Do you really know the exact cost of every item on your menu? Or, like many restaurateurs, do you determine your menu prices based on what competitor’s charge, a set cost percentage applied to every menu item, or some other non-precise method? Pricing is an essential part of creating a successful menu, and a huge reason why menu engineering is so important for your restaurant.
- Haven’t costed-out your menu recently
- Need to update your menu
- Want to add a new menu item
- Are building your menu for the first time
We recommend using a menu costing formula to calculate the exact cost of every ingredient included in your menu and help you determine profitable menu prices.
If you don’t know the exact costs to purchase, prepare and serve your menu, then your menu prices are just a guess and likely will be affecting your bottom line profits.
A best practice is to measure, cost and account for every ingredient required to prepare, cook, garnish and serve each of your menu items.
For example; when costing out a fried item, a portion of the fry oil used to cook the item is often times not included. This overstates the item’s gross profit and understates its food cost percentage. Applying a portion of the fry oil to each fried item as a 'surrounding cost' will result in a more accurate gross profit and food cost calculations. Other surrounding costs, such as seasonings, oils, garnishes, etc. should also be included in your menu item costs.
In addition, you should also account for any ingredient your guest uses when they consume an item as a 'consumption cost'. These are items such as ketchup, mustard mayonnaise, steak sauce, salt, pepper, vinegar for fries, or other requested condiments. Again, if we don’t add the consumption cost, these items will result in a mistaken higher gross profit and lower food cost percentage.
Completing a proper food cost and menu pricing plan is time-consuming, but it is an extremely valuable tool in understanding your exact food costs and determining profitable menu prices. Once each of your menu items is costed-out, it takes very little time to update them in the future.
How to Use a Food Cost and Menu Pricing Plan
To demonstrate how to properly plan your menu pricing we've designed a free Excel spreadsheet which you can download below.
Once you have the spreadsheet you can follow the instructions below to see how we would go about planning our menu. We will use a ‘Pub Burger’ to demonstrate.
Step 1 -Name your menu item and sell price
Item name: Pub Burger
Sell Price: 12.99
How it works
At the top right of the sheet under “Sell Price” is where your “$ Cost” (Total item dollar cost,) “$ GP” (Dollar gross profit) and “FC%” (Food cost percentage) will be calculated. Once you enter the menu item’s “Ingredients,” “Unit” (Unit of measure), “Qty” (Quantity used), and “Unit Cost,” the sheet will calculate the “Total Cost” of the menu item ingredient.
After all the “Ingredients” are entered, the sheet will total those ingredients and the sum will appear in the “Total Ingredient Cost” field.
When the “Surrounding Cost” and “Consumption Cost” (Explained below) are added, the “Total Item Cost” is copied in the “$ Cost” field and the formulas calculate your “$ GP” and “FC%.”
Step 2 - Enter all the Ingredients
Next, we enter all the ingredients needed to prepare the ‘Pub Burger’ under the “Ingredients” column:
In our example it looks like this:
First ingredient: Grass Fed Patty: “Unit” is oz (Ounce), “Qty” (Quantity) is 7. The grass fed beef costs $4.95 a pound, so the “Unit Cost,”.31 an ounce. The “Total Cost” for the patty is $2.17 (.31 per ounce x 7 ounces). If you’re using the Excel download version, the sheet has the calculation built in for your convenience.
