Restaurateurs may experiment with menu items and space design, but they don’t price their items on a hunch made over a meal. In fact, menu pricing requires a rigorous approach that includes plenty of math and market awareness, as well as some psychology and behavioral science. This article outlines key restaurant menu pricing strategies and the common challenges restaurateurs face.

What Is Restaurant Menu Pricing?

Effective menu pricing balances customer value perception with profitability, ensuring that prices cover overhead costs such as labor, rent, and food costs while appealing to the target market and turning a profit. So, that $22.95 dish of rigatoni pomodoro and meatballs with a house salad that seems like a good deal to a customer is actually a careful calculation of math, market conditions, and other factors. This can be based on anything from value-based or cost-plus pricing to bundling and psychological pricing strategies.

Key Takeaways

  • Menu pricing is business-critical since it’s the sole source of revenue for most restaurants.
  • How and where prices appear on a menu can influence order frequency.
  • Purposely adding specifically priced items to certain menu categories can lead to increased sales of other menu items.
  • Technological advancements have led to a change in consumer behavior that restaurants must adapt to quickly.

Restaurant Menu Pricing Explained

A restaurateur has a passion for the full dining experience, from food and beverages to design and ambiance. All of these factors play a part in whether a restaurant survives and thrives — no small feat when you consider that only 20% of US restaurants last more than five years, according to recent industry statistics. Also crucial to a restaurant’s success is the business side of dining, specifically how to properly price the menu items to cover the many expenses associated with operating a dining establishment. These expenses include employee payroll, lease payments inventory stocking, equipment, tables, chairs, utilities, insurance, and technology. Then, of course, there’s the profit factor because a restaurant that loses money every week isn’t likely to remain open very long.

The successful restaurant owner considers factors such as food cost percentage, preferred profit margins, and the competition when deciding on menu prices. Industry best practices can provide guidance for determining that perfect price point that marries a restaurant’s financial viability with customers’ comfort level for paying that price on a regular basis.

Restaurant Menu Pricing Challenges

Consumers often decide what to order at a restaurant—or whether to even go there in the first place—based on menu prices. But that’s only one of the challenges restaurants must consider when determining what to charge for what they serve. Other factors include:

  • Cost fluctuations: The price of ingredients can change based on influences beyond a restaurant’s control, such as extreme weather, seasonality, trends in the market, and product shortages. Patrons may be accustomed to seeing MP (market price) on a menu for certain higher-end dishes, such as lobster and filet mignon, but this label won’t necessarily sit well with them if it’s used elsewhere on the menu with any frequency. Such cost fluctuations can affect a restaurant’s prime costs, meaning the combination of cost of goods sold (in this case, the ingredients used to make the food) and labor costs.
  • Customer perception and expectations: Customers should perceive menu prices as fair and justifiable based on the quality of the product, environment in which it’s served, and portion size. Finding the right balance takes thorough analysis and research of the market, industry trends, and the local economy. What works in one town or city might not work in another.
  • Competition: One of the biggest challenge for a restaurant is to identify its most impactful competitors. Competition can come in the form of cuisine, location, atmosphere, table service, online delivery, or other factors. Understanding competitors’ menu pricing strategies can help a restaurant balance its revenue and profitability overall.
  • Menu complexity: Ever sit down at a restaurant, open the menu, and get dizzy from all the fonts, colors, photos, and choices? Layout and design can add as much to menu complexity as the number of items listed and the variety of foods offered. Restaurateurs must find the right mix of dishes to carry out their vision as well as manage kitchen operations, customer service, and profitability. And they must do it with an aesthetically pleasing menu.
  • Regulatory compliance: As the practice of passing along credit card processing fees to customers becomes more prevalent across all businesses, regulations surrounding how to communicate that information are changing. For example, in New York, businesses can no longer advertise one price and then add a surcharge at the point of sale (POS) for credit card users. Rather, they must post the higher price and then offer a discount for cash payments. For restaurants with locations in multiple parts of the country, such regulations vary by state. When factoring in labor costs to determine menu pricing, restaurants must consider how the states they operate in handle minimum wage in conjunction with tip credits. For instance, in some states restaurants are allowed to pay their employees below the state minimum wage requirements on the assumption that employees will make at least minimum wage per hour when tips are included.
  • Psychological pricing: Psychological pricing is an approach whereby restaurants set prices based on how customers perceive and react to them, rather than solely on costs or value (more on that later). While this strategy can influence customers’ purchasing decisions, there are some concerns for restaurateurs. Patrons must perceive the prices as justifiable and not just a money grab. And while every consumer loves a discount, there’s a fine line between frequent discounts and the bottom line. There are also brand positioning, skeptical consumers, and potential legal ramifications to consider when employing psychological pricing.
  • Technological and analytical limitations: Gone are the days of simple in-house or takeout dining. As customer habits and expectations change and new technology takes hold, restaurants must also maintain menus in multiple online delivery spaces and build in new pricing to offset at least some of the fees associated with those services. Digital menu boards also are becoming more common at fast-food and fast-casual restaurants, allowing them to change prices quickly and test new strategies, such as dynamic pricing. Additionally, QR codes for menu access and contactless payment—practices made popular during the COVID-19 pandemic— re becoming more prevalent. Managing all of this, in addition to in-house POS data, can get complex.
  • Economic factors: The restaurant industry is very much beholden to one thing it can’t control: the state of the economy. As food costs rise, restaurant prices often go up as well, adding to the squeeze customers feel in all areas of their lives. Restaurateurs must stay mindful of consumers’ spending power as they monitor profitability against rising labor and supply chain costs and the economic stability of different geographical areas.

