Overwhelmed with restaurant pricing decision? Looking for some restaurant pricing strategy hacks? We have discussed the 4 steps of a restaurant pricing decision. RIER : Research-Implement-Evaluate-Revise. Each step has some mini-steps/factors to reach the optimal restaurant pricing. . Let’s understand it one by one.
Restaurant Pricing Strategy – RIER:
You should do basic research to decide the correct pricing. Research should not be complicated and easy to understand for all your staff members.
While researching you should consider your geographic location and main competitors. Selecting the correct geographic location is vital. It is not wise to do research at the country level when you are competing within a small town area.
There are always two types of customers: Price sensitive and price inelastic. It is up to you how you want to stay in-game.
A price war is always damaging in long term. However, your pricing should be aligned with the customer’s budget.
You should ask following questions which will help you to know your customer:
- Are you targeting? Super rich, 9-5 middle-income segment or low-income segment.
- Are you able to bring food innovation to charge a higher price?
- Is your restaurant service top-notch to charge a premium price?
- Is your staff trained?
- Do you have a budget to hire top-notch staff?
- Is your customer price sensitive?
- Can you spend to build a solid brand to charge a premium price?
- What is the age of your ideal customer?
- What are the expectations of your customers?
Ok! So you are not starting a price war. However, it is always wise to keep an eye on local market pricing.
Your pricing might be a bit higher for the same recipe your competition is selling. Yet, it should not be double or triple.
You can use different strategies to charge high and still bit the competition. Bringing a signature dish or offering a combo is one of such strategies.
Use below questions to outwit competition in pricing:
- Name out your main competitors
- Find out the best selling items and their pricing
- Know the quality of food delivered by the restaurant
- Is there any weakness of your competitors such as poor hygiene or poor customer service? You can charge high by offering high-quality service.
- Can you overlap price competition overall with your unique selling point?
- What will be the long term vision of your competitor?
- How do they promote their service?
You can ask dozen of questions and get as much information as you can. After considering all the parameters, you can go with a restaurant pricing decision.
There are three methods to determine food cost.
- Food cost per serving
- Cost of goods sold
- Food cost percentage method
Lets understand three methods one by one.
Food cost per serving :
Joy wants to determine the cost per sandwich served. Joy requires to write down all the ingredients with the weight of each.
He lists down as per below:
2 slice of Bread : $1.20
Tomato Catchup : $0.40
Total cost : $6.60
Cost per serving one sandwich is $6.60.
Cost of Goods Sold:
Cost of goods sold can be determined by considering total food cost for specific period. You need to consider inventory stock while doing the calculations.
There is simple formula to calculate cost of goods sold.
Cost of Goods sold = Purchase made during the year Add Opening inventory value Less Closing inventory value
Food cost percentage method:
Food cost percentage method calculates cost of food in relation to sales. It can be determine per serving or at the end of the period.
Lets determine sales value per serving using percentage method.
Let say the food cost per serving is $6.60. Joy wants to keep his food cost 35% on sales. He can calculate sales per serving using the below formula:
Sale value per serving =
Food cost per serving / ideal per cent *100
Joy needs to charge $18.86 per sandwich to keep food cost per cent at 35%.
Lets understand how to determine sales value using cost of goods sold.
Joy wants to keep his food cost at 35% at month-end considering total sales. He has the following figures available in the inventory system.
Purchase made during the month = $12,600
Inventory at the beginning of the month = $3,200
Inventory at the end of the month = $2,200
Cost of goods sold = $12,600 + $3,200 – $2,200 =$13,600.
Ideal sales value = Cost of goods sold / Ideal cost per cent *100
= 13,600 /35*100
Joy is achieving his cost target by having a monthly sales value of $38,857.14 or more.
In the practical world, you may not follow the cost benchmark for each serving. You may be compelled to charge lower prices for some dishes to sustain the demand. You can offset the low profit by charging higher prices on the premium dish.
As we talk about before, competing on pricing is really tough in the restaurant business. You can escape a pricing war by being innovative.
Uniqueness enables you to charge premium prices. It helps you to attract premium customers. Uniqueness attracts customers from other cities. People always love new and innovative things. They don’t hesitate to pay a higher price for a new experience.
You can bring innovation in multiple ways such as
- The unique theme in the restaurant interior.
- Targeting niche customer. Ex. Egg-based items only or Chicken pizza only.
- Unique style of service such as food served by robots or food served by staff wearing unique clothes.
- Unique location or area. Food served at underwater restaurant or restaurant near the sea or lake.
- Innovation and uniqueness in the menu. Every restaurant should have its speciality that attracts new customers and grow its customer base with word of mouth.
- Building community for local people and presenting your restaurant as a space to collaborate and meet.
- Arranging eating or other food-related completion to excite and attract people. This makes your restaurant popular by spending few bucks.
There are multiple ways to bringing uniqueness. You can innovate yourself or get inspiration from restaurants around the world. There is no limit to creativity.
Restaurant menu strategies :
Restaurant menu is the relection of your restaurant brand and it influence the decision making of customer.
The restaurant menu should have a unique eye-catching design. It should be simple enough to find any item and take quick decision.
Don’t hesitate to hire an expert to design a restaurant menu. You can recover the menu design cost within one week.
There are several important elements of a restaurant menu. But we are focusing here on pricing elements.
