#RestaurantPricing #FoodCost #MenuPricing #RestaurantBusiness
How Do Restaurants Calculate the Prices of Each Dish?
Have you ever wondered how restaurants come up with the prices for their dishes? 🤔 It’s not just a simple process of throwing together a bunch of numbers and hoping for the best. In fact, there’s a lot of thought and calculation that goes into determining the cost of each item on the menu. Let’s break it down and see how restaurants accurately calculate the prices of their dishes.
Understanding Food Cost
Before we can get into the nitty gritty of how restaurants calculate their menu prices, we need to understand what food cost is. Food cost is the percentage of total revenue that a restaurant spends on food product. This includes the cost of ingredients, kitchen supplies, and any other items directly related to the production of food.
How Restaurants Accurately Calculate Prices
Now that we know what food cost is, let’s take a look at how restaurants calculate the prices of their dishes:
1. Cost of Ingredients
– Restaurants start by determining the cost of all the ingredients that go into a particular dish. This includes everything from the main protein to the seasonings and garnishes.
– For example, if a restaurant is making a classic beef burger, they need to consider the cost of the beef patty, the bun, lettuce, tomato, cheese, and condiments.
2. Overhead Costs
– In addition to the direct cost of ingredients, restaurants also need to consider their overhead costs. This includes things like rent, utilities, labor, and equipment.
– For example, the cost of running the kitchen, paying the chef and kitchen staff, and keeping the lights on all need to be factored into the overall cost of each dish.
3. Desired Profit Margin
– Once the cost of ingredients and overhead costs have been tallied up, restaurants then need to factor in their desired profit margin. This is the amount of money they want to make on each dish after covering all their expenses.
– For example, if a restaurant wants to make a 30% profit margin on a dish that costs $10 to make, they’ll need to price it at $13.33 in order to achieve that margin.
4. Competitor Analysis
– Finally, restaurants often take a look at what their competitors are charging for similar dishes. This helps them ensure that their prices are in line with the market and that they’re not undercharging for their offerings.
Accurate Pricing vs. Rough Estimates
Now that we understand how restaurants calculate their menu prices, let’s address the question of whether they do it accurately or just make rough estimates:
– Accurate Pricing: While there may be some variation from restaurant to restaurant, the majority of establishments do take the time to accurately calculate the prices of their dishes. This ensures that they’re covering their costs while still offering a competitive price to their customers.
– Rough Estimates: That being said, there may be some instances where restaurants make rough estimates, especially for daily specials or one-time menu items. In these cases, they may base their pricing on similar items already on the menu or use rough estimates to quickly come up with a price.
Overall, the goal for most restaurants is to accurately calculate their prices in order to ensure the long-term success of their business.
In conclusion, the pricing of restaurant dishes involves careful consideration of the cost of ingredients, overhead costs, desired profit margins, and competitor analysis. While there may be some variation in the pricing process from restaurant to restaurant, the majority of establishments strive to accurately calculate their menu prices in order to ensure the financial success of their business. By understanding the factors that go into pricing, diners can gain a better appreciation for the thought and consideration that goes into the cost of their favorite dishes.
What you want to do is look at the cost for your raw ingredients, then you sort of estimate how much of each ingredient will cost in a particular dish. A rough estimate is fine, but the closer the better. Now do you have the estimate of how much it costs you to make that dish? Great. Multiply it by 3. Thats the rule of thumb.
Some (maybe all) of your dishes will have a smaller profit margin because they’ll be the ones that pull the crowd in in the first place. The idea is that you’ll make your money on volume. Some will have a wider profit margin because they won’t be ordered too much, but you still have to keep them on the menu.
This is all generally speaking. Different restaurants have different pricing strategies or will alter costs depending on popularity. But if you’re planning on opening up like a chili dog stand at your next neighborhood bazaar for shits and giggles, this is how I would determine my prices.
I work part-time as a bartender at a large chain of pubs, but my day job is in Business Intelligence. You’d be amazed at the data that can be gathered.
The overall cost of food is calculated to multiple decimal places; the ingredients (including seasonal pricing changes), the average time it takes to prep and cook and clean up after and the associated cost of wages, average spend and popularity of dishes through the year, average number and type of drinks served with associated dishes, the list of variables is endless.
