Well, here is another one of those very exciting posts. It may not be as sexy as some of the other schlock I have put out there, but it is such an important part of your restaurant’s success.
This is often the least understood aspect of the whole ‘let’s open a restaurant’ adventure. The thing about it is that you only have one chance to get it right. It’s not like you can open your restaurant, and then decide a couple of months later to raise your prices because you now realize that you really blew it when you were figuring out what to charge.
I went out to breakfast with my daughter not too long ago, and after being in the place for two minutes, I leaned over to her and said, “Don’t get to used to this place–they won’t be here very long.” As it turned out, the place closed a couple of months later. Sorry for them, but it made me look pretty cool to my daughter (I promise you that doesn’t happen very often).
Sure, they had many problems to contend with, but as I looked at the menu, I quickly realized that they were charging at least a dollar less than they should have been for each entree.
The fixed food cost method
This is the easiest but has its disadvantages. You figure out what you want your food cost percentage to be–let’s say 30% just to make it simple–decide how much it costs you to put the food on the plate, and then divide by your desired cost percentage. That will tell you what to charge for it.
Let’s say you have figured out that it costs you $3 to produce a plate of food. You divide that by your desired 30% food cost, so you would charge $10 for that particular dish.
Like I said, it is easy, but the problem is if it cost you $12 to put the food on the plate, and you divide that by that 30%, you would have to charge $40 for that item. Not a lot of people are willing to pay that much.
Let’s say you have a dessert that costs you $1 to produce. You divide that by 30% and you will end up charging only $3.33, when you could probably be getting a lot more money for that dessert.
So, the lesson here is you are going to have a higher food cost percentage for the expensive items, and a lower food cost percentage for the less expensive menu items.
With this method you see what others in the area are charging for their food, and you charge about the same. Again, easy. IF you find recipes that will let you charge that same amount. This has problems, though, too. Maybe you compared the prices of some idiot who didn’t know what they were doing and you find yourself charging too little. You don’t want to end up out of business like the other guy.
Maybe there is something special about your food that will allow you to charge more for it. We call that a unique selling proposition.
Maybe you based your prices on some other place where the grandfather gave the property to the owner, and therefore they don’t have any rent. You just based your prices on someone with a different cost structure. Oops.
Value perception pricing
I know this is getting kind of long, so I will finish up soon. Value perception means you look at what customers will pay, what they value, and then you come up with a menu, and food costs that fit in that mold. Choose your recipes carefully to make sure that it all adds up to your advantage when all is said and done.
Choose the correct combination
Using a little of each of these is the plan I recommend. But be careful! The bottom line (pardon the pun) is that it must all add up in your favor in the end. I always tell my students and my consulting clients to ‘pay yourself first’. Decide how much you want to make first, do the math and make it all work out.
See what others are charging, choose your recipes carefully, control your food costs, and live happily ever after.