how do restaurants calculate the prices of each dish? Do they accurately do it or just a rough estimate?
In: Economics
To be honest, I thought people use the break even calculation in economics class and just do some additional cost or something
There are several methods, but they all boil down to understanding how much your food costs and having Standardized Recipes.
In order to be successful, your recipes are consistent – this means they taste the same, but also that they cost the same every time you make them and every time the guest orders them.
For the simplest example, we’ll cost out a hotdog on a bun. The Hot Dog itself costs $0.50 and the bun costs $0.25. Your Total Food Cost is $0.75.
If we want to run a 30% food cost (base industry standard), we figure:
$0.75 / 0.30 = $2.50
Our Menu Price is $2.50. Our Gross Profit is $1.75.
That $1.75 goes towards our overhead for producing the Hot Dog (our cook making it, our electricity in heating it up, any paper products or condiments, washing the dishes, etc.)
Our Net Profit is what remains after all of those pennies, nickels and dimes are spent getting the hotdog from the package to our guest’s bellies.
Again, at its most basic level, you don’t rely on selling one item once to make any money- you rely on selling a lot of items quickly. If a cook can produce 60 hot dog meals in an hour, that’s $105 in gross profit per hour.
Food Distributors now have applications that will break down the ingredients cost to the teaspoon, and you enter your recipe into the form. Once you have cost out the recipe, you can see how much each portion costs and then know how much to charge for each menu item.
There are other, more complex methods, that involve padding a profit margin into each plate.
Source: Former Chef, Restaurant Group Manager and Culinary Arts & Cost Controls Instructor at accredited Culinary Arts Academy
Depends how many you plan to sell and for how long.
Weekend feature my math is: protein costs like $20ish per pound plus sides, 8oz portion of meat, like $13 after sauce and veg for cost, so probably sell around $40-45.
For a menu staple, I know how much that tuna steak is, down to the penny, and I’ve got it standardized with 2-3 different products they might substitute. I’ve added in the cost of the seasoned flour, the oil in the pan, the cost of the paper boat it’s served in, the cost of the onion and cilantro. If there are any sauces, I’ve batch costed those and done the math for the portion cost. I’ve got a cost number that is 7.32 with the Sysco tuna, or 7.44 with the substitute tuna. At 19.99 I know I’m making 12.55 per plate, and have a good par for how many I’ll sell each day.
If I’m putting it in multiple places, or selling thousands of portions a day, I might even go so far as to sign vendor contracts that lock in prices for chicken and other products for the next 12 months, while guaranteeing I purchase so many cases per year.
A lot of people believe restaurants are this low margin business, and it’s just not true.
The chains make profit as the grow, process, sell product and franchise, it’s a lot of layers of profit hidden by separate companies.
Small restaurants are notorious for being mismanaged. So many people wing it, some get lucky and some fail. The reality is each item, side, combo, etc should be on a spreadsheet. Ingredient, labour, overhead costs calculated, then you use a formula to give you a suggested sell price. The formula should vary by food category.
Once you have the big picture, and can also see sales history you can hand tweak pricing, change margins or create a loss leader if required. This way you run the business and it doesn’t run you.
Most food service I worked in had a simple approach. Multiply by 3. For example if the ingredients cost $5.00 you charge the customer $15.00, 1/3 covers the cost of the food, 1/3 goes to pay bills and payroll, the last 1/3 is the “profit” it goes to marketing/equipment repair/ building upkeep. I don’t know if this is still a viable method with the current economy, though.
On their respective restaurant rescue shows, both Robert Irvine and Gordon Ramsay have been teaching the wayward restaurant owners that they should take the cost of ingredients for a dish and triple it – one for the food, two is for the labor, and three is for paying the rent.
Finally a question I can answer. I worked in restaurant accounting & data analysis/reporting for 15 years.
For smaller mom & pop diners/restaurants, they pretty much guestimate. They know a 10lb can of green beans costs $12 and it contains 12 servings so that’s $1 for green beans. They know a bag of chicken breasts is $7 and contains 9 servings so that’s $0.77 each. They come up with a cost of ingredients, multiply that by something like 2.5x – 4x to cover labor costs and have enough left over to pay things like rent, utilities, insurance, etc.
For large restaurant chains, they have this down to a real science. Let’s use a pizza chain as an example. They use sophisticated point of sale and inventory systems to track everything. They enter recipes into the POS (Point of Sale) system so it knows what ingredients and quantities for every item on the menu.
They take inventory every day and know exactly how much cheese, dough, toppings, etc. they have on hand. The POS tracks every pizza that was sold in a day and based on that information knows exactly how much that inventory for each item should decrease each day. It knows when the pizza-making process began and when it came out of the oven, it knows the pay rate of your cook and how many you have working right now so it can calculate labor cost. It calculates a precise cost per oz of every inventory item, and with the recipes from the POS system, you get a very accurate cost of ingredients + labor for everything on the menu.
This type of system is also really great at making sure the pizzas are made correctly and preventing theft. If the POS system says you sold 200 pizzas and should have used up 125 pounds of cheese, but your inventory shows you used 150lbs of cheese, you know your people are putting too much cheese on the pizza, or someone is stealing it and taking it home for their tacos.
Cost accounting is a real thing. We can get the a true cost of everything involved and come up with a number.
In the end, the price is based more of demand and strategy of the business.
I do this for a living. It’s often a combination of the two. The basic methodology for pricing a food item is this:
I want to sell a burger. The burger will have 8oz (raw) of beef, a slice of onion, a slice of cheese, some lettuce and a pickle spear, and obviously a bun. A 60lb case of beef costs $200 (made up number). So you take 60lb/8oz=120 portions, so you divide the price of your case of ground beef by how many portions you get (usually accounting for some amount of loss which varies by business) and that’s how much each burger costs you in beef. Do the sake thing to your buns per case.
Onions are cheap, and lettuce used to be so you can ballpark those pretty easily.
Then you decide how much your food cost (%of what you charge for it that just pays for ingredients) needs to be to keep your overall menu profitable and there you go. It’s not necessarily difficult, but it is extremely tedious when you have a lot of different ingredients on your menu. Certain things like fries are big money makers because potatoes cost nothing, and are delicious, so you can charge a higher proportional amount for them.
They do it the same way any other business does it, they put the price as high as they think people will pay.
If it doesn’t sell, they lower it.
If after that it sells, but it isn’t profitable (or bringing in people who buy profitable stuff), they remove it.
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