For example, a dish that sells well but takes a lot of prep time might be less preferable to a dish that doesn’t sell as well but can be microwaved, as you save on the cost of wages for the kitchen staff.
How much can be done with this is only limited by how much a company wants to spend on BI and how clever your BI Analyst is.
This question betrays a fairly fundamental misunderstanding of how prices work – prices are not set to be the lowest that they can be given costs. They’re set to be the highest that people will pay. So it’s very simple: if everybody’s buying it, you slowly put the prices up. If nobody’s buying it, you either put the prices down, or if that isn’t viable, drop it.
Answer: Former chef here. We get a factor given to us by those who know the actual particulars of a restaurants economy. For instance 4.2 was out factor, so any prices for raw ingredients had to be multiplied by 4.2. This factor covers everything from utilities to paychecks for staff etc.
How that factor is calculated is above my pay grade.
Part of it is calculation, and the other part is market value.
If I have a restaurant called “Gaeel’s Gorgeous Gazpacho”, I could probably sell the gazpacho at a much higher margin than other dishes, and even at a higher price than my competitors. i’ll probably sell my fries at a more conventional price, especially since “Freddie’s Fabulous Fries” next door is attracting all of the french fry enjoyers.
Other costs, besides ingredients, are important to take into account too, like rent, salaries, taxes etc…
Also, a restaurant only has a limited number of tables, I’m losing money if my restaurant is full. So if my dishes are popular enough that I’m turning away customers, I ought to price things higher. Maybe some people will choose to eat elsewhere, but that’s only a problem if I lose more customers than I can make up for with increased prices.
Some restaurants even sell some dishes at cost, maybe even at a loss, and make up the difference with upsells.
For instance, there’s a chip shop in my city that sells pretty good fries, at a very good price, especially since they’re on a busy pedestrian street. They make up the difference with sides, like cheeseballs and meatballs, special sauces, drinks, and occasional time-limited dishes. They mostly sell takeaway meals, so seating isn’t too much of a problem. The seating is mostly high tables and stools that don’t encourage sitting around after eating, and they don’t sell any desserts, which also means that their tables are freed quickly, letting them serve more dine-in customers than they would if people stayed seated for longer.
**tl;dr:** The economics of the restaurant industry are complicated, you need to consider ingredients, rent, salaries, up-front costs like equipment and decorations. The people buying the food don’t care how much it costs you to make it, they care about how much they’re going to enjoy it, and they want to feel like they’re getting a good deal. Your competition is playing the same game, and if they’re able to out-price you with a product that is perceived to be better than yours, or they’re located in a more attractive location, you’re screwed.
So the answer is: you charge as much as you can convince your customers to pay, and if that’s not enough to cover your expenses, you’re out of business.
A friend just to have a fast food (not chain) restaurant and he would do it by estimation: I buy 1lb of meat and I can make X dishes. Then knowing the price by dish, he’d add a margin. I imagine larger restaurants get it a bit more complicated, but I’d be surprised if no stocking/ordering software handle this (knowing price per pound, inputting how much of ingredient is in a plate, use that ratio to find cost). Even maybe some spreadsheets in excel would be enough
I can calculate the exact ingredient cost of every dish that is put out by the kitchen. We take that cost and bump up the price by x percentage to hopefully cover overhead but be competitive with everyone else in the area (if we have to. Say my place just got written up as a “best date night”, we can charge a bit more for date night items, but that takes more dedicated analysis than just calculating cost), and the difference is generally made up by the bar.
OP question and comments are actually why 1/3 of restaurants fail within the first year. Running a business and pricing things correctly vs knowing how to cook something people like to eat are usually 2 very different skills. Very few people possess both.
[Ingredient cost/number of grams of usable product per unit] * grams per final portion.
Repeat with all ingredients. Add 1-3% to cover for waste.
Cross reference this with the daily break even number, check average per person, and cover count to project business stability.
Well-run F&B operations definitely have formulas that consider the fixed and variable costs that go into each plate. This isn’t just about chain restaurants, also (and especially) independently-owned places need to find a version.
