How to price a menu item

The method in six steps

1. Cost the ingredients for one batch from what you actually paid. How to calculate food cost walks through it.
2. Allow for waste: trimmings, spoilage and portions you cannot sell.
3. Divide by the number of portions the batch makes to get the food cost per portion.
4. Pick a target food-cost percentage and divide: price = food cost per portion ÷ target.
5. Add up the other costs of the batch, such as a helper’s pay, gas and packaging, and check what each portion leaves once they are paid.
6. Round the price up, compare it with your market, and review it whenever your costs move.

Worked example: a cake cut into 12 slices

The numbers are round so the steps are easy to follow, and they work in any currency. Use your own prices and portions.

Steps 1 to 3: the ingredients for one cake cost 5,400. Allowing 10% for offcuts and the odd broken slice, the food cost is 5,400 ÷ 0.9 = 6,000, or 6,000 ÷ 12 = 500 a slice.

Step 4: at a 30% target, the price is 500 ÷ 0.3 = 1,666.67 a slice.

Step 5: say baking and finishing the cake takes 2,400 of a helper’s pay, and gas, electricity and boxes come to 1,200. That is another 3,600 ÷ 12 = 300 a slice, so a slice really costs 800.

Step 6: round up to the next 100 and the menu price is 1,700. Food is then 500 ÷ 1,700 × 100 = 29.4% of the price, and each slice leaves 1,700 − 800 = 900 once everything is paid: 10,800 for the whole cake.

Food-cost target or markup on full cost?

There are two common ways to turn a cost into a price, and both work.

• Price from a food-cost target: price = food cost per portion ÷ target %. It is quick and widely used, and it assumes the rest of the price covers labour, overheads and profit.
• Add a markup to the full cost: price = (ingredients + labour + other costs) per portion × (1 + markup %). Labour and the other costs are inside the price from the start.

Use one to set the price and the other to check it. In the example, 1,700 on a full cost of 800 is a markup of 900 ÷ 800 × 100 = 112.5%. Markup vs margin explains the difference between the two percentages.

Check the price against your market

A cost-based price tells you the least you can charge and still make the profit you planned. It does not tell you what customers will pay. Before you print it, compare it with similar dishes near you, at a similar portion size and standard.

• If your price is well above the market, change the dish before you cut the price: a smaller portion, a cheaper cut, a better supplier, or less waste.
• If your price is well below the market, you may be leaving money on the table, or your portions may be smaller than your competitors’.
• Some dishes will always earn less than others. That can be fine if they bring customers in, as long as you know their real numbers.

Round up, not down

Pick a rounding step that suits your currency and menu, such as the next 100 naira, the next 50 cents or the next whole pound, and always round up. Rounding down quietly takes away part of the margin you have just calculated.

Make sure the month adds up

Rent, salaries and electricity are paid whether or not you sell a single slice. Rather than spreading them over every recipe, check that your sales over a month leave enough to cover them.

In this example, monthly bills of 300,000 and 60% of each sale left after ingredients, labour and packaging mean 500,000 of sales a month just to break even. If your sales are below that, the prices, the costs or the volume have to change.

Pricing mistakes to avoid

• Copying a competitor’s price without knowing your own cost. Their rent, portions and suppliers are not yours.
• Leaving packaging out of takeaway and delivery prices. A box, a lid and a bag are part of the dish when it leaves the kitchen.
• Cutting the price when sales are slow, before checking whether the portion, the recipe or the presentation is the real problem.
• Pricing once and never again, while ingredient prices keep moving.

Review prices when costs move

A price is only right for the costs it was based on. When a main ingredient goes up, recost the dish and decide whether to change the price, the portion or the recipe. The food-cost percentage guide covers checking your targets against what you really spend.