One of the easiest ways to get menu pricing wrong is to look at what everyone else is charging.
The cafe down the road sells a bacon and egg roll for $12.
So you charge $12.
The restaurant around the corner sells a chicken schnitzel for $28.
So you charge $28.
It seems logical.
But there is a problem.
Their costs aren’t your costs.
Their rent might be different.
Their wages might be different.
Their suppliers might be different.
Their portion sizes might be different.
Their kitchen efficiency might be different.
Their customer base might be different.
And their profit target might be completely different.
So instead of asking:
“What are other businesses charging?”
you should start with:
“What does this product need to sell for to make our business work?”
Start With the Real Cost of the Dish
Before you can set a price, you need to know what the product actually costs you.
That means more than looking at the price of the main ingredient.
Take a simple burger.
You might have:
- Beef patty
- Bun
- Cheese
- Lettuce
- Tomato
- Sauce
- Pickles
- Chips
- Garnish
Each component has a cost.
Add them together and you have your ingredient cost.
For example:
Beef patty – $3.00
Bun – $0.80
Cheese – $0.50
Salad – $0.70
Sauce – $0.25
Chips – $1.20
Garnish – $0.20
Total ingredient cost – $6.65
Now you have a starting point.
But you don’t have your selling price yet.
Food Cost Isn’t Your Profit
This is where many hospitality businesses get confused.
If a meal costs you $6.65 in ingredients and you sell it for $20, you haven’t made $13.35 in profit.
That $13.35 needs to contribute towards everything else the business has to pay for.
That includes:
- Wages
- Rent
- Electricity
- Gas
- Insurance
- Equipment
- Repairs
- Cleaning
- Software
- Merchant fees
- Packaging
- Marketing
- Accounting
- Waste
- Administration
- Owner’s return
And then, after all of that, you need to have a profit left over.
Understand Gross Profit
A useful starting point is gross profit.
If your dish sells for $20 and costs $6.65 in ingredients:
Selling price: $20.00
Ingredient cost: $6.65
Gross profit: $13.35
That’s a gross profit of 66.75% before other business costs.
This is why simply saying:
“It costs me $6.65, so I’ll add $10 and sell it for $16.65.”
isn’t necessarily a sound pricing strategy.
The business needs to be considered as a whole.
Don’t Use a Universal Food Cost Percentage
You’ll often hear hospitality businesses talk about a target food cost percentage.
For example:
“Food cost should be 30%.”
It can be a useful management measure.
But don’t treat one percentage as a universal rule that every hospitality business must follow.
A cafe, fine-dining restaurant, pub, hotel and takeaway business can have very different cost structures.
What matters is whether your overall pricing supports the economics of your particular business.
Use food cost percentage as a tool.
Don’t let it become the entire pricing strategy.
Calculate the Actual Recipe Cost
Your menu pricing should start with recipe costing.
For every significant menu item, document:
Ingredient
Quantity
Unit cost
Cost per portion
This allows you to calculate the real cost of producing the dish.
It also makes it much easier to see what happens when supplier prices change.
If your chicken supplier increases prices by 15%, you should be able to see which menu items are affected.
Don’t Forget Small Ingredients
One of the easiest ways to underestimate food costs is ignoring the small stuff.
A business might carefully cost the chicken and vegetables but forget:
- Sauces
- Oil
- Herbs
- Spices
- Garnishes
- Dressings
- Butter
- Bread
- Cooking ingredients
One individual ingredient might only cost a few cents.
Across thousands of meals, those cents add up.
Portion Size Changes Your Price
Two restaurants can sell the same dish for the same price while having completely different profitability.
Why?
Portion size.
If one business serves 150g of chicken and another serves 220g, their ingredient costs are different.
This is why pricing and portion control need to work together.
If your kitchen doesn’t have consistent portions, your recipe costing isn’t particularly useful.
Your actual cost will constantly move around.
Weigh Your Portions
You don’t necessarily need to weigh every plate during service.
But when developing and costing recipes, establish the correct portion.
For example:
Chicken – 180g
Chips – 150g
Salad – 100g
Then train your team to reproduce that portion consistently.