If you come up with a dish that calls for four nice big scampi and it keeps leaving the kitchen with five you will quickly kill your margins. Obviously you can adjust some so that the overall experience makes sense for a diner, but pricing is a business decision, not a gut feeling.
You estimate the costs, you do some market research to see what sells and what prices people buy at, you see how profitable it would be at each price and decide if you want to go for quality of quantity, and thats it; Sometimes you “normalize” prices. makign some things cheaper, even at a a lost, because they are covered by others that have a lower cost. Ice cream shops do this a lot (it allows you to have more flavors)
I worked in a big fast food company. Generally we aimed for 30%food cost. Sometime would charge more if we thought people would pay it, or sometimes less if we wanted to use it to get people into store.
Our very basic rule of thumb was 25% of the cost is ingredients, so $5 worth of food in the dish, $20 roughly would be the menu price.
Obviously this doesn’t fit all situations, and was more of an average target overall, but for most main dishes it gave us a good starting point. Starters and small plates and labour intensive dishes might be more like 15-20%. Specials of course was just trying to clear out whatever crap we had too much of, so that would be like 33%.
You don’t want to price yourself out of the market, and you also don’t want customers to undervalue your food by making it too cheap, so you’d have to take this with a dose of common sense.
You can only get an exact price in retrospect because you have some prices tied to sales (the actual ingredients) and some fixed (rent, utilities, labor).
They do it the same way any other business does it, they put the price as high as they think people will pay.
If it doesn’t sell, they lower it.
If after that it sells, but it isn’t profitable (or bringing in people who buy profitable stuff), they remove it.
I do this on the regular. Let me explain my process.
Produce, seafood, meat etc usually always require some form of processing, so I need to “yield”
everything to cost it accurately. Meaning, I purchase 4540g (10lbs) of potatoes for $1lb, but I peel them and my waste is let’s say 454g (1lb) which is 10%. My yield is 4086g (9lbs), so it actually cost me $10 for 9lbs of usable potatoes which is ends up really costing me $1.11lb. Same steps apply for processing a whole tenderloin, sirloin, fish etc.
Now that I have my usable yield of potatoes I can use that in my recipe/menu item. I go through and do this for every item that I’m using in the dish/recipe (if it will have any waste whatsoever so I can cover my loss on the waste)
I plate my dish for myself to taste it and to weigh out each ingredient. 2g kosher salt, 20ml olive oil, 50g cleaned sirloin etc etc. lets say the total cost
Of my dish is $5.46. Generally speaking, restaurants aim to run no higher than 30% food cost on a dish. However that isn’t always the case as perception of value, expensive ingredients and other things can skew this. As long as the menu as a whole is coming in under 30% usually it’s fine.
At $5.46 my selling price would be:
5.46 divided by 30% = $18.20
Make sense OP?
I do this for a living. It’s often a combination of the two. The basic methodology for pricing a food item is this:
I want to sell a burger. The burger will have 8oz (raw) of beef, a slice of onion, a slice of cheese, some lettuce and a pickle spear, and obviously a bun. A 60lb case of beef costs $200 (made up number). So you take 60lb/8oz=120 portions, so you divide the price of your case of ground beef by how many portions you get (usually accounting for some amount of loss which varies by business) and that’s how much each burger costs you in beef. Do the sake thing to your buns per case.
Onions are cheap, and lettuce used to be so you can ballpark those pretty easily.
Then you decide how much your food cost (%of what you charge for it that just pays for ingredients) needs to be to keep your overall menu profitable and there you go. It’s not necessarily difficult, but it is extremely tedious when you have a lot of different ingredients on your menu. Certain things like fries are big money makers because potatoes cost nothing, and are delicious, so you can charge a higher proportional amount for them.
Cost accounting is a real thing. We can get the a true cost of everything involved and come up with a number.
In the end, the price is based more of demand and strategy of the business.
Finally a question I can answer. I worked in restaurant accounting & data analysis/reporting for 15 years.
