Establishing menu prices is vital for restaurants looking to distinguish themselves in the vibrant UK dining landscape, aiming not only to attract patrons but also to cultivate lasting loyalty.
Amid the UK’s evolving food industry, menu pricing remains a key focus for both traditional restaurants and CloudKitchens® delivery kitchens.
Here, we present a comprehensive guide to strategically set menu prices that appeal to UK diners and encourage repeat visits.
How to set your prices?
Setting menu prices requires careful consideration and detailed calculations to ensure profitability for every dish on your menu.
Begin with the food cost percentage
Determining the food cost percentage for each menu item is crucial. For instance, if you run a burger shack and your specialty is chicken burgers, adhering to its food cost percentage is vital. Let’s set it at 25% for this example.
Calculate the cost of goods sold (COGS)
After determining the food cost percentage, the next step is calculating the expenses for preparing the chicken burger, including raw ingredients and sauces, which we assume will be £5 per burger. Using the formula provided, you can determine the appropriate pricing for the chicken burger.
Apply this equation
Utilise the following formula for your menu pricing strategy:
Price = COGS / Target Food Cost
Price = £5.00 / .25
Price = £20
This calculation indicates that to achieve your desired food cost percentage of 25%, you should set the price of your chicken burger at £20. However, alternative methods for menu pricing are also available.
Utilising gross profit margin for menu pricing
Understanding gross profit margin is vital. It denotes the portion of total sales from a dish that accounts for profit. For instance, assuming a chicken burger maintains a 30% profit margin, it means that 30 cents of every dollar spent on its creation goes towards profit.
Calculating your gross profit margin
Calculating the price and gross profit margin of any menu item requires a formula involving the item’s price, raw food cost, and desired gross profit margin.
For instance, take our chicken burger priced at £15 with a £5 cost, as mentioned earlier. Assuming a 60% target gross profit margin, the calculation is as follows:
Gross Profit Margin = (Menu Price – Raw Food Cost) / Menu Price
Gross Profit Margin = (£15 – £5) / £15
Gross Profit Margin = 66.6%
With a menu price of £15, you achieve a gross profit margin of nearly 67%, marking a remarkable accomplishment.
Pricing strategies for buffet menus
Buffet menus require a different pricing approach, considering several factors:
- Customers typically consume around one pound of food.
- The overall cost of raw materials needed for one pound of food (COGS).
- Your target food cost or desired gross profit margin.
Assuming a one-pound food cost of £10, encompassing meats and side items like french fries, if your target food cost is 30%, you can determine the required price using the following formula:
Price = COGS / Ideal Food Cost
Price = £10 / 0.30
Price = £33.3
Suppose you aim for a gross profit margin of 80% and list the buffet pricing at £20 on your restaurant’s menu. In that case, you can use the following formula to assess if you will meet that target:
Gross Profit Margin = (Menu Price – Raw Food Cost) / Menu Price
Gross Profit Margin = (£20 – £10) / £20
Gross Profit Margin = 50%
From this calculation, it’s evident that you need to increase your prices to achieve the 80% target. To do so, your buffet should be priced at £50.
Additional factors impacting menu pricing
Consider these key factors to ensure your menu resonates with customers and maintains profitability.
1. Direct costs
Direct costs involve various essential elements related to raw materials:
- The purchase cost of raw materials, excluding labour and transportation expenses.
- Expenses associated with food waste, covering unused or uneaten food and raw materials.
- The cost per portion of each dish, varies across menu items.
Adjust menu prices to sustain profitability by addressing high direct costs and ensuring alignment with business goals through accurate expense assessment.
2. Indirect costs
Indirect costs, including labour expenses and kitchen essentials like pots, pans, and cutlery, must be factored into menu pricing to ensure profitability and financial sustainability, especially in traditional restaurants where labour costs are higher than in CloudKitchens® delivery kitchens.
3. Customer perception
Customer perception is crucial in menu pricing, as it influences patrons’ perception of value. Striking the right balance is key to conveying quality and value while remaining competitive in the market.
4. Menu engineering
Menu engineering focuses on maximising profits from your top-selling dishes. In essence, it aims to achieve two primary objectives:
- Reduce the food costs associated with your best-selling items.
- Increase the visibility of these dishes on the menu by offering promotions and discounts that attract customers’ attention.
Analysing costs, profit margins, and sales records are essential. Mastering menu engineering may seem daunting, but it yields significant long-term benefits for your business.
5. Monitoring competitor prices
Competition is inevitable, whether you run a traditional restaurant or a CloudKitchens® delivery kitchen in the UK. Understanding competitors’ pricing strategies is crucial for maintaining competitive or lower prices. Higher prices without a unique value proposition may drive customers to competitors, but exceptional food can justify higher prices. The aim is to ensure each dish generates sufficient profit to sustain your business, requiring innovative cost reduction without compromising quality if your prices exceed competitors.
Determining your pricing strategy?
Menu pricing is crucial for both traditional restaurants and CloudKitchens® delivery kitchens, affecting profitability and sustainability. Monitor direct and indirect expenses and competitor pricing for success. For more insights on crafting menus, explore our blogs.
Contact us if you’re interested in opening a CloudKitchens® delivery kitchen.