8 Restaurant Menu Pricing Strategies

How exactly do restaurants figure out how much to charge customers for food/beverages, service, and experience? Here are eight different tactics restaurants can use to develop and adjust menu prices to maximize their revenue.

  1. Cost-Plus Pricing

    Cost-plus pricing is aimed at ensuring that the restaurant covers its costs and maintains its profit margins. It works by determining the actual cost of producing each menu item, factoring in ingredients and overhead and then adding a predetermined profit margin figure to calculate the final selling price of each dish.

  2. Competitive Pricing

    Knowing your competition is always a best practice in business, and the same holds true for restaurants. This tactic involves reviewing restaurants with similar concepts as well as other types of eateries near your location, giving you an idea of what customers are willing to pay. Charging significantly more than a competitor can be tricky, but offering more value or something unique can justify it. If your calculations indicate that your prices are much higher than competitors’, you can look to lower your cost of ingredients or highlight the differences between your restaurant and theirs. The type of restaurant—casual versus fine dining, for example—also plays a role in determining optimal menu pricing.

  3. Value-Based Pricing

    A value-based menu structure centers on perceived value as restaurants account for quality, atmosphere, and unique features in addition to prices. This approach lets restaurants charge what customers are willing to pay for a meal at that establishment rather than determine pricing based only on cost-plus calculations. The popularity of a dish, which can be determined via point-of-sale data, is another factor in value-based pricing, as is prep time.

  4. Psychological Pricing

    Two things commonly seen on restaurant menus are prices ending in .99 and prices listed without a currency symbol. Why? The first concept is called charm pricing, where items are priced just below the next dollar amount. The thinking behind this approach is that a customer sees $8.99, and even though it’s merely a penny less than $9.00, the brain zeroes in on the first digit and associates $8.99 as closer to $8 than $9. Similarly, research has shown that customers mentally equate a currency symbol with spending money. So, an appetizer listed simply as 14 rather than $14 isn’t immediately perceived as a purchase.

    Offering a wider range of prices for menu items also can increase a diner’s total spend. If the top item lists for $60, for example, offering dishes in the $25 to $50 range creates more of a sense of affordability. It also puts the midrange dishes more in play for guests since most people don’t typically order the least expensive item on the menu. This pricing tactic also works well with drink menus and wine lists. Establishing a floor price with an inexpensive bottle of wine tends to increase orders of midpriced wines simply because “a $50 bottle of wine has to be better than a $30 bottle, right?”

  5. Dynamic Pricing

    With a dynamic pricing structure, restaurant menu items vary in price based on including time of day, current demand, special events, or other factors. This tactic is known in other industries as surge pricing or congestion pricing. For restaurants, it can mean increasing sales during typically slower times of day by offering a lower price. For example, a $12 Caesar salad with grilled chicken may cost only $9 if ordered before noon, incentivizing customers to order early and perhaps lessen a restaurant’s workload during peak lunch hours. Drawbacks to this strategy include customer disapproval, which voiced on social media can quickly turn into a major headache.

