Here’s how to calculate the prices on your menu

How to calculate the prices on your menu

We will describe each step in detail. Time to determine the cost of your dishes and maximize your profits.

1. Calculate the cost of each dish listed on your menu

Before you can determine the prices of the dishes on your menu, you first need to know how much it costs to serve the dish.

Use the following formula for this:

Johnny from Johnny’s Burger Bar wants to know how much it costs to make a serving of his famous Johnny Burger. The dish consists of 200 grams of ground meat, 1 bun, 1 tablespoon of sauce, 2 slices of cheese, 2 slices of tomato and 2 potatoes.

Johnny buys his ingredients in bulk and pays 19€ for 2 kilos of minced meat. A 200-gram ground beef burger costs its restaurant €1.90. Johnny then calculates the cost per serving for the other ingredients in the dish.

  • 200 grams of minced meat: 1,90€
  • 1 roll: 0,25€
  • 1 tablespoon of sauce: 0,10€
  • 2 slices of cheese: 0,90€
  • 2 slices of tomato: 0,50€
  • 2 potatoes: 0,75€

Cost per serving = The sum of the cost of all ingredients for one serving of a dish.

Cost per serving Johnny Burger = 1,90€ + 0,25€ + 0,10€ + 0,90€ + 0,50€ + 0,75€ = 4,40€

It costs Johnny’s Burger Bar €4.40 , to make a Johnny Burger.

Calculate the cost per serving of all the dishes on your menu this way. Don’t forget your drink menu here either!

Here's how to calculate the prices on your menu

2. Choose your desired contribution margin

Contribution margin is the ratio between the cost of your ingredients and profit. This percentage determines the amount restaurants need to add to their cost per serving to set menu prices that can cover costs like rent, staff, facilities, advertising and more.

Not all restaurants work this way, but it is recommended to use. With an optimal contribution margin, you can maximize profit per dish.

What contribution margin should your restaurant have?

For a financially healthy business, most restaurants maintain a cost per dish of 28 to 35% of the price on the menu. This percentage applies to different types of restaurants, from fast food to fine dining. You can determine the best contribution margin by keeping a close eye on your financials and how customers respond to your prices. But how do you do that?

Calculate the current contribution margin of your dishes

  • At the beginning of the week, make a list of all the stocks you received or. you bought.
  • Write down the cost of each ingredient in a list
  • Write down the purchases of stock you make later in the week to add to your original list.
  • Repeat these steps at the beginning of next week.
  • Calculate your total sales per day using the sales reports from your POS system.

Now calculate the current contribution margin per week. Here’s how you do it:

Again, we’ll use Johnny’s Burger Bar as a starting point:

starting value inventory = 11.000€

Final value inventory = 15.000€

Contribution margin = (11.000€ + 7.000€ – 15.000€) / 8.000€

Contribution margin = 3.000€ / 8.000€

Contribution margin = 0.375, i.e. 37.5%

Calculate your ideal contribution margin

Johnny white now that his current contribution margin is 37.5%. Now it’s time to compare this percentage with the ideal contribution margin.

Let’s say the total cost was 2.500€. As stated above, the total turnover was 8.000€.

Ideal contribution margin = 2.500€ / 8.000€

Ideal contribution margin = 0.31, or 31%

You can see that the current contribution margin of Johnny’s Burger Bar is 37.5%, but the ideal percentage is 31%. That’s why it’s important to calculate the contribution margin. If you don’t, you’re missing out on the opportunity to maximize your profits. Armed with this information, you can reconfigure your restaurant’s menu and ensure that you make the maximum profit on each dish.

If you don’t have historical pricing data or if you have yet to open your restaurant, we recommend keeping your prices in the middle of the restaurant average, d.h. between 25% and 35. Once you have your complete sales data, for example after the first month, you can compare your current contribution margin with the ideal contribution margin.

Here's how to calculate the prices on your menu

3. Give your menu the right prices

In our example it costs Johnny’s Burger Bar 4,40€, to make a Johnny Burger. What price does Johnny need to sell the dish for to cover overhead and possibly still make a profit? To calculate this, we use the following formula:

As said before it costs Johnny’s Burger Bar 4,40€, to serve a Johnny Burger. We have now decided that we will use a contribution margin of 31%, since this is the ideal percentage. Now we put the numbers into the formula:

Price dish on the menu = 4,40€ / 31% = 14,20€

Based on the ideal contribution margin of 31%, Johnny’s Burger Bar should reduce the price of the Johnny Burger to €14.20 Apply.

Calculate the current and ideal contribution margin for each dish on your menu to ensure your restaurant maximizes revenue per dish.

4. Evaluate the impact of the new prices on your turnover

You might think that you are now done after calculating the new menu prices. But if you want to run a successful restaurant, you need to know the effects of the repriced dishes on your sales so you can then determine if you should adjust the prices again if necessary.

We come back to the example of Johnny’s Burger Bar. After Johnny used our formulas, he found that he could reduce the price of the Johnny Burger from 11.65€ at 14,20€ should increase. What are the consequences of this price change?

We describe 2 possible scenarios.

Scenario 1: Fewer burgers are sold

This may mean that customers feel the price is too high. So if Johnny wants to lower the price of the dish to increase sales, he needs to do so strategically within the industry’s range. If he selects 35% as the contribution margin, the maximum percentage of the range, his Johnny Burger will cost €12.57. This is a price that is affordable for its customers and covers its overhead costs.

Scenario 2: Burgers go over the counter like hot sandwiches

If Johnny sells his burger well even with the price increase, it means that customers can still pay the price.

According to this, to increase the price without scaring off customers, Johnny could use a 28% contribution margin. The Johnny Burger then costs 15,70€

In both scenarios, it is important to keep in mind how customers react to price. Look for the optimal point at which your dishes are profitable for your restaurant and well received by customers.

5. Other ways to calculate the cost of your menu

If higher prices on your menu result in fewer guests coming to you, you can minimize the contribution margin by lowering the cost per serving. You could do this as follows:

  • Look for low-cost suppliers: can you buy the same or comparable ingredients for a lower price from a new supplier?
  • Smaller portions: For example, Johnny could sell a 150-gram burger instead of a 200-gram burger to make the portion smaller and thus lower the cost per serving.

With these two options, you can lower the cost of your dishes.

Here's how to calculate the prices on your menu

Top tips on pricing your menu and costs

By keeping costs low and assigning the right prices to the dishes on your menu, you can make your restaurant successful. That’s why it’s so important to compare your current contribution margin to your ideal contribution margin and adjust your prices accordingly.

It may seem like a very cumbersome way to put contribution margins under the microscope, but you use it to make sure you stay in control of your restaurant’s profits.

We’ll conclude by summarizing how to give the dishes on your menu a financially healthy price:

  • Calculate the cost per serving of all dishes on your menu.
  • Calculate your current contribution margin.
  • Determine your ideal contribution margin.
  • Give your dishes the right price.
  • Adjust the prices of the dishes of your menu and your purchase prices based on the reaction of your customers to the price changes.

Now that you know exactly how to calculate costs, it’s time to take a critical look at them and take a good look at your menu of.

Here's how to calculate the prices on your menu

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