Second ingredient: House Baked Roll, “Unit” is “ea”, “Qty” is 1, “Unit Cost” is .30, “Total Cost” is .30
Third ingredient: Sweet Potato Fries, “Unit” is “oz”, “Qty” is 8, “Unit Cost” .10 “Total Cost” is .80
Fourth ingredient: House Maple Mustard Garlic Dill Pickle Spear, “Unit” is “ea”, “Qty” is .5, “Unit Cost” is .65, “Total Cost” is 32.5
Fifth ingredient: Bourbon Sriracha Aioli, “Unit” is “oz”, “Qty” is 1, “Unit Cost” is .08, “Total Cost” is .08
Sixth ingredient: Balsamic Caramelized Red Onions, “Unit” is “oz”, “Qty” is 3, “Unit Cost” is .07, “Total Cost” is .21
Seventh ingredient: Organic Spring Mix, “Unit” is “oz”, “Qty” is 1, “Unit Cost” is .12, “Total Cost” is .12
So in the end, the“Total Ingredient Cost” to plate the ‘Pub Burger” is $ 4.01Step 3 - Add Surrounding Costs
We add .25 for the “Surrounding Cost” of seasoning, fry oil, and grill oil and we add.30 for the “Consumption Cost” of ketchup, mayonnaise, mustard, steak sauce, etc.
Step 4 - Asses the Profit Margin and Food Cost PercentageFrom here the spreadsheet calculates everything you need to know about your menu item
At the bottom of the sheet, the “Total Item Cost,” which includes the “Surrounding Cost” and “Consumption Cost” is calculated and also populates the “$ Cost” field at the top right of the sheet.
By simply entering a new “Sell Price,” you can see how the new price changes your Gross Profit ($ GP) and your Food Cost percentage (FC%).
For the ‘Pub Burger’, with a “Sell Price” of $12.99, the sheet calculated a “$ Cost” of $4.56, a “$ GP” of $ 8.44, and a “FC%” of 35.07.
If we remove the “Surrounding Cost” of .25 and the “Consumption Cost” of .30, that would bring the item “$ Cost” down to $4.01, which would increase the “$ GP” to $8.99 and lower the “FC%” to 30.83. That’s a 54 cent higher gross profit and a 4.24% lower food cost. Multiply those variances by all your menu items and your gross profit will be overstated while your cost percentages will be understated.
Using this sheet will help you quickly calculate any changes in ingredient costs and you can immediately see how those changes affect your margins, percentages and profits.
The special instructions field at the bottom of the sheet allows you to:
- Make any notes about an ingredient
- Note any special preparation needed for that item
- List factors that may change in a menu item, i.e. the price of grass fed beef may fluctuate and needs to be checked monthly
Food Cost vs Gross Profit
If you determine that your ideal food cost should be 30%, then you have thirty cents of every dollar to purchase and prepare the ingredients for that menu item.
This doesn’t mean every item on your menu should have a 30% food cost. When pricing high-cost menu items like steaks and seafood, you may end up with a high food cost but you also have a very high gross profit margin. Whereas, low-cost items like pasta, have a lower food cost and a lower gross profit.
For example, if you have a pasta dish with a “Sell Price” of $10 and a “$ Cost” of $2, you have a 20% food cost, which looks good for your 30% ideal food cost. The gross profit on the $10 “Sell Price” is $8.
Now, if you sell a porterhouse steak for $40 and it costs you $20 to serve the steak, that’s a 50% food cost, which doesn’t look very good for your ideal 30% food cost, but the gross profit on the $40 “Sell Price” is $20.
If you look at food cost percentages alone, you may be tempted to raise the steak price. But when you look at how the $20 the steak contributes to gross profit compared to the $8 contribution of the 20% food cost pasta dish, you can see the value of the gross profit as opposed to just food cost percentage in determining profitable menu prices.
Analyze every menu item this way. Determine what contribution each menu item provides to the profitable bottom line and don’t rely solely on food cost percentages. You bring dollars to the bottom line, not percentages. Create a balance of menu prices that result in an overall ideal 30% food cost.
Once you account for every ingredient used in your menu items, it makes it easier to evaluate and determine profitable menu prices. You also end up with a more accurate picture on your P&L statement as to where your profits are coming from.
Take the time necessary to price out all your food and beverage items using the Menu Item Costing Sheet so you have an exact cost for every item on your food and beverage menus. This will help you better understand how each of your menu items is performing, and you can then create profitable menu prices that make sense for your restaurant.