    Regardless, the National Restaurant Association’s Restaurant Technology Landscape Report states that 30% of all restaurant operators surveyed said they planned to devote resources to dynamic pricing. That same survey showed that 61% of adults are in favor of dynamic pricing, with Gen Z adults (71%) and millennials (67%) showing stronger interest than Gen Xers (58%) and Baby Boomers (54%).

  6. Menu Engineering

    A restaurant’s menu is much more than a list of food and associated prices. Rather, it’s a carefully curated document that, when properly designed and organized, can take the customer on a culinary journey that puts extra dollars into an eatery’s tills. Effective menu design capitalizes on the “golden triangle,” which represents the typical eye movement of menu readers. It starts in the middle, then top right, and then top left. Placing higher-margin items within this area can increase profits.

    Arranging menu items based on popularity and profit is another way to increase revenue. Experts suggest using four categories:

    • Stars: High popularity, high profitability
    • Plow horses: Very popular, low profitability
    • Puzzles: High profitability, low popularity
    • Dogs: Low popularity, low profitability

    By using POS data, restaurants can determine popularity and then decide which dishes to remove from the menu. They can also choose to move dishes around on the menu to see if a dog can become a star simply based on menu location.

    Other menu engineering considerations include layout, the use of color, font selection, and the balance of white space with words and images. A cluttered menu can feel overwhelming to some, especially new customers not yet familiar with the items in an establishment. Another way to boost sales is by including suggestions of sides and pairings. For example, suggesting that a particular type of potato side dish or glass of wine pairs well with a steak entrée can lead customers to order it.

  7. Premium Pricing

    This tactic involves creating perceived value based on higher prices. It adds an aura of exclusivity, in addition to superior quality, ambiance, service and overall dining experience. Also referred to as luxury pricing or prestige pricing, premium pricing can help shape the brand, especially for new restaurants. But be forewarned: There are limits to how high a restaurant can go with premium pricing before it begins to turn guests off.

  8. Decoy Pricing

    This strategy combines elements of psychological pricing and menu engineering. Decoy pricing makes one dish, usually one with a relatively high profit margin, look more appealing and affordable based on a similar but more expensive meal with a lower profit margin placed next to it. For example, say a menu offers a small pasta dish for $10 and a large pasta dish for $25. By introducing a medium size at $17, this choice seems like a good value, and it doesn’t cost much more to produce than the $10 offering. Or, let’s say the grilled branzino is the most expensive item on the menu, yet it has the highest profit margin. Some customers won’t order it simply because it costs the most money, but if the menu also has a steak dish priced higher, it makes the branzino feel more affordable. Decoy pricing also works well with wine offerings: A $25 bottle of wine looks nicer when it’s juxtaposed against a $15 bottle and a $40 bottle, as opposed to just a $15 bottle.

Calculating Pricing Based on Ideal Food Cost Percentage

The cost of food is important to any restaurant. But a more compelling angle for owners is thinking about the cost of food as a percentage. Say a restaurant spends $10,000 a month on food; that gives the owner a limited amount of information. Now compare that to how much revenue that $10,000 generates and the restaurant’s overall financial picture becomes clearer. A $10,000 spend that generates $15,000 in sales is one thing, but if that spend brings in $30,000 in sales, that’s a whole different thing. This is why restaurateurs use ideal food cost percentage— 67% versus 33% using the previous example—to help set menu prices.

There are two ways a restaurant may want to calculate the ideal food cost percentage: by individual item and by menu in its entirety. Calculating food cost percentage by individual item uses this formula:

Food cost percentage = (cost of goods sold / revenue) x 100

For example, say a restaurant charges $18 for a chicken Caesar salad, and the cost of goods sold (COGS) for that dish is $5.79. The food cost percentage for that item is calculated like so:

Food cost percentage = ($5.79 / $18) x 100 = 32.2%

Every restaurant has its own unique set of circumstances, but the generally accepted range for food cost percentage is 28% to 35%.

