how do restaurants calculate the prices of each dish? Do they accurately do it or just a rough estimate?
In: Economics
Part of it is calculation, and the other part is market value.
If I have a restaurant called “Gaeel’s Gorgeous Gazpacho”, I could probably sell the gazpacho at a much higher margin than other dishes, and even at a higher price than my competitors. i’ll probably sell my fries at a more conventional price, especially since “Freddie’s Fabulous Fries” next door is attracting all of the french fry enjoyers.
Other costs, besides ingredients, are important to take into account too, like rent, salaries, taxes etc…
Also, a restaurant only has a limited number of tables, I’m losing money if my restaurant is full. So if my dishes are popular enough that I’m turning away customers, I ought to price things higher. Maybe some people will choose to eat elsewhere, but that’s only a problem if I lose more customers than I can make up for with increased prices.
Some restaurants even sell some dishes at cost, maybe even at a loss, and make up the difference with upsells.
For instance, there’s a chip shop in my city that sells pretty good fries, at a very good price, especially since they’re on a busy pedestrian street. They make up the difference with sides, like cheeseballs and meatballs, special sauces, drinks, and occasional time-limited dishes. They mostly sell takeaway meals, so seating isn’t too much of a problem. The seating is mostly high tables and stools that don’t encourage sitting around after eating, and they don’t sell any desserts, which also means that their tables are freed quickly, letting them serve more dine-in customers than they would if people stayed seated for longer.
**tl;dr:** The economics of the restaurant industry are complicated, you need to consider ingredients, rent, salaries, up-front costs like equipment and decorations. The people buying the food don’t care how much it costs you to make it, they care about how much they’re going to enjoy it, and they want to feel like they’re getting a good deal. Your competition is playing the same game, and if they’re able to out-price you with a product that is perceived to be better than yours, or they’re located in a more attractive location, you’re screwed.
So the answer is: you charge as much as you can convince your customers to pay, and if that’s not enough to cover your expenses, you’re out of business.
Answer: Former chef here. We get a factor given to us by those who know the actual particulars of a restaurants economy. For instance 4.2 was out factor, so any prices for raw ingredients had to be multiplied by 4.2. This factor covers everything from utilities to paychecks for staff etc.
How that factor is calculated is above my pay grade.
I work part-time as a bartender at a large chain of pubs, but my day job is in Business Intelligence. You’d be amazed at the data that can be gathered.
The overall cost of food is calculated to multiple decimal places; the ingredients (including seasonal pricing changes), the average time it takes to prep and cook and clean up after and the associated cost of wages, average spend and popularity of dishes through the year, average number and type of drinks served with associated dishes, the list of variables is endless.
For example, a dish that sells well but takes a lot of prep time might be less preferable to a dish that doesn’t sell as well but can be microwaved, as you save on the cost of wages for the kitchen staff.
How much can be done with this is only limited by how much a company wants to spend on BI and how clever your BI Analyst is.
This question betrays a fairly fundamental misunderstanding of how prices work – prices are not set to be the lowest that they can be given costs. They’re set to be the highest that people will pay. So it’s very simple: if everybody’s buying it, you slowly put the prices up. If nobody’s buying it, you either put the prices down, or if that isn’t viable, drop it.
What you want to do is look at the cost for your raw ingredients, then you sort of estimate how much of each ingredient will cost in a particular dish. A rough estimate is fine, but the closer the better. Now do you have the estimate of how much it costs you to make that dish? Great. Multiply it by 3. Thats the rule of thumb.
Some (maybe all) of your dishes will have a smaller profit margin because they’ll be the ones that pull the crowd in in the first place. The idea is that you’ll make your money on volume. Some will have a wider profit margin because they won’t be ordered too much, but you still have to keep them on the menu.
This is all generally speaking. Different restaurants have different pricing strategies or will alter costs depending on popularity. But if you’re planning on opening up like a chili dog stand at your next neighborhood bazaar for shits and giggles, this is how I would determine my prices.
I scrolled the top replies and most people in here are full of shit and conjecture. I’ve run restaurant kitchens and it is a cost pricing. You calculate the ingredients in your dish based on an average 30% food cost goal. You account for the proper yield of your ingredients and get the most accurate number per portion possible. Labor is not typically factored into each dish, but you try to keep that at 30% of total sales, so you use sales projections to inform staffing levels. Then 30% goes to overhead costs, rent, utilities, keeping the business running. If you hit these numbers you can make a 10% profit. There are some adjustments like raising the chicken price to make the steak more reasonable, and booze have a much higher profit margin with a 300% markup and next to no waste/little labor.
When I worked as a cook, another guy and I got to create the specials sometimes. One daughter the owner explained the food cost was too high for the price we had set. He didn’t think the item would sell at a higher price so we had to pull some ingredients off, reduce portion a bit.
It’s usually a combination of setting a price that you think it will sell at with comparing to the cost at a ration of about 3:1 or higher. If you can’t get both those things to work, unless you expect other accompanying items to make up the margin, then it doesn’t make it on the menu.
Don’t know if someone else mentioned, but you have to also factor the competition prices in the area.
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