £7.00.

So, £23.50 divided by 1.175 is £20.00, less £7.00 equals £13.00. Margin would be £13.00 divided by £20.00 which is 65%.

If you want to make this even easier for yourself, you can work cost up. The quickfire gross margins quoted are 60% to 70%. Assume you have an tax included in the price of 20% or less, then this is the simplest of sums:
Greater or equal to 60% margin = 3x food cost
Greater or equal to 70% margin = 4x food cost

For the above dish, 60% margin would yield a price of £21.00 and 70% margin, therefore, £28.00.

This reflects the food margins on that dish and should include any known or allowable waste write offs. An example: If you run a nice dining room and sell wine by the glass, do you waste anything at the end of the bottle and what do you do with it? A 750ml bottle should provide 4x 175ml glasses with 50ml left over. Is that 50ml passed onto the next glass or slopped to keep the wine offering consistent? Your calculation may need to take into account your “real” measure of 187.5ml (750ml divided by 4).

All well and good, but these numbers have guides, which will dictate where the price can fit.

1 What are your direct competitors charging for the same product? This will be an upper limit for you unless you have a marketing or quality advantage over them. Also, you probably don’t have much idea on their base food costs.

2 Accept that your menu sells in different margin areas. Some high end meat cuts may attract a high price, a good cash margin (simply net price less food cost) and a lower percentage margin. This may soften the blow on more luxurious wines and foods, if you can think this way. Cash margin thinking prevents your shelves getting clogged with aging, high cost inventory.

3 What sells and what makes a profit? Menu re-engineering is a discipline that provides awareness of sales movement and product profitability.

We will cover more on pricing and cash margins ….. soon.