Menu pricing strategies to price restaurant menu items

When choosing a restaurant, menu price is a top priority for many customers. In fact, in a survey conducted by US Foods, 83% of diners have admitted to checking out a menu online ahead of time, and 9 in 10 of them said that pricing of menu items impacts their decision of what they'll order.

This means that, from a restaurant owner or operations management point of view, creating the perfect menu pricing strategy is extremely important, as it’ll dictate whether or not customers choose to dine in your venue, or elsewhere. 

This guide explores different factors you need to take into consideration when creating your menu pricing strategy. 

What is a restaurant menu pricing strategy?

Menu pricing is exactly what it sounds like: calculating the prices of individual items on a menu. The prices of individual dishes are usually calculated through a variety of factors, such as the cost of ingredients, labor, and markup for profit. However, this may not be the only factor in deciding the prices of individual dishes, you also need to understand the bigger picture.

This is where your menu pricing strategy comes in. This is essentially how much you’ll charge, taking your entire menu, and other aspects, into account. After all, when you visit a restaurant, the atmosphere and experience are important elements too, so you might want to take these things into consideration when calculating your pricing. Then there's things like value-based pricing which focuses on how much customers are willing to pay based on the perceived value of your dishes.

This could mean deviating from prices calculated based solely on your food cost percentage in favor of other prices that may inform an overall strategy.

Understanding different menu pricing models

Now, there's not a one-size-fits-all approach to setting your restaurant's menu prices. That's because different menu pricing strategies work better for different businesses that have their own goals, market, customer satisfaction, and expectation metrics. So when you're thinking about how to do menu pricing and how to price food to sell, the best thing to do would be to find the strategy that works best for you. Below, we’ll explore some of the most common menu pricing strategies and how they can be applied.

Restaurant menu pricing based on food cost percentage 

This model focuses on calculating the cost of ingredients for each dish and determining its price based on a target food cost percentage. Typically, restaurants aim for an average food cost percentage of 28-35%, though this can vary depending on the type of restaurant.

Example of pricing menu items based on food cost percentage 

Let’s say you’re serving a pasta dish, and the ingredients cost $5 to prepare. If your target food cost percentage is 30%, the calculation will look like this: $5 ÷ 0.30 = $16.67. This means the pasta dish should be priced at approximately $16.67 to meet your target food cost percentage.

Restaurant menu pricing based on gross profit margin

This approach considers not only the cost of ingredients but also how much profit you want to make on every dish that you serve. To use this model, you’ll need to set a desired profit margin (dpm) amount for each dish and then add this amount to the total cost of ingredients. In other words, it doesn’t just help you get to your break-even point, it helps you hit your profit goals.

Example of pricing menu items based on gross profit margin

Imagine that same pasta dish costs $5 to make, and you want a gross profit of $10 per plate. You'd add your ingredient cost and gross profit margin together and charge $15 for the plate.

Competition-based pricing

This strategy (which is also known as competitive pricing) is all about setting your prices depending on what your top competitors are charging. If they charge premium prices on certain dishes, for instance, you could too. If your restaurant is in a highly competitive area or market, this is a great strategy to choose when deciding how to price items.

To use this method, you first have to research your top competitor's menus and work out the price ranges for similar dishes. Then, decide whether to match, undercut, or slightly exceed them.

Demand-based pricing

A demand-based pricing strategy of a restaurant takes into account how much customers are willing to pay for your dishes based on factors like where you're located, the time of the day, the season, and the types of customers you serve. For example, you could charge more for food items on a Saturday evening when demand is high but offer it at a discounted price during a mid-week lunch special.

Now, if you've got great technology on your side (like a restaurant POS system for example) you can even take this a step further and do the more advanced version of this strategy which is called dynamic pricing. This is where your food pricing adjusts in real-time based on factors like demand, supply chain, time, or external conditions.

Factors to consider to set the right restaurant menu pricing strategy

In this section, we’ll explore the key factors you need to consider when determining the perfect price point for your dishes.

1. Your restaurant’s target market

How you price your menu will depend on the type of customers you’re looking to attract. The prices you set will need to be affordable to the customers who walk through your door. If they’re too high for the type of people in your area, you may drive away your potential customers. 

Creating a great menu with good, reasonable prices will mean doing some market research . Take a look at the neighborhood you set up in. What types of people tend to frequent your area? What types of jobs do they work? How much disposable income do they have?

Once you have a general idea of your target market, you can develop the appropriate dishes that will appeal to them and calculate the prices they’re likely willing to pay. For instance, if you set up a restaurant on or near a university campus, it’s likely that your main clientele will be students, so you’ll want to develop a menu that’s fairly affordable since students tend not to have a lot of disposable income.

Or, if you’ve decided to set up a restaurant in a fairly affluent neighborhood, you may want to develop a menu that caters to more elevated and sophisticated tastes, with a price tag to match. 

2. Your restaurant costs 

Cost is the primary factor to consider when choosing how much to charge for the items on your menu. To make a very basic costing of your menu, you’ll need to calculate your food cost percentage.

