Menu Pricing from the Ground Up

Pricing your menu is the most important financial decision you can make. There are many facets but financial impact is the focus of this article. You must determine how to make money with the best menu pricing possible. If your prime cost is running north of 60% you're going to have a difficult time making a good living and paying off the initial investment (prime cost = total product cost + total labor cost including taxes and benefits). Usually data of this kind results in three different reactions-you're crazy, it's the State's fault, or how do I fix it? The first two are entirely possible but the answer to number three is what to pursue. It's simple math. Operating costs are going to cost about 15-20% by factoring utilities, credit card fees, supplies, marketing, discounts, repairs, etc. Occupancy (rent, CAM, taxes, insurance) is going to cost around 10%. Do the math:

Prime cost 60% + Operating costs 20% + Occupancy 10% = 10% remaining for taxes, depreciation, return on investment, debt, capital expenditures and a number of other items of which you're all too aware.

The first area to improve profitability is product cost. To achieve the financial impact you wish start by computing the cost of all recipes. It's surprising how many operators don't routinely calculate recipe costs. For illustration purposes let's use a simple plate cost:

Prime Rib 12 oz with baked potato, corn on the cob, bread and butter. We'll ignore the seasoning cost necessary but you can always include a little something for items like salt, pepper and frying oil.

1.Find how much you're paying per purchase unit, in this case $5.00 per pound (C).
2.Calculate the yield on cooking and/or cutting. In this case we'll assume an 80% cooked yield on the prime rib (D). Notice the price per pound to sell the product went from $5.00 to $6.25 (E). These calculations must be made for every product when costing a recipe especially Produce which changes seasonally.
3.Calculate the conversion to unit of measure needed for the recipe (G) and how much of that unit of measure is needed (H). This will total the recipe cost (I).
4.Build the remaining items included in the entrée served to the guest (in this case the baked potato, corn on the cob, and bread.) The total cost of the meal is $6.87.
Once the cost of the meal has been determined it's time to decide what price to put on the menu. The goal is to sell the meal at the point where value and price align while maintaining the best gross profit and maximizing guest counts. With a menu cost of $6.87 here are three options:

The price of $17.95 is the optimum pricing in this scenario as it contributes the most in gross profit and contributes an extra $3 toward labor cost without increasing labor. In this example, the number sold per year has been reduced from the $14.95 price point as the likelihood of selling less is calculated as menu price increases. Prime cost will be good on this item as it is low prep and easy to execute off the line.

Once you have the all menu items costed out (including beverage) you will want to line them up in a spreadsheet against what you sell and forecast changes on an annual basis that can be made to get to an optimum pricing point that will reduce product cost and contribute to 60% or better prime cost. Keep it simple on the labor side of the equation. Compute whether the item is low, medium or high in labor cost. Don't bother assigning a time to produce menu items. Follow logic as assigning labor values to recipes is inaccurate and time consuming; you'll never finish the task. Eliminate or modify those items on your menu that require a high labor cost.

Schedule time weekly for recipe costing and modification and finish the task in the next quarter. The best operators understand the value of managing recipe costs and driving prime cost. Get prime to 60% or better and you'll have a great return on your investment.