For smaller mom & pop diners/restaurants, they pretty much guestimate. They know a 10lb can of green beans costs $12 and it contains 12 servings so that’s $1 for green beans. They know a bag of chicken breasts is $7 and contains 9 servings so that’s $0.77 each. They come up with a cost of ingredients, multiply that by something like 2.5x – 4x to cover labor costs and have enough left over to pay things like rent, utilities, insurance, etc.
For large restaurant chains, they have this down to a real science. Let’s use a pizza chain as an example. They use sophisticated point of sale and inventory systems to track everything. They enter recipes into the POS (Point of Sale) system so it knows what ingredients and quantities for every item on the menu.
They take inventory every day and know exactly how much cheese, dough, toppings, etc. they have on hand. The POS tracks every pizza that was sold in a day and based on that information knows exactly how much that inventory for each item should decrease each day. It knows when the pizza-making process began and when it came out of the oven, it knows the pay rate of your cook and how many you have working right now so it can calculate labor cost. It calculates a precise cost per oz of every inventory item, and with the recipes from the POS system, you get a very accurate cost of ingredients + labor for everything on the menu.
This type of system is also really great at making sure the pizzas are made correctly and preventing theft. If the POS system says you sold 200 pizzas and should have used up 125 pounds of cheese, but your inventory shows you used 150lbs of cheese, you know your people are putting too much cheese on the pizza, or someone is stealing it and taking it home for their tacos.
On their respective restaurant rescue shows, both Robert Irvine and Gordon Ramsay have been teaching the wayward restaurant owners that they should take the cost of ingredients for a dish and triple it – one for the food, two is for the labor, and three is for paying the rent.
A lot of people believe restaurants are this low margin business, and it’s just not true.
The chains make profit as the grow, process, sell product and franchise, it’s a lot of layers of profit hidden by separate companies.
Small restaurants are notorious for being mismanaged. So many people wing it, some get lucky and some fail. The reality is each item, side, combo, etc should be on a spreadsheet. Ingredient, labour, overhead costs calculated, then you use a formula to give you a suggested sell price. The formula should vary by food category.
Once you have the big picture, and can also see sales history you can hand tweak pricing, change margins or create a loss leader if required. This way you run the business and it doesn’t run you.
Depends how many you plan to sell and for how long.
Weekend feature my math is: protein costs like $20ish per pound plus sides, 8oz portion of meat, like $13 after sauce and veg for cost, so probably sell around $40-45.
For a menu staple, I know how much that tuna steak is, down to the penny, and I’ve got it standardized with 2-3 different products they might substitute. I’ve added in the cost of the seasoned flour, the oil in the pan, the cost of the paper boat it’s served in, the cost of the onion and cilantro. If there are any sauces, I’ve batch costed those and done the math for the portion cost. I’ve got a cost number that is 7.32 with the Sysco tuna, or 7.44 with the substitute tuna. At 19.99 I know I’m making 12.55 per plate, and have a good par for how many I’ll sell each day.
If I’m putting it in multiple places, or selling thousands of portions a day, I might even go so far as to sign vendor contracts that lock in prices for chicken and other products for the next 12 months, while guaranteeing I purchase so many cases per year.
There are several methods, but they all boil down to understanding how much your food costs and having Standardized Recipes.
In order to be successful, your recipes are consistent – this means they taste the same, but also that they cost the same every time you make them and every time the guest orders them.
For the simplest example, we’ll cost out a hotdog on a bun. The Hot Dog itself costs $0.50 and the bun costs $0.25. Your Total Food Cost is $0.75.
If we want to run a 30% food cost (base industry standard), we figure:
$0.75 / 0.30 = $2.50
Our Menu Price is $2.50. Our Gross Profit is $1.75.
That $1.75 goes towards our overhead for producing the Hot Dog (our cook making it, our electricity in heating it up, any paper products or condiments, washing the dishes, etc.)
Our Net Profit is what remains after all of those pennies, nickels and dimes are spent getting the hotdog from the package to our guest’s bellies.
Again, at its most basic level, you don’t rely on selling one item once to make any money- you rely on selling a lot of items quickly. If a cook can produce 60 hot dog meals in an hour, that’s $105 in gross profit per hour.
