Learn how to balance customer value, ingredient quality, overhead cost and profit.
- In order to decide how much to charge for your dishes, you should fully understand your target customer and what they're willing to pay.
- Additionally, determine the food cost per item, the overhead per dish and the ingredient overhead.
- Adjust prices and costs as necessary.
You already have a firm idea of the clientele you want to serve in your restaurant and the type of food you want to serve. Based on your primary customer persona (their wants, social demographics and disposable income), you should have a fair idea of how much those people are willing to pay per dish, but how do you make sure you're charging a fair price? You need to make a decent profit without gouging your customers.
Let's take a look at the best ways to decide how much to charge for your dishes in order to benefit your business and please your customers.
How to calculate the cost of food
According to Blue Cart, in order to calculate food costs, you should use the food cost percentage formula. This consists of the ratio of ingredients (inventory) and the revenue that these ingredients bring in when they are sold (food sales). This number is always presented as a percentage. This percentage is highly important because it helps to determine the overall profitability of any restaurant.
How to determine the food cost per item
The very first thing you need to do is to work out the cost per serving of every ingredient that goes into a dish. This includes condiments, seasoning, cooking oil and garnishes. Once you've got these figures, you can work out the food cost of every dish.
How to calculate the overhead cost per dish
Your overhead is everything (other than food) that it takes to get a dish out to a customer. While these costs will be a well-educated estimate, it's important that you are as accurate as possible so there are no surprises down the road. Account for labor, taxes, rent or mortgage, equipment leases, loans, electricity, water and any other business-related expenses. Don't be conservative with these estimations. While accuracy is important, these figures will fluctuate, and you should also remember to account for theft, spoilage, employee meals, delivery costs, returns charges and any extras.
Once you know how much you spend per month, it's simple enough to figure out how much you spend on overhead per day. Once you've got this figure, you need to estimate how many covers your restaurant completes (customers served) per day. This will vary across the week and seasonally, but take an average number. For example, if your overhead is $1,000 per day and you have an average of 200 covers, your overhead is $5.00 per person.
Do your research
Now that you know how much you need to make per dish to break even, you need to take a look at your competitors. Look at those restaurants that cater to the same demographics as you. If you're serving high-end French cuisine, you don't want to look at fast-food restaurants.
Additionally, only factor in thriving businesses. Don't include struggling ones in your calculations. Find out who your competitors are and what their price range is. Once you've examined your direct competitors, you can garner an average price range across all those you researched. Your dishes should fall somewhere within this price range.
How to determine your restaurant's ingredient, overhead and profit percentages
It's important to identify how much profit you want to make per dish. Sure, 100% pure profit from each dish would be fabulous, but it's unlikely. Be realistic. What percentage of profit per item do you need to live comfortably? Industry standards tell us that food cost, overhead costs and profit should be reasonably even percentages per dish.
In our example, the overhead cost per person is $5, assuming that person is only having one course. Therefore, the food cost should also be around $5 per dish, based on industry standards, and your profit should be approximately $5 per dish. However, you don't have to follow the industry recommendations. If your overhead is comparatively low, you may find that you spend more than one-third of the dish cost on ingredients, and that's OK. You also need to remember that the cost of ingredients can vary seasonally. Some eateries combat this by primarily offering seasonal produce, while others simply factor the cost fluctuations into their calculations and use a yearly average price.
Adjust prices or costs as necessary
If, based on the rule of thirds, your dish's price comes in far higher than your competitors – or far lower – you may need to think about making some adjustments. If your dishes would have to be priced far higher than those of your competitors, you may need to look at reducing your overheads or finding better prices on your ingredients. Additionally, remember to offer a selection of more costly dishes like prime steaks and lavish seafood, and budget-friendly ones like chicken and pasta dishes, as this will help balance your food costs across the menu.
Average food costs
According to the Restaurant Report, although there is no such thing as a one-size-fits-all food cost percentage, there are some ways new restaurants can get a sense of the ideal food costs. For instance, the type of restaurant plays a factor in your food cost percentage. For example, steakhouses may have food costs that run up to 40%, while Italian restaurants may have food cost percentages of up to 28%. On the other hand, the average food cost of American regional-themed restaurants can run up to 35.7%.
Additionally, according to the Academy Get Back Bar, the industry average for bars in terms of their total beverage program is between 18-24%. In particular, the average for liquor costs is approximately 15%. The average food cost for beer is approximately 20% for draft beer and 20% for bottled beer. Additionally, the average food cost for wine can be 30-40%.