Pricing methods
This Menu pricing methods Info Guide tells you the best methods to use when pricing your restaurant menus to get the most profitable results.
There’s no magic pricing recipe. Your pricing policy is influenced by your business’s internal cost-structure, eg, your rent level and external market conditions. An economic downturn affects how much disposable income people have and how much they are willing to pay for a meal.
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Use cost-plus pricing to add a standard percentage of the purchase cost of your ingredients (called mark-up) in order to arrive at your selling price.
When should I use cost-plus pricing?
You should use cost-plus pricing as a first step in calculating your basic prices and profitability.
Cost plus pricing: Example
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What is the minimum selling price that a restaurant should charge, when the cost of ingredients is €3.50 and the desired mark-up is 150%?
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| Cost of ingredients for a meal |
€3.50 |
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| Add 150% mark-up |
€5.25 |
€3.50 x 150/100
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| Selling price (excl. VAT) |
€8.75 |
€3.50 + €5.25
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| Add VAT @ 13.5% |
€1.18 |
€8.75 x 13.5/100
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Selling price (incl. VAT)
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€9.93 |
€8.75 + €1.18
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This restaurant needs to charge a minimum of €9.93 if it is to achieve a desired mark-up of 150%.
VAT
When you have decided your price, remember to add VAT.
Cost plus / margin pricing calculator
Cost-plus pricing: Advantages and disadvantages
Cost-plus pricing:
- is easy-to-use and useful for making comparisons with your competitors, but it doesn’t take account of the overall cost-base of your business. Benchmarking may be distorted if your competitor’s cost-base is significantly different.
- should not be used as your sole pricing method – you should also consider using break-even pricing and target-profit pricing.
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Using this method, you start with the desired selling price of a meal, and then deduct the intended gross margin to be earned on that meal to arrive at a maximum cost of ingredients.
When should I use margin pricing?
Selling prices of individual products (eg menu items or beverages) may be determined by competitor prices. To remain profitable, you need to make a satisfactory margin by controlling the costs of these products.
Remember!
The combined profit margins from all products may not be enough to cover a business’s overall costs and profits.
Margin Pricing: Example
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What is the maximum amount that a Head Chef should pay for ingredients in order to sell a meal for €9 with a gross margin of 60%?
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| Selling price of a meal (incl. VAT) |
€9.00 |
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| Less VAT @ 13.5% |
€1.07 |
€9.00 x 13.5/113.5
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| Selling price (excl. VAT) |
€7.93 |
€9.00 - €1.07
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| Less gross margin 60% |
€4.76 |
€7.93 x 60%
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| Cost of sale |
€3.17 |
€7.93 - €4.76
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The Head Chef needs to ensure that the cost of ingredients for this meal does not exceed €3.17 in order to sell the meal for €9 with a gross margin of 60%.
Margin pricing calculator
VAT
When you have decided your price, remember to add VAT.
Maximise the number of high-margin products offered.
Limit the number of low-margin products and maximise the number of high-margin products on offer.
Remember!
You cannot apply the same profit margin across the board to all your products because this would lead to some dishes being over-priced and others being under-priced.
Margin pricing: Advantages and disadvantages
Margin pricing:
- is easy-to-use and useful for making comparisons with your competitors but it doesn’t take account of the overall cost-base of your business. Benchmarking may be distorted if your competitor’s cost-base is significantly different.
- is applied at individual product level, eg, a meal or a beverage, and therefore it only takes account of that product’s direct costs, ignoring the profitability of the business as a whole.
- should not be used as your sole pricing method – you should also consider using break-even pricing and target-profit pricing.
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While pricing methods such as cost-plus pricing, margin pricing, value pricing and going-rate pricing have advantages, none guarantees that a restaurant will cover its total costs or make a profit.
To ensure that all your costs are covered, you should use a break-even pricing approach which takes into account the total fixed and variable costs of a restaurant.
Remember!
Before you decide which pricing methods to use, you need to know the minimum price which you can charge, below which you cannot afford to go, in order to avoid making a loss. Your break-even point gives you this information.
Break-even pricing: Advantages
Break-even pricing enables you to:
- determine the minimum sales value required for a business to break-even.
- calculate the average price per dish or average spend per customer required to achieve break-even, ie the price at which all costs are covered, and at which the business is making no profit and no loss.
- take account of all your business costs so that you avoid slipping into a loss-making situation.
Calculate the minimum average spend per cover you need in order to break even or to achieve a target-profit
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While pricing methods such as cost-plus pricing, margin pricing, value pricing and going-rate pricing have advantages, none guarantees that a restaurant will cover its total costs or make a profit.
To ensure that all your costs are covered, and that a target-profit can be achieved, you should use a target-profit pricing approach which takes into account the total fixed and variable costs of a restaurant plus the desired target-profit amount.
Target-profit pricing: Advantages
Target-profit pricing enables you to:
- determine the minimum sales value required for a business to achieve a certain profit level.
- calculate the average price per dish (or average spend per customer) required in order to ensure that all costs are covered and the business is making the desired target-profit.
- take account of all your business costs as well as your target-profit amount.
Remember!
You need to check your calculations regularly to ensure that you identify any significant cost changes and update your prices to reflect those changes.
Calculate the minimum average spend per cover you need in order to break even or to achieve a target-profit
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Going-rate pricing
Value pricing
Yield management
When should I use going-rate pricing?
You can use going-rate pricing to pitch your prices above, below or at the same level as those of your competitors, depending on the quality-level offered by competitor restaurants.
Going-rate pricing example
You may decide to drop your lunch price from €15 to the €12-€12.50 price range charged by your competitors to attract customers and increase your competiveness. However, you need to ensure that you still make a profit on lunch sales.
Prices at or above competitor prices
If your prices are held at or above those of competitors, free extras may make your product and price more appealing and better value for money.
Prices below competitor prices
If your prices are set below competitor prices, you can reduce the impact on your profits by, for example, cutting food preparation costs while ensuring that your service quality is not reduced.
VAT
When you have decided your price, remember to add VAT.
Going-rate pricing: Advantages and disadvantages
Going-rate pricing:
- is flexible in responding to changing market condidtions.
- can damage your business in the long-term, particularly if you have a unique, high-quality product offering, and the competitor whose prices you are tracking does not.
- takes no account of the cost-structure of your business or your target-profit, and as a result, your business may quickly become unprofitable and find it difficult to recover.
- may devalue your business’s current brand and undermine your current customer base.
- may result in price-wars if your prices are set below competitor prices and your competitors are able to afford further price-cuts.
- should not be used as your sole pricing method – you should also consider using break-even pricing and target-profit pricing.
Avoid price-wars
- Competitors may have a lower cost-base than you and have greater scope for price-cutting while remaining profitable and competitive.
- Cutting your prices can help you to compete better but customers often associate reduced prices with inferior quality. New customers secured by under-cutting competitors may be unprofitable in the long-term.
- Instead of engaging in a price-war, you could make your offering more appealing by offering extras or using value pricing.
Value pricing is where you focus on the perceived value to the customer of a meal rather than the costs incurred in producing that meal. This perceived value may be driven by the following:
When should I use value pricing?
You can only use value pricing if you can differentiate yourself from your competitors, for example by offering superior quality, customer service or value for money.
VAT
When you have decided your price, remember to add VAT.
Value pricing: Advantages and disadvantages
Value pricing:
- matches your customers’ perceived value of your product and gives you the flexibility to pitch prices at premium levels when opportunities arise.
- may not take into account the cost-structure of your business unless you also use break-even pricing and target-profit pricing.
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