Pricing Your Restaurant Menu

Opening a new restaurant is definitely not child’s play. There is so much that needs to be done; developing a business plan, arranging the finance, acquiring a suitable location, setting up the kitchen, furnishing the premises, obtaining licenses, hiring and training the staff and so on. When all the founding steps have been taken, here comes the fun part of putting together the menu.

Compiling a menu is not just about what items your restaurant offers to the customers but at what price. Your pricing strategy has a long-term impact on your restaurant’s brand image as well as the sales revenue. A price is more than just a number. The same goes for existing restaurants as well. No matter how many years your restaurant has been in business, you need to evaluate the product pricing and the factors associated with it from time to time.
In this article, we aim to tell you about the factors that you should consider while you price your products.

Calculating the Food Cost

It is obvious that before you price any item on the menu, you need to know how much money went into preparing it. In general, it is widely acceptable for the restaurants to charge three or four times the food cost. Let’s take an example of the steak dinner.

A steak dinner typically comprises of a steak, a sauce, some bread, vegetables on the side like sautéed mushrooms, peas, and French beans or a side of fries and some salad.

The steak costs you £6 and the other items that come along with it account for £2, then the total meal costs you £8. The food cost should preferably be within the limit of 35% of the menu price. So, divide the food cost by 35% to arrive at the menu price of the steak meal.

Food cost * 100 = Menu Price
£8 * 100 = £22.86

You can price the steak meal at the minimum £22.86. As we mentioned earlier, the menu price is a little under three times the cost, which is acceptable. Furthermore, you could employ a psychological pricing tactic. Instead of pricing the steak meal at £23, you could go for £22.50 or £22.99. The customers perceive £22.50 and £22.99 as £22 and not £23, making it look like a good deal. You end up making almost a pound more on each steak meal without making the customer unhappy.

£22.99 for a steak meal sounds like a lot to you because you know it actually cost you only £8. But we are yet to consider the cost of labour involved, such as the chef, the servers, the bus boy and the cleaning staff. You need to pay these folks as well and it all needs to be covered through the menu price. You also need to take into account the overheads like gas, electricity, water etc. Besides, £22.99 for a steak dinner is just the minimum that you should charge. The pricing will vary with the following factors.

  • What model do you follow; table service or self-service?
  • How is the ambiance of the restaurant and if it is a casual dining or fine dining establishment?
  • Are your food offerings market-driven or demand-driven?
  • What is the location of your restaurant, downtown or uptown?
  • Who are your target customers? Are they residents, office goers, students, travelers, shoppers etc?
  • Do you have a medium of entertainment such as a live band?

These are some of the major factors to consider before assigning a price to the menu item. Also, involve the staff responsible for purchasing and inventory management in the process of determining the food cost.

Exercise Portion Control Measures

For your food cost to be the same for every order, you need to implement strict portion control. If you calculated the cost at £6 for a 6 oz. steak, all the other steaks that you prepare should weigh the same. Similarly, the quantity of accompaniments like sauce, salad, vegetables and bread should be the same as well. Instruct your chefs to measure each ingredient they use with the help of the measuring cups and scales.

Lastly, involve them in the exercise of portion control. They know the best because they are the ones who actually prepare the food and know precisely how much of what ingredient goes into making a particular dish.

Have an Extensive Menu

Along with the pricey items like steak and seafood, you could offer other less costly items like chicken preparations and pizzas. This will help balance your overall menu in case the cost of ingredients for the expensive dishes rises for a while. The sale of the less expensive items would offset the burden of the increased cost.

We hope this write-up gave you an insight into how important it is to put more thought into pricing the menu items. The price should not only cover the costs but also justify the quality of the food and the entire dining experience of the customers. We will be back with some more, interesting articles about restaurant operations. Stay tuned!

Restaurant Variance Analysis

Do you find your restaurant’s operating results unsatisfactory? Do the profits turn out to be diminished compared to what you had anticipated? It’s time you took a closer look at the operations scenario and figure out what’s making those numbers shrink. Variance analysis is one of the most powerful and practical tools at your disposal to investigate the deviations between the budgeted and actual results.

It goes without saying that restaurant owners prepare budgets from time to time for both the fixed costs and variable costs. The budgeted cost is then topped with a percentage markup to arrive at the selling price of the items on the menu. It is when the actual costs deviate from the budgeted that there is a variation between the budgeted and the actual profits. The variation could be either positive or negative. Let’s take a look at the following example.

Let us consider that your restaurant had expected to serve 1400 meals this week with an average bill of £30. That makes your budgeted sales £42,000. However, you ended up serving 1450 meals with an average bill of £32. Hence, you made an actual sale of £46,400. The difference between the actual sales and budgeted sales is called the variance. In this case, there is a positive revenue variance of £4,400 because the actual sales exceed the budgeted, which is a good sign.

The sales variance of £4,400 can be split into two parts; £1500 and £2,900 based on the idea of volume variance and price variance. The positive sales variance of £1500 is the result of the rise in volume by 50 meals at the rate of £30. On the other hand, the £2 increment in the anticipated average bill of £30 for all the 1450 meals resulted in the positive sales variance of £2900.

Similarly, if the actual sales fall short, there would be a negative sales variance, which could be a cause for concern if there is a major and consistent decline or stagnancy over a longer period. This is when you would need to analyze the variance. By that we mean, finding out what went wrong and why?

