Strategic menu pricing can have a positive effect on a restaurant’s brand identity and customer retention. When creating a pricing strategy, it’s important to remember that diners will pay for the value they receive. But how can you define that specific price?
Restaurant managers can look at key factors of their business to determine fair and appropriate prices for their food, service and ambience.
Let’s take a look at the factors restaurants consider when developing a competitively priced menu:
The first step for developing restaurant menu prices is figuring out the exact cost of your product. Keep in mind not only the cost for the raw ingredients, but also delivery fees, wages, and overhead costs.
To bake a dozen blueberry muffins may cost your restaurant $6 for the ingredients, but your eggs may have had a $50 shipping charge and it took your employee two hours to bake them.
Food Service Warehouse also suggests factoring in indirect costs, such as the aspects of the restaurant that add to perceived value or quality of your dishes.
Factor in Restaurant Type
Once restaurants have determined the cost of actually producing each menu item, they need to determine the type of service and ambience they’ll offer customers. Quick service, fast casual, casual dining and fine dining restaurants will all have different pricing strategies because they offer different dining experiences.
For example, a fine dining restaurant can sell a hamburger at a much higher price than a fast-casual restaurant because of higher quality ingredients, more attentive service, and an upscale setting.
Look at Competition
Restaurant managers should be aware of what their competitors are doing when setting or changing menu prices.
One way to do that is by visiting restaurants in your neighborhood to determine how the quality of their product and service holds up to the prices they’ve set. Dennis Lombardi, executive Vice President of foodservice strategies for WD Partners says dining at a competitor’s restaurant is important because portion sizes, preparation and presentation all contribute to diners’ value perception.
Managers should also review purchasing trends of the neighborhood’s demographics to get a sense of which prices would be too high. This tactic can help restaurateurs determine pricing barriers, or the point that most of your customers will not pay above to dine at a restaurant.
Once you’ve researched cost and expectations, you can start setting actual prices.
Many restaurants choose an ideal cost pricing method, which means the raw cost of the food item is divided by the desired food cost percentage. This percentage typically lies between 25 – 30%. For instance, a menu item that costs $4.25 to produce with a 25% food cost percentage would be priced at $17.00.
Other restaurants will price items based on the competition – usually either at the same price, slightly lower to appeal to bargain hunters, or slightly higher to show quality – or based on supply and demand. Airport restaurants, for example, benefit from the supply and demand pricing because they are the only source of food or alcohol in the near vicinity.
Establishing a competitively priced menu at your restaurant can help to reinforce your brand identity and improve the customer experience. When customers have a consistent, branded experience from the ambience to menu items and pricing, they are more likely to visit again and again.
Check out our blog post about tactful ways to change your restaurant menu and prices!