Restaurant Menu Pricing Strategy

Many restaurant owners starting out focus so heavily on operations and the finer details of opening a restaurant that they spend too little time on a sound menu pricing strategy. Price too high and you lose customers. Price too conservatively and you give up valuable profit. So how do you set menu prices that attract customers who are happy to pay?

Designing a fair menu pricing strategy that works for both the customer and the owner is no easy task, and many restaurateurs make pricing mistakes that hurt the business. To help you find the sweet spot, we have put together a set of menu pricing strategies you can put to work right away.

Set the menu price based on the type of restaurant

Food is the primary product a restaurant sells to cover its costs. Food in a full-service fine dining restaurant is priced higher than at a casual diner, cafe, or quick service restaurant (QSR), because people pay a premium for the ambiance and the experience. Keep your restaurant format in mind when setting prices. The price per dish must cover raw materials, labor, decor, cutlery and building maintenance, electricity, and other overheads. In an ideal case, the menu price is the sum of food cost, overhead cost, labor cost, and projected profit for that item. To arrive at the ideal price, calculate the Gross Margin Value (GMV), the difference between the menu price and the food cost of a dish, expressed as a share of revenue. The formula is:

GMV = (Total revenue - Cost of goods sold) / Revenue

A healthy GMV target varies by format. Fine dining restaurants generally carry a higher gross margin than casual dining places, which in turn run higher than a typical QSR. Use your own food and overhead costs to set the right target for each type of service you offer.

Price exotic and novelty items higher

The cuisine you serve plays a big role in your menu pricing strategy. If your restaurant specializes in Japanese cuisine, for example, you can charge a premium for exotic varieties of sushi or seafood. Customers will still pay because they associate Japanese cuisine with exotic, pricey dishes. You can also offer regular Asian fare like rice and curries or noodles at moderate prices so you cater to a wider spectrum of customers.

Another approach is to keep different variations of the same dish: a low-priced version with basic ingredients, and a richer version with one or two exotic ingredients added to enhance the flavor and aroma. A classic example is an ice cream shop with a reasonably priced chocolate ice cream made with choco chips, alongside an exquisite version made with Belgian chocolate.

Use relative pricing

Relative pricing encourages customers to buy more and helps you earn more profit. When an expensive item and a cheaper one sit next to each other, many people pick the cheaper one. So on a menu where a plain grilled cheese sandwich with salted fries is $15 and a jalapeno cheese sandwich with parmesan fries is $20, a table of ten might order seven of the plain combo and three of the jalapeno combo. Restaurants usually earn higher margins on the basic variant than on the exotic one.

Match the price to the portion size

Owners often charge too much for small portions or too little for large ones. Charge more for less and customers walk away. Serve too much for a low price and your margins shrink. Getting the balance of portion size and price right is the key to steady footfall, a good volume of orders, and healthy margins. Avoid these pitfalls:

• Charging more for large portion sizes
• Charging less for small portion sizes
• Charging more for small portion sizes

Instead, serve food in proportion to the price charged and state the number of servings alongside the price of each item to clear up any confusion. For a chicken wings platter, for example, list the total number of pieces and the condiments served on the side.

Give a detailed description of each item

Appetizing descriptions that name the ingredients and explain what makes each dish special generate interest and build an appetite. Even at a high price point, customers order because they are already craving a particular dish and want to experience what they imagined while reading the description.

Boost sales with bundle pricing

Bundle pricing combines several items into a pre-packaged set. Customers get to try more of your menu, and demand rises for the complementary items that round out the combo. You can also offer the bundle at a discount to make it more attractive.

Many QSR chains build their menus around bundles, more popularly known as value meals. When a customer gets a full meal with a burger, fries, and a beverage at a low combo price, they often do not mind spending a few extra dollars for an additional side of fries.

Wrapping it up

Setting the right menu pricing strategy takes real work on top of these tips. A pricing strategy is not a one-time exercise either. It evolves as your business evolves, and outside factors such as government policies, taxes, competitor pricing, and broader industry trends all affect it. Detailed market research, paired with the tips above, will help you build pricing that appeals to your customers and stays profitable for your business.