The basic formula for calculating your food cost percentage is: Food Cost Percentage = (Beginning Inventory + Purchases - Ending Inventory) ÷ Food Sales.

TIP: Setting a Maximum Allowable Food Cost (MFC) can help you stay aligned with your profit margins and ensure that pricing decisions don’t exceed what’s financially feasible. 

Direct costs

Direct costs are the costs are the costs of the ingredients, which could include:

• The cost at which ingredients are bought
• Menu costs related to food waste
• Costs related to portion sizes

The higher your direct costs, the higher your likely menu prices. 

Indirect costs

Indirect costs include all the costs associated with preparing the food that isn’t included in preparing the ingredients. These may include:

• Water
• Electricity
• Gas
• Labor

Having lots of indirect costs will force your prices even higher. 

Overhead expenses

Overhead expenses are costs you run into in simply operating your restaurant. These could include:

• Rent
• Marketing budget
• Renovation costs

It’s very easy to let your overheads get out of hand. Make sure to manage these costs, or you might have to put your prices up.

Seasonal costs

The restaurant industry is incredibly vulnerable to seasonality. Seasonal costs could include:

• Costs of hiring extra staff for peak trading months
• Changes in the price of ingredients that are in or out of season
• Heating and cooling costs for hot and cold months

Paying attention to your seasonal costs will allow you to thread the needle by buying seasonal ingredients at lower prices.

3. Benchmark your prices with the market competition

It’s important to know what your competitors are charging. Check out the prices at nearby restaurants to see where you stand. If your prices are too high compared to similar places, you could lose customers. On the other hand, if your prices are too low, you might not cover your costs.

Look at the quality of the food and experience your competitors offer. If they’re charging more, it’s likely because they provide a premium experience. If you’re offering similar dishes in a similar setting, your prices should be in line with theirs. Be mindful of local market trends and adjust accordingly to stay competitive without sacrificing your profit margins.

4. Analyse demand for your menu items for optimal menu engineering

To set the right prices, you need to know which menu items are popular and which ones aren’t. Look at your sales data to figure out what your customers are ordering most. Items that are in high demand can often be priced higher, especially if they’re signature dishes or customer favorites.

Low-demand items may need a price adjustment to either make them more appealing or to clear them off the menu. By analyzing your menu’s performance, you can make informed decisions on which items to push, which to remove, and how to price them for maximum profit without losing customer interest.

5. Stay up to date with the latest trends in the industry 

The restaurant industry is always changing, and staying current with trends is key to keeping your menu pricing competitive. Whether it's new food trends, customer preferences, or shifts in the economy, being aware of what's hot can help you adjust your prices and menu items accordingly.

For example, if plant-based foods are trending, offering vegan or vegetarian options at the right price could boost your sales. Similarly, if customers are leaning toward sustainable and locally sourced ingredients, pricing accordingly can show you’re in tune with their values. 

6. Create the perfect balance in your menu 

Most restaurants will have a series of dishes that offer a range of price points. This is so the restaurant offers something for everyone: higher-priced items for people who are looking to splurge alongside lower-cost items for people who are looking for something tasty yet affordable.

It’s important to strike a good balance between high and low-cost items on your menu. You want to offer a decent selection while keeping your pricing consistent with your brand. Use your judgment about the right balance to strike. 

How point of sale technology helps with menu pricing strategy

You may come up with the very best menu pricing strategy in the world, but if it doesn’t deliver you the right profit margin, it’s useless. That’s why it’s imperative that you keep a close eye on your sales to make sure you’ve got the right strategy in place. This is where point of sale (POS) technology becomes your ultimate ally, giving you the tools to fine-tune your pricing and maximize profitability.

Analyse POS data to cut down on expenses

With an Epos Now POS program, you can create easy-to-understand sales reports that give you great and useful information on your sales trends. You can also use sales reports to make business decisions on cutting operational costs and highlight areas for growth. 

• Visualize data and see trends with custom dashboards
• Access insights from any device and run your business on the go 
• Determine market prices by analyzing winning and losing menu items
• Compare actual vs expected inventory to identify lost or stolen goods and reduce wastage
• Simplify your accounting and taxes by syncing your POS reports with Sage, Xero, Quickbooks, and more

Use your inventory management system to manage COGS effectively 

Inventory management tools make it easy to track your cost of goods sold (COGS) in real-time. This ensures you’re not overspending on ingredients or undercharging for dishes. By keeping a close eye on your food costs, you can tweak your menu pricing to maintain healthy profit margins while offering fair prices to your customers.

Control labor costs better to reduce primer costs with effective team management 

Labor is one of the biggest expenses in the restaurant industry. With the right POS system, you can track staff hours, schedule shifts efficiently, and reduce overtime costs. These tools help you manage your team more effectively, keeping your prime costs (labor + COGS) in check and ensuring your menu pricing strategy remains profitable.

With Epos Now, you’ll have all the tools you need to analyze sales, manage costs, and create a QR code menu pricing strategy that sets your business up for long-term success.