Pricing your dishes effectively is crucial for your restaurant’s success. Overpricing can deter customers, while underpricing can lead to insufficient revenue. Understanding and implementing proper food costing techniques can help you strike the right balance, ensuring profitability and customer satisfaction. This guide provides a detailed explanation of How To Do Food Costing, empowering you to make informed decisions about your menu prices.
One of the core concepts in menu pricing is your food cost percentage. This metric reveals the proportion of your sales dedicated to ingredients and food supplies. Monitoring your food costs is essential for setting menu prices that maximize profits.
In this post, we’ll explore how to determine and use the following elements for effective menu pricing:
- Restaurant food cost
- Food cost percentage
- Food cost per serving
Understanding Restaurant Food Cost
Food cost represents the relationship between a restaurant’s ingredient expenses (food inventory) and the revenue generated from selling menu items containing those ingredients (food sales). It’s typically expressed as a percentage, known as the food cost percentage, which will be discussed in detail below.
While some restaurants rely on food cost to determine the price of creating a dish, others opt for the Cost of Goods Sold (COGS), which encompasses the total value of inventory used in a dish, including items like toothpicks, napkins, and garnishes.
Essential Steps Before Starting Food Costing
Budgeting is a critical aspect of business management. It’s an ongoing process, not just a one-time activity during business plan creation, that requires constant monitoring to maintain profitability. Regularly reviewing your budget allows you to track your finances and achieve success.
Although dealing with numbers can be daunting for some, the process doesn’t have to be overly complex. Managing your cash flow and restaurant budget can be simplified with the right tools, providing you with peace of mind.
Accounting software can streamline the management of your books, records, inventory, and transactions. If you have a POS system with inventory management capabilities that tracks your inventory and purchases, you can sync your data with accounting software for seamless operation.
Alternatively, if you prefer a traditional approach, here are some essential budgetary items to consider:
- Track all your numbers: Whether your POS system handles it or you do it manually, understanding your prime cost, or the ratio between sales and costs, is crucial.
- Define your accounting period: While many restaurants use a four-week accounting period, you can customize it to best suit your business needs.
- Set budget targets: Budgets should guide your restaurant toward optimal efficiency, not just reflect current performance.
- Focus on a weekly operational budget: While high-level overviews are important, a more granular view of your weekly operations can help you track expenses more effectively.
Once your budgeting system is established, you can begin with food costing.
Demystifying Food Cost Percentage
It’s crucial for restaurateurs to take food cost percentage seriously. Keeping this percentage as low as possible (without compromising food quality) allows for more gross profit to cover other expenses and generate leftover revenue. Let’s explore various aspects of food cost percentage:
- Definition of food cost percentage
- Importance of calculating it
- Ideal food cost percentage
- How to calculate it
- Examples of food cost percentage calculations
What is Food Cost Percentage?
Food cost percentage represents the ratio of food costs to revenue, expressed as a percentage. This figure helps restaurants determine menu prices.
Calculating Food Cost Percentage
To calculate food cost percentage, you’ll need values for the following:
- Beginning inventory value: The value of your inventory at the start of the week.
- Purchases: The value of inventory purchased during the week, not included in the beginning inventory.
- Ending inventory: The value of remaining inventory at the end of the week.
- Total food sales: The total value of your sales for the week, available in your sales reports.
Food Cost Percentage Formula
To calculate your food cost percentage, add the beginning inventory value to your purchases, then subtract the ending inventory value from the total. Finally, divide the result by your total food sales.
Food Cost Percentage Explained: An Example
Let’s see how Johnny’s Burger Bar calculates its food cost percentage with the following values:
- Beginning inventory value = $11,000
- Purchases = $7,000
- Ending inventory value = $15,000
- Total food sales = $8,000
Food cost percentage = (11,000 + 7,000) – 15,000 / 8,000
Food cost percentage = 18,000 – 15,000 / 8,000
Food cost percentage = 3,000 / 8,000
Food cost percentage = 0.375, or 37.5%
Johnny’s Burger Bar’s food cost percentage is 37.5%, indicating that 37.5% of their revenues are spent on ingredients. This is above the industry average for burger joints, prompting Johnny to consider adjusting his menu prices.
To confirm this, he needs to calculate his ideal food cost percentage and compare it to his actual food cost percentage.
How to Calculate Ideal Food Cost Percentage
To determine your ideal food cost percentage, you’ll need these two values:
- Total food costs
- Total food sales
Assuming Johnny’s total food costs are $2,500 and his total food sales are $8,000 (as seen above), the ideal food cost percentage is calculated by dividing total food costs by total food sales.
Ideal food cost = $2,500 / 8,000
Ideal food cost = 0.31, or 31%
Johnny’s Burger Bar’s ideal food cost is 31%. Given that their current food cost percentage is 37.5%, Johnny is missing out on 6.5% more revenue.
What is a Good Food Cost Percentage?
For a profitable restaurant, most owners aim to keep food costs between 28 and 35% of revenue. However, there’s no single “ideal” food cost percentage, as it depends on the type of food served, overhead, and operating expenses.
A common misconception is that every restaurant should strive for a specific number. In reality, a healthy percentage can vary widely based on your products, food cost control, and the market you serve.