There could be several reasons the actual outcomes diverge from the anticipated ones. Particularly in the restaurant industry, one or more of the following factors are commonly responsible for the sales variance.
– Unforeseen fluctuations in the occupancy rate
– Varying bill sizes
– Deviation in the actual cost of labour from the budgeted affects both the cost variance and profit variance.
– Deviation in the actual procurement cost of ingredients from that budgeted affects both the cost variance and profit variance etc.

Whenever there is a negative sales variance, any increased costs can take up a major proportion of the sales revenue, thereby eating into the profits.

When do you analyze the variances?

The one very intriguing characteristic of variances is that not all of them are subject to examination. It depends on how significant or abnormal a variance is. For example, you accounted for cost of a specific quantity of the ingredients for the week to be £12,000. However, there was a rise in the prices of certain ingredients and you had to pay £13,000. The additions £1,000 spent on ingredients might not be as significant and hence, you might give it a pass.

However, if you continue to pay increased prices over the long run, you might need to analyze the variance in the cost of procurement. Renegotiating the prices of the commodities in question with your supplier would be the most sensible thing to do. If that doesn’t work out well, you could try looking for another supplier. However, make sure you do not compromise the quality of the ingredients. Some restaurateurs would also consider raising the prices of the specific items on the menu using the dearer ingredients.

Let’s not ignore the fact that the variance in the occupancy rate and cost of labour can occur alongside. The percentage aggregate variance could have a major impact on the profits. Therefore, it could be detrimental to your business to disregard a variance for analysis if you think its percentage is negligible.

So let’s face it, guesswork is risky. Conducting variance analysis on a regular basis is the practical and feasible method to prevent yourself from losing track of all the costs and deviations. We hope this write up helped you understand how vital the tool of variance analysis is when you want to establish the cause of discrepancies and implement corrective measures.

Previously we had shared an insightful write-up about efficient inventory management practices. In the upcoming article, we would discuss the winning strategies for pricing the items on your restaurant’s menu. Stay tuned!

Restaurant Inventory Management

In the current era of entrepreneurship, the food and beverage industry is making a lot of heads turn. Every so often we get to see a shiny, new restaurant opening its doors to the foodies in town. However, we all know that running a restaurant is not all unicorns and rainbows. It requires a strong business sense and consistent meticulousness to survive and grow.

Needless to say, the labour cost constitutes the major portion of the operating cost of a restaurant. The inventory cost sums up to be the second largest segment. The labour cost is a fixed cost. The cost of inventory is something that you can control to avoid wastages. Through this write-up, we aim to explain to you how crucial it is to have stringent inventory management policies in place, and how the implementation of these measures or the lack thereof can make or break your restaurant business.

Let’s take a look at some of the best restaurant inventory management practices that your business could embrace to minimize wastage and maximize profitability.

1. Prepare a Timetable

It is very important that you prepare a timetable for taking inventory and follow it consistently. For example, if you count your inventory on Mondays, stick to it. Fix a time for doing inventory to avoid any variations, like in the morning or at night. You cannot accomplish the task with precision if there is work in progress. Taking inventory before the restaurant opens or after it closes, are the best times to account for inventory. In addition, avoid doing the inventory when new stock is being delivered.

2. Set the Frequency

The frequency of doing inventory shall vary from one item to another, depending on their nature and frequency of ordering. The one thing that we can say with the utmost surety is that taking inventory only on a monthly basis is not good practice. In the restaurant industry, you often place orders on a weekly basis. Therefore, take weekly inventory of such items to keep a tab on their availability and rate of usage. Similarly, account for the items you order every day on a daily basis.

3. Follow the FIFO Method

FIFO stands for First In, First Out. It means using up the old stock before moving on to the new one. Most items in the restaurant storeroom are perishable. To avoid wastage, they must be used before they go bad. It also depends how well you forecast the demand of the items before you decide on the ordering quantity.

4. Systematic Arrangement

We cannot emphasize enough how crucial it is, the way you arrange items in your restaurant’s storeroom. The staff responsible for taking the inventory should be trained to follow the routine arrangement of the stock on the shelves to efficiently implement the FIFO technique. The older stock should occupy the front row on the shelves for being readily accessible. Once these items are used up, the next batch of inventory should be moved to the front, as we go. Do not forget to declutter your storeroom by taking the expired items off the shelves.

5. Make it a Two-Person Job

Assigning the responsibility of keeping track of the inventory to two employees is a great idea. The two in-charges could do the inventory separately and compare their results to see if there is any discrepancy. Having said that, it reduces the odds of you missing the inconsistencies, both current and probable.

6. Use Technology to Your Benefit

The market is flooded with a wide range of inventory management software. You could try them and find out which one fits your needs the best. Why we emphasize so much on accuracy is the fact that your inventory records have an impact on the Profit and Loss statement. Any incorrect details would skew the final picture of the profitability of your business, thereby jeopardizing it in the long run. The inventory count sheets you prepare using the program would not only help you track your stock levels but also reveal consumption trends of the various items across the timeline. The trend proves useful in forecasting the demand of such items to arrive at a precise ordering quantity.

7. Standardization is the Key

As highlighted earlier, the solution to a sound restaurant inventory management system is consistency, which comes from standardization. Standardize the units used for quantifying each item in stock, be it measure of weight or number of items. To reduce errors and increase the swiftness of the process, it is necessary that the same employees do the inventory every time.

We are sure that once you put these ideas into practice, a significant wave of positive change would come your way. You would notice reduced incidences of wastage, pilferage, and spoilage, which ultimately culminate into enhanced profitability. We hope you found this information practical and realistic. In our upcoming post about restaurant operations we would talk about variance analysis and product costing, stay tuned.

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