A restaurant’s menu pricing is the most important factor in determining the restaurants profitability, as the menu is what generates 100% of the revenue. Therefore it is critical for restaurant management to invest time in developing a definitive strategy on how food and drink items are priced and positioned in their establishment.
In my 25 years of experience in the industry, the majority of restaurants that I have worked with drive more than half of their menu sales, from the sale of food products. Despite this fact, most restaurants still do not follow a strategy to maximize profits with the food menu. As a result, restaurants are losing substantial profitability from their food menu – in most cases more than 2% of their sales in lost profits.
Here are some key steps to effective menu engineering for increased profitability.
Understanding Menu Costs
Firstly, a menu needs to be fully costed. It is impossible to implement a pricing strategy that is going to maximize profitability without knowing the complete costs of all the items.
Pricing based on Margin, not Cost
Once a menu is costed, many restaurants fall into the trap of trying to attain a certain “percentage cost” when they price a menu (eg. attain a 30% food cost). Percentage costs are extremely important when monitoring inventory control (or on financial statements), but they only come into play once you have effectively maximized the profitability of your menu, using margin-pricing techniques. Focusing on percentage cost when pricing a menu, as opposed to margin (Margin = Sales Price – Product Cost), will actually result in less profitability for your restaurant as well as less value for the guest.
To explain further, lets review the example below where there are three approaches to selling a dinner item.
- Dinner #1 is an example of one extreme, where the product cost is $2 and the selling price is $10, creating a 20% food cost.
- Dinner # 3 is the other extreme, where the product cost is $4, meaning the guest is receiving double the amount of food, or improved quality, of Dinner #1. The selling price is $12, which is a 33% cost.
- Focusing on percentage cost alone, one would estimate the best pricing solution for the restaurant is to offer Dinner #1, as it is only a 20% food cost.
However, all three dinner options have the exact same profit margin, meaning the restaurant makes the exact same profit for selling each dinner option to a guest. My guess is that if you asked the guests after their dinner which dinner provided the best value, they would all say Dinner #3 by far.
Guest Value Perception
So the 33% cost dinner option is the best value for the guest, which is a perception to consider when developing menus to drive repeat business. Dinner #3 will also make the restaurant the same amount of profit as the other options, which had less value. Implementing more detailed margin strategies will allows you to develop more cost- effective solutions. For example, selling an item for $12 at a cost of $3.50 will still give you a great value for the guest, but an even better profit margin of $8.50.
We are just skimming the surface on effective menu engineering, as there is a lot more complexity to building the overall strategy. However it is suffice it to say that to maximize a menu’s profitability, it is imperative that product item costs are known and that the profit margin of each item is the primary focus – not percentage cost.
Stay Tuned for part two – a look at QuaM Graphs – the real tool to menu profit maximization.
Written by David Hopkins, President The Fifteen Group