This protects both your food cost and your customer experience.
Your Best Seller Isn’t Necessarily Your Best Product
This is a really important distinction.
The item that sells the most isn’t automatically the item that makes you the most money.
Imagine:
Chicken burger
Sells 200 per month.
Gross profit per sale: $10.
Total gross profit: $2,000.
Now compare that with:
Steak sandwich
Sells 100 per month.
Gross profit per sale: $16.
Total gross profit: $1,600.
The burger generates more total gross profit.
But now imagine the steak sandwich takes half the kitchen time.
The answer becomes more complicated again.
This is why you need to look beyond sales volume.
Consider Kitchen Time
A menu item can have a good ingredient margin but still be difficult to make profitably.
Ask:
How much kitchen time does this dish require?
A dish that takes five minutes to prepare is very different from one that takes 20 minutes.
Also consider:
- Preparation
- Cooking time
- Plating
- Cleaning
- Special equipment
- Staff skill
- Service bottlenecks
Your menu should work for your kitchen, not just your spreadsheet.
Don’t Forget Waste
Your theoretical recipe cost isn’t necessarily your actual food cost.
If you buy $100 of ingredients but regularly throw $15 away, that waste needs to be accounted for somewhere.
Waste can come from:
- Spoilage
- Overproduction
- Incorrect preparation
- Incorrect portions
- Returned meals
- Damaged products
- Poor stock rotation
This is another reason why actual food costs can be higher than your recipe costing suggests.
Packaging Counts Too
If you offer takeaway, don’t forget packaging.
Depending on the product, you might have:
- Container
- Lid
- Cup
- Coffee lid
- Straw
- Napkin
- Cutlery
- Bag
- Sauce container
A takeaway meal with $8 of food and $1 of packaging doesn’t actually have an $8 food-and-packaging cost.
It has a $9 direct product cost before considering other costs.
Small details matter.
Look at the Whole Menu
Don’t price every dish in isolation.
Your menu is a portfolio of products.
You may have:
High-volume products
High-margin products
Low-margin products
Premium products
Entry-level products
Signature products
Each can have a role.
For example, a lower-priced item might attract customers.
A premium item might increase average spend.
A high-margin side might increase profitability.
A signature dessert might create a reason to choose your venue.
Your menu should work as a whole.
Use Price Points Carefully
Customers don’t necessarily evaluate every price in isolation.
They compare products against each other.
Imagine your menu contains:
Burger – $19
Chicken burger – $22
Steak sandwich – $25
Premium steak – $38
The premium option changes how the customer perceives the other prices.
You can use different price points to create a sensible range.
But don’t manufacture ridiculous prices simply to make another item look cheap.
Customers are still evaluating value.
Don’t Automatically Copy Your Competitors
Competitive pricing is useful information.
You should know what similar businesses are charging.
But competitors should be a reference point, not your pricing formula.
If your competitor sells a $15 breakfast and you discover your equivalent dish needs to sell for $18 to cover your costs and make an appropriate return, you have a business decision to make.
You might:
- Improve the product
- Change the portion
- Reduce costs
- Change the ingredients
- Improve efficiency
- Find a different customer
- Reposition the product
- Remove it from the menu
Simply selling it for $15 because your competitor does isn’t a strategy.
Customers Don’t Buy Ingredients
Customers don’t necessarily think:
“That meal contains $6.65 worth of ingredients.”
They think:
“Is this worth $20?”
Value is about much more than ingredients.
It can include:
- Portion size
- Quality
- Presentation
- Service
- Location
- Atmosphere
- Convenience
- Brand
- Experience
- Reputation
This is why two businesses can successfully charge different prices for apparently similar products.
Don’t Be Afraid to Charge More
Many hospitality owners are uncomfortable increasing prices.
They worry:
“Customers will complain.”
Some customers might.
But constantly keeping prices artificially low can be far more damaging to the business.
If your costs have increased and your prices haven’t, your margins are being squeezed.
Eventually, something has to give.
You either:
Increase prices
Reduce costs
Increase sales
Improve efficiency
Change the product
or accept lower profitability.
