how do restaurants calculate the prices of each dish? Do they accurately do it or just a rough estimate?
In: Economics
A well run restaurant knows exactly what they are spending.
The best example of this for me was a restaurant I worked at when I was in college in the 90s.
Coffee and soft drinks came with free refills.
Entrées came with all you can eat soup and salad.
Management had calculated exactly how much salad the average customer ate, and knew what the food cost of that was.
The data point I still remember was soft drinks : their calculation was that (including refills), a customer drank nine cents worth of pop. So getting customers to order a $1.99 Coke was very important for the restaurant.
The mandate from ownership was that overall food cost needed to be 30% or less. In other words, a $20 meal needed to have less than six dollars of actual food cost on the plate. The rest of the price went to paying staff, and all of the overhead of running the building.
A restaurant might start at a price based on costs, but prices are usually more about selling the right amount of stuff than how much the stuff originally cost. If nobody orders a dish, and it’s still profitable at a lower price, they’ll lower the price. If nobody orders a dish, and it’s time consuming to make or otherwise unprofitable at a lower price, they’ll take it off the menu. If a lot of people order a dish, or they’re spending a lot of time on it in the kitchen, they’ll raise the price.
30% food cost is what we aimed for at hotel and conference centers. $10 meal should cost about $3 in food.
It’s exact cost by weight of all ingredients, totaled and multiplied by 4
1x is the plate cost
1x is the overhead (electric, cc processing, gas, etc…)
1x is for employee labor
1x is profit
So your $12 cheeseburger costs 3 bucks in ingredients. But 9 bucks in total cost to do business.
These comments are terrifying. OP could have asked how a chef knows his new recipe will make the restaurant more money and these commenters are acting like the chef only needs to use excel.
The price of food is difficult because so much of it is based on what people *think* something is worth, rather than the actual cost involved. What people think something is worth is based on how much it costs in similar places in similar locations, as well as their own biases regarding their willingness to pay for something. People are more willing to pay for something, for instance, when they are on vacation or on a business trip, than when they are 5 minutes from home. Few things are more “perception” based than the food we eat. This is why most restaurants go out of business within 2-3 years. So, for instance, the costs of a plate of spaghetti include the a portion of the rent of the building, a portion of the labor of all the staff, a portion of the utilities (gas, electricity, water), a portion of the initial setup costs of the business amortized over a certain period of time (pots, pans, dishes, tables, chairs, paint, flowers, legal costs, insurance, etc.), the interest of any loans you might have taken out, and the principle of those loans you have to pay back, the cost of the materials used in the making of the spaghetti, and finally, profit. You *could* break that down, and price each individual dish on your menu accordingly, but your best bet is to figure a per dish fixed cost (all the little setup and utility costs), and a specific dish variable cost (actual ingredients and time spend making it). The problem is, will people actually pay that? Suppose you figure everything out, and a plate of spaghetti ends up costing you $7.46, and people think it should be $5.99? This is the kind of thing you should be figuring out in your business plan before you even start looking for money to set up your shop. It’s called market research. Looking at your whole menu, some things might make you more profit, some might cost you more than you make. The idea is that the overall operation of your shop makes you enough profit to make the business a success.
I don’t work in the industry but in general it’s a 30/30/30/10 rule. 30% cost of input 30% labor 30% overhead 10% margin if you don’t know your costs you won’t be in business very long p
It’s generally a rough estimate. Corporate chains have expectations that sales every day of each year should exceed the previous year and that’s just generally not reality. They don’t account for any variances. They calculate the amount of labor for prep work for the amount of food that should be ready to be dished out each day, but again, it’s generally not reality. There’s definitely some odds and ends that can be adjusted to make each dish generate a better return of investment but that doesn’t account for mistakes. Lots of mistakes happen in kitchens.
Add the cost of all the ingredients and set a price based on the margin that you need to turn a profit. Not a hard and fast rule, but your labor and food costs should be a combined 60% of your revenues. Foods that are made from raw ingredients take more time to process than a bag of fries that you dump into a fryer. If you build a “product mix” of what you anticipate selling(based on historical data), you can accurately predict what your margins should be come the end of the month. New restaurant owners with no experience and that don’t cost out their menu are commonly referred to as “former restaurant owners”.
Yes, they try to be as accurate as possible, but they can only get so close.
Understand that the target price is “as much as they can get away with”.
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