Food Distributors now have applications that will break down the ingredients cost to the teaspoon, and you enter your recipe into the form. Once you have cost out the recipe, you can see how much each portion costs and then know how much to charge for each menu item.
There are other, more complex methods, that involve padding a profit margin into each plate.
Source: Former Chef, Restaurant Group Manager and Culinary Arts & Cost Controls Instructor at accredited Culinary Arts Academy
Yes, they try to be as accurate as possible, but they can only get so close.
Understand that the target price is “as much as they can get away with”.
To be honest, I thought people use the break even calculation in economics class and just do some additional cost or something
Add the cost of all the ingredients and set a price based on the margin that you need to turn a profit. Not a hard and fast rule, but your labor and food costs should be a combined 60% of your revenues. Foods that are made from raw ingredients take more time to process than a bag of fries that you dump into a fryer. If you build a “product mix” of what you anticipate selling(based on historical data), you can accurately predict what your margins should be come the end of the month. New restaurant owners with no experience and that don’t cost out their menu are commonly referred to as “former restaurant owners”.
It’s generally a rough estimate. Corporate chains have expectations that sales every day of each year should exceed the previous year and that’s just generally not reality. They don’t account for any variances. They calculate the amount of labor for prep work for the amount of food that should be ready to be dished out each day, but again, it’s generally not reality. There’s definitely some odds and ends that can be adjusted to make each dish generate a better return of investment but that doesn’t account for mistakes. Lots of mistakes happen in kitchens.
I don’t work in the industry but in general it’s a 30/30/30/10 rule. 30% cost of input 30% labor 30% overhead 10% margin if you don’t know your costs you won’t be in business very long p
The price of food is difficult because so much of it is based on what people *think* something is worth, rather than the actual cost involved. What people think something is worth is based on how much it costs in similar places in similar locations, as well as their own biases regarding their willingness to pay for something. People are more willing to pay for something, for instance, when they are on vacation or on a business trip, than when they are 5 minutes from home. Few things are more “perception” based than the food we eat. This is why most restaurants go out of business within 2-3 years. So, for instance, the costs of a plate of spaghetti include the a portion of the rent of the building, a portion of the labor of all the staff, a portion of the utilities (gas, electricity, water), a portion of the initial setup costs of the business amortized over a certain period of time (pots, pans, dishes, tables, chairs, paint, flowers, legal costs, insurance, etc.), the interest of any loans you might have taken out, and the principle of those loans you have to pay back, the cost of the materials used in the making of the spaghetti, and finally, profit. You *could* break that down, and price each individual dish on your menu accordingly, but your best bet is to figure a per dish fixed cost (all the little setup and utility costs), and a specific dish variable cost (actual ingredients and time spend making it). The problem is, will people actually pay that? Suppose you figure everything out, and a plate of spaghetti ends up costing you $7.46, and people think it should be $5.99? This is the kind of thing you should be figuring out in your business plan before you even start looking for money to set up your shop. It’s called market research. Looking at your whole menu, some things might make you more profit, some might cost you more than you make. The idea is that the overall operation of your shop makes you enough profit to make the business a success.
It’s exact cost by weight of all ingredients, totaled and multiplied by 4
1x is the plate cost
1x is the overhead (electric, cc processing, gas, etc…)
1x is for employee labor
1x is profit
So your $12 cheeseburger costs 3 bucks in ingredients. But 9 bucks in total cost to do business.
These comments are terrifying. OP could have asked how a chef knows his new recipe will make the restaurant more money and these commenters are acting like the chef only needs to use excel.
30% food cost is what we aimed for at hotel and conference centers. $10 meal should cost about $3 in food.
A restaurant might start at a price based on costs, but prices are usually more about selling the right amount of stuff than how much the stuff originally cost. If nobody orders a dish, and it’s still profitable at a lower price, they’ll lower the price. If nobody orders a dish, and it’s time consuming to make or otherwise unprofitable at a lower price, they’ll take it off the menu. If a lot of people order a dish, or they’re spending a lot of time on it in the kitchen, they’ll raise the price.
