The vibrant descriptions and lip-smacking photos that embellish your restaurant menu are not just optical attractors; they are strategically deployed soldiers fighting for your profitability.
The most important thing about these soldiers are the price tags. Too low, and you’ll lose money. Too high, and the customers won’t pay. That's why you need to learn and deploy these restaurant menu pricing strategies.
Restaurant menu pricing strategy denotes setting the right price for your food items, which keeps all operational costs covered but also lures the customers inside, leaving you with a nice profit margin in the end.
This comprehensive guide focuses on a deep dive into the world of pricing your menu items. We will present you with the necessary information, formulas, and psychological tricks to create a menu that sings to your target audiences’ palates.
How to Price Your Food Items – Pricing Strategies & Formulas
Let's go ahead and learn about the menu pricing methods, strategies and formulas that convert these costs into the prices that customers will see. The restaurant industry uses the following prominent types of pricing methods.
Cost-Plus Pricing
This is among the more straightforward methods. Cost-plus pricing involves taking the menu costs of a single dish — in other words, the food cost plus the overhead expenses — and adding the desired percentage of profit.
Cost-plus pricing is a secure and straightforward menu pricing strategy, as it guarantees that the restaurant generates profits and covers all its overall expenses. This price model is effective at ensuring that the restaurant earns a certain profit margin on every portion of its goods by establishing base prices.
How do I apply?
- Calculate the total cost of a specific dish, covering everything from raw materials to preparation and labour costs all the way down to the minute it’s served to customers.
- Decide your desired profit margin as a percentage of the total cost of the dish.
- Lastly, add the profit percentage to your total cost to determine your selling price.
Best Use Case
Cost-plus pricing is a safe and reliable strategy for deciding your baseline prices. It also works well when you are introducing new menu items or establishing a new restaurant.
Value-Based Pricing
This strategy involves focusing on the value of menu items purchased by customers instead of relying on costs. Here, we consider additional factors such as the ambience of your restaurant, the quality of customer service, and the uniqueness of your cuisine. This method is likely to lead to higher prices than those recommended by the cost-plus pricing approach, as it considers both the obvious and hidden value factors you offer to your customers.
How to apply
- Identify a unique selling point that attracts customers to your restaurant, such as the fresh or sustainable ingredients you use, the luxurious ambiance, or a renowned chef.
- Establish which factors contribute the most to your clients’ value perception level. Determine how much customers might be willing to spend on a dining experience.
- Set a balanced price that reflects the overall value proposition you offer, considering both tangible (food) and non-tangible (quality, experience) factors.
Best Use Case
Value-based pricing works best for a luxurious fine dining experience restaurants or those who have a strong brand that attracts diners. It helps you capture the full value of the service and experience you offer, allowing you to maximise your restaurant profit margins
Competitive Pricing
This method involves comprehensive competition research and determining your restaurant menu prices based on the prices set by similar establishments within your area. This aggressive strategy involves setting your prices slightly lower than your competitors to grab their customers.
You can also match their prices if you’re charging a lower amount for the same dishes. This is based on the fact that customers want a good deal. This approach ensures you maintain a competitive reputation and reassures your patrons that they are getting a fair value for their money.
How to apply
- Gather the menus from all your competitors offering similar dishes nearby.
- Research the price-sensitivity levels of your target audience and determine how aware they are of the competition in the area.
- Set the undercut or parity levels after considering your profit margins and your brand image in the market.
Best Use Case
Competitive pricing is best for new restaurants that are trying to settle in the market or established restaurants that are facing cutthroat competition. It’s also good for low budget fast food restaurants aimed at low-income people.
Price Building
Price-building strategy involves structuring your menu to guide consumers where you want them to go, directing them towards the more profitable items. The two menu engineering tactics for price building are the following:
- Price Nesting: Surround your high-profit dish with slightly more and slightly less expensive options. Then, take the profit opportunity in the middle; the psychological effect forces the middle option to appear to be the best value.
- Price Point Anchoring: Highlight a high-priced and profitable item on your menu. This creates a reference point, which makes everything else seem low-priced and affordable for your customers.
How to apply
- Identify what high-profit dishes you want to promote.
- Evaluate your menu layout and build a cluster based on the strategy. Place these items right in the middle of high- and low-priced menu items and highlight them nicely.
- If you are looking to use anchoring, identify a high-value item and highlight it, making other options look affordable and cheap.
Best Use Case
Price building is the ideal menu planning strategy to subliminally guide client choices and promote your most profitable menu offerings.
Dynamic Pricing
This more advanced strategy involves adjusting your menu prices depending on various real-time factors, including demand, the day of the week, or special events. Although dynamic pricing requires more sophisticated technology and data analysis, it can enable you to maximise your overall bottom line profit by capturing high-demand periods and optimising prices during slow times.
How to apply
- Invest in an advanced POS system such as 3S POS that enables dynamic price adjustments automatically and can analyse your real-time sales data.
- Set the parameters for your system to adjust your prices depending on the time of the day, day of the week, or historical sales data for a specific time period.
- Monitor your dynamic pricing strategy and customer-related changes in demand, and adjust your settings accordingly.
Best Use Case
Dynamic pricing is ideal for restaurants with varying customer traffic levels over the day or season. If your overall profitability suffers from long or frequent slow-time periods, you should maximise your profit margins during peak hours and attract more customers during slow times by decreasing your prices.
However, dynamic pricing should be used very carefully and strategically, as it can lead to confusion among customers and make them feel betrayed. It's best to couple dynamic pricing with digital menus so you can adjust your pricing on your menu in real-time.
Loss Leaders
The loss leader tactic involves pricing some of your menu items cheaper than the cost of goods sold. The goal is to upsell them on higher-margin beverages or side dishes, ultimately generating a profit despite the initial loss on the low-priced item.
How to apply
- Identify the items on your menu that have a high perceived value but do not cost as much to produce, such as soft bread or low-cost appetisers.
- Set a price that covers variable costs but not overhead.
- Train your waitstaff to effectively upsell the more expensive beverages and high-margin side dishes alongside the loss leaders.
Best Use Case
Loss leaders are great for attracting new customers and getting them to sample new menu items. Ideally, your loss leader should be suitable for an upsell with your more expensive beverages, side dishes, or other high-profit menu items.
How to Pick the Right Pricing Strategy?
Choosing a pricing strategy is very much like cooking the perfect recipe. You need to understand each of the key ingredients, their effect on the taste, and how they work together.
Start with the base layer: analyse your restaurant’s DNA. Who is your target audience? What do they value—an affordable price, high quality, atmosphere, or impression? Are you promoting simple fun or fine dining?
Secondly, think about the cost analysis and your financial goals. What is the food cost percentage for each dish on a plate? Determine at what stage you will begin to make a profit. When will the break-even point take place? Then, determine which strategy you should focus on based on the obtained information.
For most of your menu, you can rely on cost-plus pricing, whereas when it comes to your signature dishes with high USPs, value-based pricing is more suitable. If you are looking for a more psychological approach, you can try anchoring or clustering along with the loss leaders.
For almost 20 years, 3S POS has offered one of the most flexible EPOS systems to international brands such as Caffe Concerto, Chaiiwala, Heavenly Desserts, Pepe’s Piri Piri, GDK and thousands more delighted customers.
If you are looking for an Restaurant POS System or Quick Service EPOS System that will not just help you accept payments but includes inventory management, loyalty programs, and much more, speak to our sales for a free demo.