A second way to determine food cost percentage is to use the entirety of the menu to get an overall view of restaurant pricing. The formula is as follows:

Food cost percentage = (beginning inventory + purchases – ending inventory) / food sales x 100

Here’s an example:

  • Beginning inventory: $8,000
  • Purchases: $3,000
  • Ending inventory: $7,000
  • Food sales: $9,000

Using the formula above, the food cost percentage is 44.4%. The equation looks like this:

Food cost percentage = ($8,000 + $3,000 – $7,000) / $9,000 x 100 = 44.4%

Calculating Pricing Based on Ideal Gross Profit Margin

When determining the gross profit margin for a restaurant, the focus is on COGS and excludes production expenses, such as labor and rent. The typical formula for determining the gross profit margin of a menu item is as follows:

Gross profit margin = (selling price of item – COGS) / selling price of item x 100

Say a restaurant wants to calculate the gross profit margin for a grilled chicken sandwich priced at $5.29. POS data shows that the cost of ingredients for this item is $3.44. The equation would look like this:

Gross profit margin = ($5.29 – $3.44) / $5.29 x 100 = 35%

Restaurant Menu Pricing Legal Considerations

Restaurateurs must be mindful of legal and regulatory considerations when setting menu prices. One such consideration are regulations governing credit card surcharges and fees. Because these fees vary by state, restaurants with locations nationwide need to ensure that they follow the specific regulations for each location and communicate them to consumers accordingly. Additionally, some states and localities mandate that menus clearly display the pretax prices of items, while others require the inclusion of a specific tax rate or a notice that prices are subject to an additional tax. Failure to comply with these regulations can result in fines or other legal consequences.

Another legal aspect restaurants must consider is the potential for psychological pricing tactics to be viewed as deceptive or misleading by customers. Restaurateurs need to walk a fine line to ensure that their pricing doesn’t cross into misleading or deceptive practices that could violate consumer protection laws. Clear and transparent pricing is advisable.

Manage Your Restaurant Pricing Strategy With NetSuite

Today’s restaurants have multiple points of sale, including table and takeout service as well as in-house and third-party delivery services. Restaurant owners need a single and scalable platform to connect all their data sources, including sales, inventory, and payroll data. NetSuite’s cloud-based solution can handle ever-changing business needs related to ingredients inventory, franchise management, vendor payments, personnel, accounting, and more. NetSuite offers role-based dashboards, reports, and key performance indicators so that owners, managers, and employees can quickly access the data they need and are authorized to see. NetSuite also offers Oracle GloriaFood, a free online-ordering system that integrates with a restaurant’s website and charges zero fees or commissions, regardless of the number of online orders processed.

Just as the cooks in the kitchen exercise great care and precision in preparing meals, so too should restaurant owners and operators when it comes to menu pricing. Profitability is crucial to any business, and finding that chef’s-kiss sweet spot between financial and culinary success takes time, research, and tinkering.

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Restaurant Menu Pricing FAQs

What is the menu pricing method?

There are several pricing tactics for creating optimal menu prices, including competitive, promotional, psychological, dynamic, and demand-driven. Pricing the food right requires a balance of meeting customer expectations, turning a profit, and staying competitive in the market. When using a competitive pricing method, for example, a restaurant can price its dishes the same, higher or lower than its competitors’, depending on the type of restaurant and its brand strategy (casual vs. fine dining, for example). Demand-driven pricing suggests that an establishment can raise prices if its tables are in high demand.

What is the most common method for pricing menu items?

The most common way to price menu items is the cost-plus method, whereby the restaurant determines the actual cost of producing each item, factoring in ingredients and overhead, and then adds a predetermined profit margin figure.

How do you set menu prices in a restaurant?

The right menu pricing is a balance between generating enough revenue to cover costs and earn a healthy profit margin without turning customers aways. Consider the demand for each items, what the competition is charging for similar items, promotions, current economic conditions, and how you want to best position your brand.

How do I figure out how much to charge for food?

Once you understand how much it costs to make the items on the menu, you can figure out how much you want to charge for the food. Factors to consider include desired profit margin, what the market will bear based on location and the overall economy, and the prices competitors charge for similar menu items.