- No of items
- No currency sign against the amount
- Item name
- Item description
It is really surprising that mere changing the name of the item can bring more sales.
You can add a unique and exciting description at the bottom of each item. A little bit of creativity and efforts are necessary to bring uniqueness. However, it’s worth it.
There are many talented writers and food experts out there. They can help you to bring creativity to the restaurant menu.
Rule of 3:
Rule of 3 is a restaurant pricing strategy to offer three versions of any dish. Simple, better and best. The better version has some extra ingredients. It should be charged higher than the simpler version. The best version should be the most costly one.
Customers go with the better version most of the time because it gives some extra and it is still less costly than the best version.
Offering food in the combo pack is one of the most popular sales technique. Just make a combo of 3-4 popular high selling items and give some discount. Customers love this.
You should create a combo in such a way to get maximum overall margin. Offset one item’s low price with other item’s high price.
It is necessary that you clearly write down how much the customer is saving on the combo. This boosts combo sales.
Combo offers are very popular in online home food delivery. At the end of the tiring day at work, the customer doesn’t want to take the hassle of selection and just order as soon as possible.
No currency sign:
Putting a dollar sign next to item price is a real sales killer. Customer starts concerning about money and gets the motivation to spend less. It is wiser to avoid currency sign altogether in the menu.
Restaurant pricing gets affected by many factors such as ingredients’ rates, competition, economic crisis. Restaurant pricing strategy should be analyzed and revised periodically. It is a never-ending process. The following factors should be considered while reviewing restaurant pricing.
Having a restaurant budget can help you compare actual result with budgeted cost and sales value. There is no specific time period for the budget. For a small restaurant, monthly budget preparation is good practice.
You can prepare a budget in restaurant accounting software. You can prepare a budget in excel or google sheet if the software you used has not budgeting feature.
There are certain industry benchmarks regarding restaurant prime cost, profit markup etc. You can compare the actual monthly result with industry benchmarks. This helps you to focus on improvement and revised pricing accordingly.
Effects of changes in pricing:
Mere revising pricing is not enough. You should evaluate the effect of price change on sales and profit margin. Ask the following questions to know the effect of a price change?
- What is the overall customer experience?
- Are we losing customers due to a price increase?
- Are we getting recurring customers?
- Are we achieving BEP for a new dish?
Marketing plays a huge role in restaurant pricing. Poor marketing attracts low paying customers. Ultimately, it forces you to reduce the pricing.
Using online media is an unavoidable marketing channel today. Online marketing can help you grow your brand and bring new customers. Nevertheless, online marketing is costly.
You should ask for monthly reports from the marketing manager. The reports should include the following :
- Cost per lead in PPC marketing
- Cost per lead in food marketplace
- Cost per follower on social channel
- PR cost
- Discount and coupon cost
- Best and worst performing food item in online marketplace.
You should have knowledge of the average cost per new lead and the cost of acquisition of an old customer. A skilled marketing manager can help you with the analysis of result and suggest the steps to improvement. You can increase or decrease pricing accordingly. You may launch a new combo offer or remove certain food items from the food marketplace.
Performance analysis of new serving:
You should measure cost per serving of new dish. Your goal in beginning should be achieve the BEP. Following questions can help in analysis:
- Are we following cost per ingredient as per budgeted cost?
- Are we achieving BEP?
- What is the response of customers?
- Can we offset the loss with other items initially?
- Are we able to generate profit in long run?
- Are we able to increase the price next month?
Overall performance analysis:
It is not possible to have a uniform profit percentage on each item served. Your end goal should be to achieve the ideal profit markup at month-end.
Following formulas can help in markup calculation:
COGS Per cent = COGS / Sales *100
In this formula, you can get overall cost per cent on sales.
Gross profit % = Sales Less Operating cost / Sales *100
You should not consider administrative cost, interest, tax, depreciation while calculating operating cost.
Net profit % = Sales Less All Expense / Sales *100
You should consider all expense except tax.
Net profit after tax = Net profit less tax / sales *100
Above formula will give overall net profit after tax.
Ask following questions to interpret the result further:
- Are we able to maintain the cost per serving as per the budgeted cost?
- Are we achieving overall profit markup at month end?
- Are we following industry benchmarks?
- What is the effect of increasing/decreasing the price of a specific menu item?
- What is the effect of changes in menu design?
- Are we growing the brand?
- Are we getting direct traffic via word of mouth?
This is the last step to build an effective restaurant pricing strategy. Quarterly review and revision of restaurant pricing are recommended.
Ask below questions while revising pricing:
- Is any specific dish making recurring losses?
- Can we offer a loss-making item under combo?
- Can we increase the premium dish price by 5% or 10%?
- What is the reason for the sales decline in a specific menu section?
- Are we getting enough feedback from a customer?
- Do we need the help of a restaurant pricing strategy expert?
The key is to make necessary revision and implement a new pricing strategy again. This should be done over and over again until you are satisfied with the result.
There is no one fit answer to restaurant pricing decision. You should set pricing, keep analysis and revision.
Yes, you can use some physiological tricks. However, they only work if your product quality is awesome. Never get lost in tricking customers.
The ideal restaurant pricing is value-based. Happy customers never hesitate to pay a little bit higher price Good customer experience should be combined with optimal pricing. One day success will knock on your door.