Raise Prices Strategically
You don’t necessarily need to increase everything by the same percentage.
Look at individual products.
If one menu item has become significantly more expensive to produce, it may need a larger adjustment.
If another has barely changed, the increase might be smaller.
You can also review:
- Portion sizes
- Ingredients
- Suppliers
- Preparation methods
- Menu mix
Pricing should be an active management process.
Not something you do once every few years.
Don’t Hide Price Increases
If you need to increase prices, don’t be embarrassed about it.
You don’t necessarily need a huge sign saying:
“SORRY, EVERYTHING IS MORE EXPENSIVE!”
Simply update your menu.
Focus on the value you’re providing.
Customers understand that businesses have costs.
What they don’t like is feeling that they’re getting less value.
Train Your Staff to Understand the Menu
Your team should know which products are:
- Popular
- New
- Signature
- High margin
- Easy to recommend
- Suitable for particular customers
They don’t need to know every financial detail.
But they should understand the products well enough to make useful recommendations.
For example:
“That’s one of our most popular dishes.”
or:
“If you like something lighter, I’d go with the salad.”
or:
“The house-made dessert is really good today.”
Good staff recommendations can increase sales without making customers feel pressured.
Review Your Menu Prices Regularly
Supplier prices change.
Wages change.
Rent changes.
Utilities change.
Customer expectations change.
Your competitors change.
Your menu should change with them.
Set a regular review.
It could be quarterly, or more often for products with volatile ingredient costs.
Look at:
Sales volume
Selling price
Recipe cost
Gross profit
Waste
Preparation time
Customer feedback
Then decide whether each item still deserves its place on the menu.
Use Your POS Data
Your POS system should help you answer questions such as:
- What sells?
- What doesn’t sell?
- What sells at different times?
- What are customers adding?
- What is the average transaction?
- Which products are growing?
- Which products are declining?
Don’t just use your POS to process payments.
Use the information to make decisions.
Calculate the Break-Even Point
Your pricing decisions should ultimately connect back to the business’s break-even point.
If your fixed costs are $20,000 per month, you need enough gross profit from your sales to cover those costs before the business can generate a genuine profit.
This is why selling more cheap meals isn’t always the answer.
You could increase sales while making very little additional money.
The better question is:
“How much contribution does each sale make towards covering the costs of the business?”
Don’t Discount Your Way Out of Bad Pricing
Discounting can be useful as a marketing tool.
But if you need constant discounts to make your menu appear affordable, your underlying pricing strategy may need attention.
For example:
$25 meal discounted to $20
might look attractive.
But if the product wasn’t profitable at $20, you’ve simply created more sales at a poor margin.
Promotions should have a purpose.
They shouldn’t be used to hide a pricing problem.
Know When to Remove a Product
Sometimes the right price is no price at all.
If a product:
- Doesn’t sell
- Has poor margins
- Creates waste
- Takes too long to prepare
- Requires specialist ingredients
- Complicates the kitchen
then removing it may be more profitable than trying to find the perfect selling price.
Not every dish deserves to survive.
A Simple Menu Pricing Review
Take your top 10 menu items and create a simple table.
For each one, record:
Selling price
Ingredient cost
Packaging cost, if applicable
Gross profit
Sales volume
Preparation time
Waste
Then ask:
Which products make us the most money?
Which products take the most work?
Which products create the most waste?
Which products should we promote?
Which products should we reprice?
Which products should we remove?
You may be surprised by what you discover.
The Hospitality Takeaway
Good menu pricing isn’t about finding the magic percentage.
It’s about understanding the economics of your business.
Know what each product costs.
Control your portions.
Track waste.
Understand your labour.
Look at your sales data.
Know your margins.
Understand your customers.
Watch your competitors.
And regularly review your prices.
Most importantly, stop asking:
“What are other cafes and restaurants charging?”
Start asking:
“What price allows us to provide good value to the customer while generating a sustainable return for the business?”
Because the cheapest menu in the area isn’t necessarily the most successful.
And the busiest venue isn’t necessarily the most profitable.
Your menu needs to sell products that customers want, at prices that make sense for the business.
