Menu engineering is one of the most important aspects to planning a restaurant’s business. After all, it directly controls the amount of money that you would find in your cash register at the end of a business day. Its importance, therefore, warrants a formulaic approach to pricing that should carefully consider all the factors affecting your business, and come up with a price for each menu item, which would result in a more considerable profit for you.
Why use a formulaic method of pricing?
Using an approximated guess figure for pricing your menu items is not a smart move. It does not entail the necessary process of accounting for every single resource used, the amount in which it was used, and its cost per unit, and so is not able to judge the actual value of the product being priced. This results in lower returns in profit, a problem that can be avoided by using a formula for pricing.
Another advantage of doing so is that business owners can analyze and compare different menu items to evaluate the profit-loss margin of each piece individually. Furthermore, once a formula has been decided, updating the menu over time becomes an efficient and less time-consuming job.
The different factors you need to account for
When taking a formulaic approach to pricing, you need to consider for every single resource used for preparing a dish. This ranges from the actual ingredients that constitute the meal, like bread, meat, cheese etc., to consumption costs that vary with each customer, like how customers use condiments in variation, to the often overlooked surrounding costs, that account for the portion of oil, garnishes, seasonings etc. that were used to make the dish.
You also need to calculate the unit price for each resource (the cost of a specific amount of the resource, $ per gram for example), and how many units are used per dish.
How it works
The basic approach of the formula is to calculate the total cost (T.C) of each dish, by summing up the costs of each ingredient used. The costs of individual ingredients are the products of the number of units used per dish and the unit cost for that specific ingredient. Once the T.C is obtained, it is compared to your set selling price (S.P) to give you the gross profit (G.P = S.P – T.C) and the cost percentage (%C.P = T.C/S.P * 100). Both G.P and %C.P are essential tools for analyzing your menu prices.
Analyzing your returns
Your G.P accounts for the cold hard cash earned at the end of each day, while your %C.P shows you the percentage of your selling price that went into buying ingredients. On analyzing these values, you may notice for some items the %C.P tends to be higher than others, which might make you want to raise your selling price, to earn more off that particular dish. However, you should also consult the G.P of that dish with the others and analyze the revenue it generates for you. In this way, you’ll be able to decide whether or not you need to raise your prices.