Most restaurant business owners when starting out are so focussed on the operational aspects and finer details of opening a restaurant that they do not spend enough time on designing a sound restaurant menu pricing strategy. Keeping the pricing high can result in losing customers, whereas being too conservative can lead to losing out on valuable profits. So, how should one go about the restaurant menu pricing strategy that a business gets customers who are willing to pay?
Designing a fair restaurant menu pricing strategy that benefits both the consumers and the restaurant business owner is no easy task, and most restaurateurs often end up making a few menu pricing mistakes which can have a detrimental effect on business. But don’t fret, we have put together a list of restaurant menu pricing strategies that will help you get to the sweet spot of menu pricing. Employ these and let the magic unfold!
- Determine the menu price basis the type of restaurant
Any restaurant’s primary product from which they make money to meet all expenses is the food they sell. Hence, food in a 5-star or full-service fine dining restaurant is always priced on the higher side when compared to a casual diner or cafe, or quick service restaurant (QSR). People pay a premium for the ambiance and the experience. When deciding the restaurant menu price keep your restaurant format in mind. The price you charge per dish must cover the cost of raw materials, cost of labor, restaurant décor, cutlery maintenance, regular maintenance costs, electricity costs, building maintenance, and many such overheads. In an ideal scenario, the menu price must be the sum of food cost, overhead cost, labor cost, and projected profit for that item. To arrive at the ideal price calculate Gross Margin Value (GMV) - the difference between the menu price and the food cost of a dish. The formula for calculating GMV is:
GMV= (Total Revenue- Cost of goods sold)/Revenue
A GMV of 60-65% is good to have for the good financial health of a business. The GMV for a fine-dine restaurant will be higher than that of a QSR or a casual dining place. The industry standard of GMV for various types of restaurants are:
- Fine dining: 75%
- Casual dining: 55%
- Quick service restaurant (QSR): 45%
- Price exotic and novelty items on the menu on a higher side
The kind of cuisine you serve in your restaurant plays an important role in determining your restaurant menu pricing strategy. Say for instance, if your restaurant specializes in Japanese cuisine you can charge a premium price for exotic varieties of sushi, seafood, etc. People will still be willing to pay as they are easily able to associate Japanese cuisine with exotic and pricey. You could also have regular Asian fare like rice and curries, noodles, etc on your menu which are moderately priced so that you can cater to a wider spectrum of customers.
Another way is to keep different variations of the same dish, one a low-priced one with basic ingredients and the other version with one or two exotic ingredients added to the basic ingredients to enhance the richness of the flavor and the aroma. A classic example is that of ice cream joints. They may have a reasonably priced chocolate ice cream with just choco chips in it, and an exquisite one with Jamaican or Belgian chocolate.
- Relative Pricing
Using a relative restaurant menu pricing strategy will result in customers buying more and you as a business earning more profits. It is human psychology to pick up the cheaper product when an expensive and a cheaper one are placed next to each other. So for example on the menu, you may have a plain grilled cheese sandwich with plain salted fries priced at $15 and a jalapeno cheese sandwich with parmesan sprinkled fries at $20, a large group of say 10 people may end up ordering say 7 of plain cheese and fries combo and 3 of the jalapeno cheese combo. As a restaurant, you usually tend to earn higher margins on the basic variant as compared to the more exotic one.
- Optimize the proportion of price charged and the portion size
Restaurant owners often make the mistake of charging too much for small portions or serving size or charging less for big portions. In either case, customers will shoo away if charged more for less or your profit margins will diminish if you serve too much for a small price point. Getting the balance of portion size and the price point right is the key to getting consistent footfall, a good number of food orders, and healthy profit margins. Avoid falling into the pitfall of:
- Charging more for large portion sizes
- Charging less for small portion size
- Charging more for small portion size
Instead, serve food in proportion to the price charged, decent quantity and mention the number of servings alongside the price of each item to clear the confusion. For example, for a chicken wings platter, you can mention the total number of pieces in the platter and details of condiments served by the side.
- Give a detailed description of each item on the menu
Appetizing food descriptions stating ingredients used in the dish to explain the delicacy of each item on the menu generates interest and builds an appetite. So despite the high-price point, customers will order because they are already craving for a particular food and want to experience what they have anticipated and imagined while reading the food description.
- Boost sales with bundle pricing
Bundle pricing refers to a strategy where many items are combined to make a pre-packaged set. This way customers get a chance to experience several items on your menu and there is a surge in demand for other complementary items to go with the combo. The bundle can also be offered at a discounted rate to make it more attractive.
Many QSR fast food chains like McDonalds, Subway, and California Burritos have many bundle meal options, more popularly known as value meals. When a customer gets an entire meal including a burger, fries, nuggets, and a beverage at say $4, they do not mind spending a few more dollars for an extra bag of fries.
Wrapping it up
A lot of midnight oil burning is required to put the right restaurant menu pricing strategy in place over and above these tips and tricks. Besides, putting a pricing strategy in place is not a one-time affair, it evolves as your business evolves. There are many external factors too such as government policies, taxes, competitors' pricing, general industry trends, and more which have a direct impact on your restaurant menu pricing strategy. However, detailed market research coupled with the tips we have shared will help you put together a pricing strategy that's appealing to your customers and profitable for your business.