Every food business, whether it’s a quaint café or an exclusive culinary locale, aims to turn food lovers’ satisfaction into profit. One of the significant aspects that can ensure a well-functioning eatery is setting the right prices for your service and products. However, price determination can be a tricky process, including many variables that need careful consideration. This guide aims to help you navigate these complexities.
To begin, you must understand your market. Market knowledge refers not just to your understanding of your current and potential customers but also your competition, suppliers, and overall business environment. Developing a strong market insight will guide you in setting competitive and favourable prices for your customers.
Once the market situation is understood, delve into menu engineering. This restaurant marketing strategy requires that you classify the dishes according to profit and popularity. Highly popular and profitable items are the stars, those with high profitability but low popularity are opportunities, while plow horses are high in popularity, low in profitability and items with low popularity and profitability are classified as dogs. Catering your pricing towards promoting your “stars” and “opportunities” can boost your overall profitability.
The cost of goods sold (COGS) is another critical metric in determining your menu prices. COGS refers to the total costs associated with producing the food that your establishment sells. It includes the cost of ingredients and any other supplies needed to prepare your dishes. Once you’ve determined the COGS for your dishes, you can better price them to cover costs and generate profit.
Consider your overhead costs as well when setting prices. Overhead costs include items like rent, utilities, salaries, marketing costs, and more. These costs also need to be covered by your overall revenue. Calculate what portion of these costs can reasonably be covered by each sale, and factor this into your pricing decisions.
Value-based pricing is a strategy that can be effective, particularly in high-end eateries. This strategy entails setting prices based on the perceived value of a dish rather than basing it solely on costs. Creating a unique dining experience, investing in a vibrant ambience or adding a gourmet touch to your dishes, can demand a higher price due to an elevated customer experience.
Profit margin is a consideration that rounds off this list. Every dish should be priced to allow a room of profit after covering all associated costs. A crucial rule is ensuring that direct costs (ingredients, labour) should not exceed 30-35% of the final price you set for each dish.
More than anything, remember that price is a direct reflection of your eatery’s brand. An affordable, family-friendly restaurant will price differently than a high-end, gourmet establishment. By balancing costs, market expectations, perceived value, and profit margins, you can set prices that drive profit and promote customer loyalty.