One of the most common methods for menu costing is to use the food cost percentage, which is the ratio of the cost of ingredients to the selling price of a menu item. For example, if a dish costs $3 to make and sells for $10, the food cost percentage is 30%. You can use this method to determine how much to charge for a menu item based on your target food cost percentage, or to compare your actual food cost percentage with your budgeted one. To calculate your food cost percentage, you need to track your inventory, purchases, and sales of each menu item.
The current surge in food prices has seen some establishments go under but it is times like this that teach us to be innovative and efficient. Use of scraps and repurposing of leftovers, establishing of small gardens in buckets, or sacks for minor but pricey everyday use items like herbs and select veggies has been the way to go. And it being post harvest season, the unloved veggies and produce are quite low priced yet still grant the needed nutritional value and in some dishes needed aesthetics.
When considering food cost percentage, it's important to remember you're actually looking at two numbers. Theoretical food cost is the total cost of all ingredients on a plate divided by the price you charge for that item. This is for evaluating the profitability of menu items and you can run the equation backwards to determine the price you need to charge to achieve a given food cost factor. Your actual food cost percentage is the total you spend on food ingredients divided by your total food sales. It's good for evaluating your kitchen processes, identifying waste or theft, and tracking ingredient prices. Include disposables needed to serve your items, and take a periodic inventory to account for varying inventory levels.
Another method for menu costing is to use the contribution margin, which is the difference between the selling price and the variable cost of a menu item. The variable cost includes the cost of ingredients, packaging, and labor. For example, if a dish sells for $10 and has a variable cost of $4, the contribution margin is $6. You can use this method to measure how much each menu item contributes to your overall profit, or to rank your menu items by their profitability. To calculate your contribution margin, you need to estimate your variable costs for each menu item.
Many operators focus primarily on food cost percentage when evaluating a menu item or the menu as a whole, but this doesn't tell the whole story. For instance, it's ok for some of your highest priced items to have a higher food cost percentage, as long as the contribution margin remains higher than the lower priced alternatives on your menu. When a guest chooses the 40% food cost steak, you're likely making more money from that guest than if they had chosen the 28% food cost burger.
Although contribution margin is important, one strategy restaurant owners can employ to increase customers is to reduce the contribution margin of their signature dish. To compensate for the reduction in profits, the prices of side dishes can be slightly raised. This is done to attract more customers to try the signature dish who inevitably order side dishes as well. Hence, this leads to more customers and possibly higher overall profit.
Menu engineering is a method for menu pricing and evaluation that combines the food cost percentage and the contribution margin with the popularity and demand of each menu item. You can use this method to classify your menu items into four categories: stars, plowhorses, puzzles, and dogs. Stars are high-profit and high-demand items that you want to promote and highlight on your menu. Plowhorses are low-profit and high-demand items that you want to optimize and adjust on your menu. Puzzles are high-profit and low-demand items that you want to test and reposition on your menu. Dogs are low-profit and low-demand items that you want to eliminate or replace on your menu. To use menu engineering, you need to analyze your sales data and calculate your average food cost percentage and contribution margin.
Categorizing your menu items into stars, plowhorses, puzzles and dogs can offer incredible insight into your menu and its profitability. I use this grid as a starting point for menu updates. Highlight your stars through specials and social campaigns. Adjust your physical menu to give more prominent placement to your puzzles. Adjust your plowhorses to reduce their costs and/or increase their price. When you have new ideas for menu items, add them to your menu in place of the dogs to offer your guests something new that will also increase your profitability.
Menu pricing can influence customers' perception and behavior, so it's important to consider different strategies when setting prices. Psychological pricing involves using odd numbers or decimals to make prices seem lower, while value pricing involves offering discounts or specials. Premium pricing entails setting higher prices to convey quality or prestige, and competitive pricing involves matching or undercutting competitors' prices. All of these strategies can help you attract customers and differentiate yourself in the market.
Menu testing and evaluation are important methods for menu development to improve performance and customer satisfaction. You can collect and analyze customer feedback, such as reviews, ratings, comments, or surveys. Additionally, tracking and analyzing sales data can help measure financial performance. Furthermore, using tools like food cost percentage, contribution margin, or menu engineering can measure menu profitability and efficiency. Lastly, principles of layout, typography, color, and imagery can be used to enhance menu appeal and readability.