We used to have a show on Food Network Canada called Restaurant Makeover. Basically Kitchen Nightmares but with a designer and less drama and screaming. One time, the chef expert showed the cook how to make a basic dish, but then he went through pricing it. They estimated how much cost in ingredients went into the dish and multiplied it by a factor of four to help cover everything from the bread on the table to the guy in the back washing dishes.
A well run restaurant knows exactly what they are spending.
The best example of this for me was a restaurant I worked at when I was in college in the 90s.
Coffee and soft drinks came with free refills.
Entrées came with all you can eat soup and salad.
Management had calculated exactly how much salad the average customer ate, and knew what the food cost of that was.
The data point I still remember was soft drinks : their calculation was that (including refills), a customer drank nine cents worth of pop. So getting customers to order a $1.99 Coke was very important for the restaurant.
The mandate from ownership was that overall food cost needed to be 30% or less. In other words, a $20 meal needed to have less than six dollars of actual food cost on the plate. The rest of the price went to paying staff, and all of the overhead of running the building.
My mother ran a local non-chain fast food restaurant for years. She used the rough estimate approach. She later sold the restaurant to friends of mine. They broke out the Excel and did a bunch of math to really get an accurate handle on the ingredients-cost of all the stuff and found some things she had been making bank on and other items we were surprised to learn were being sold barely at cost or even at a loss (just in terms of ingredients). They then used that knowledge to adjust prices to something that works for them.
According to Robert Irvine you cost how much it takes for the ingredients of each dish then triple it. One pays for cost, one for labor and overhead and the last third is profit.
Restaurants track costs to make sure the dishes don’t cost them money, but that’s not the price.
The price of restaurant food and -every other thing you buy- isn’t based on the COST. It’s based on what the thing is WORTH. It’s that happy middle ground of “this makes us enough money to keep selling it” and “I’d rather spend money on this than go somewhere else.”
I assume you aren’t talking about fast food restaurants, but they in particular tend to adjust their prices (if they’re franchised) based on employee wages. Obviously everything at a fast food place costs pennies on the dollar, but even with the mark up and ‘promotions’ meant to lure in people who wouldn’t otherwise spend, they tend to have to raise their prices based on employee wages and the town/city out of which they operate, and what those customers are willing to pay.
For example, I work at one of the most expensive franchised BKs in New England. This is due to the fact that we operate out of a fairly well-paid town and have the highest minimum wage in our franchised states.
Sorry your whopper meal costs $13+, but the state has decided my employees (good and bad) deserve a raise.
You rule!
They’re buying the ingredients for everything they make, they’re using recipes that tell you how much of each ingredients should be used, and they know how much they’re paying someone to prepare it.
It’s trivial to figure out what each dish is costing them and what they need to price the dish at to make whatever margin they’re looking for on the dish plus cover the overhead of running the establishment.
It’s just a lot of simple math
There’s nothing “accurate” about the prices on the menu. Restaurants charge whatever they want.
They have a good idea of what it costs them to make each dish, both on a per-unit basis and the overall overhead of running the restaurant (which is a big part of their expenses – it costs a lot to run a restaurant even if everybody orders plain toast). And they’ll tend to put higher prices on the dishes that are more expensive for them to make, so that they don’t get caught out selling a lot of dishes at prices that will make them a loss. But there’s no obligation for them to present individual dishes at prices that correlate with their costs.
A rough estimate of the cost of materials would be good enough, as it doesn’t take a lot into account and isn’t a great way of determining pricing anyway.
its not too hard, you know the exact amount of each ingredient that goes into the dish, and how much you buy each ingredient for. From there its just middle school math. You probably also want to factor in how much chef time it takes.
Now, this calculated price has very little to do with the menu price. The menu price is “How much will people be willing to pay for this dish?”
Rough estimate based on ingredient costs, time to prepare. I’ve heard about 3x is the average mark-up. Also, some items subsidize others — eg. a steak might cost restaurant $25 and they sell it for $50 (2x mark-up) while the baked potato that sells for $7 costs them 50 cents (14x markup). Starches, sides is often teh category where you’ll pay higher margins. Alcohol is another one… a $20 bottle of booze becomes 20 $15 cocktails.