Food Cost Percentage Examples for Restaurants
For instance, a steakhouse might operate with a food cost percentage close to 35% due to the higher cost of ingredients. Conversely, a pasta-focused restaurant, where ingredients are cheaper to buy in bulk, might aim for around 28%. Both percentages can be acceptable depending on the restaurant’s context.
Restaurants should calculate their food cost percentage individually, rather than relying on general averages. Generally, the higher your total restaurant expenses (including food costs), the higher your menu prices need to be.
Understanding Food Cost Per Serving
Before setting prices for your menu items, you must determine how much they cost to make. Specifically, you need to calculate the cost of making one serving of each item on your menu. Let’s explore how to calculate your food cost per serving.
Food Cost Per Serving Formula
To calculate your food cost per serving (or food cost per menu item), find the sum of the ingredient cost per serving.
Cost Per Serving Explained: An Example
Johnny from Johnny’s Burger Bar wants to determine the cost per serving of his famous Johnny Burger. The burger consists of 8 ounces of ground beef, 1 sesame seed bun, 1 tablespoon of sauce, 2 slices of cheese, 2 slices of tomatoes, and 2 potatoes.
Johnny buys his ingredients in bulk, paying $19 for 5 pounds of ground beef. He calculates that 8 ounces of ground beef for a single burger costs his restaurant $1.90. Johnny performs similar calculations to determine the cost per serving of the remaining ingredients in the burger.
- 8 ounces of ground beef = $1.90
- 1 sesame seed bun = $0.25
- 1 tbsp. of sauce = $0.10
- 2 slices of cheese = $0.90
- 2 slices of tomatoes = $0.50
- 2 potatoes = $0.75
Cost per serving = $1.90 + $0.25 + $0.10 + $0.90 + $0.50 + $0.75 = $4.40
The ingredients used to make the Johnny Burger cost $4.40.
The Importance of Food Cost Percentage
Knowing your food cost percentage is essential for understanding how your restaurant is performing. Managing food costs helps you make informed decisions about dish prices, dish profitability, overall costs, and areas for optimization. The more you understand your food cost percentage, the better equipped you’ll be to make significant decisions about your restaurant and menu.
Benefits of Calculating Food Cost Percentages
- Understand your food costs and pricing: Analyzing your food cost percentage requires a detailed review of ingredient purchases and individual costs. You might discover that an ingredient costs more than anticipated, making its continued use in a dish unprofitable. Understanding food costs also enables you to price your items appropriately.
- Try out new recipes: If your food cost percentage analysis reveals that certain items would require high prices to remain profitable, you might reconsider the ingredients you’re using. Understanding your food costs opens the door to data-driven recipe testing. You may find alternative ingredients to lower menu prices or enhance a dish’s profitability.
- Make smart changes to your menu: Effective menu management is crucial for restaurant success. Supplier prices change, and customer preferences evolve. Regularly calculating your food cost percentages allows you to make informed menu adjustments to ensure profitability.
- Get to know your best sellers and underperformers: Do certain items consistently sell out? Are there dishes that are rarely ordered? Do you know if your most popular items are also the most profitable? This information is invaluable when analyzing your menu. Some menu items may cost less to make and generate more profit. Understanding your food cost provides a clearer picture of menu performance.
- Understand your food cost per location: If you operate multiple locations, food costs can vary, making it even more important to understand the food cost percentage at each location. This allows you to assess the performance of each location and compare menu item popularity and profitability across your restaurants.
Strategies to Lower Restaurant Food Costs
Find Cost-Effective Vendors
Can you obtain the same quality ingredients at a lower price from a different vendor? Could focusing on local suppliers reduce transportation costs?
You might also negotiate better terms with your existing suppliers. Engage with your current vendors and explore win-win scenarios that lower your costs without disadvantaging them. Consider increasing your order volume or paying upfront. Alternatively, explore long-term contracts for better pricing, providing both cost savings and guaranteed business for the supplier.
Buy Ingredients Together with Other Businesses or Join a Group Purchasing Organization
If bulk purchasing isn’t feasible on your own, partner with other food businesses to purchase ingredients together. This can significantly reduce costs through bulk discounts and shared delivery fees.
Pooling resources allows you and your partners to access lower prices typically reserved for large orders, improving your negotiating power with suppliers. It also fosters a community of supporting businesses, potentially leading to further collaboration and mutual growth.
Group purchasing organizations offer collective buying power to their members, enabling access to bulk discounts and preferred pricing. These organizations negotiate contracts with suppliers on behalf of their members, leveraging combined purchase volume to secure lower prices on food, beverages, kitchen equipment, and other supplies.
If you’re in the United States, consider exploring companies and organizations like:
- Foodbuy
- UniPro Foodservice
- Restaurant Services, Inc. (RSI)
Be mindful of membership or service fees charged by these groups, and factor them into your costs.
If you’re a member of any restaurant trade organizations, seek recommendations from other members for buying groups to join.
Plan Your Menus Better
You may need to adjust your menu to ensure you’re offering in-demand dishes while minimizing costs.
Serve dishes with overlapping ingredients to reduce waste and inventory requirements. Consider focusing on seasonal dishes featuring ingredients that are more affordable and at their peak quality.
In some cases, you might need to reduce the number of items on your menu. Focus on dishes that sell well to better control food costs and revenue.
For example, Maynard, specializing in local, high-quality vegetarian and vegan food, keeps its menu concise and focused by serving dishes that resonate with customers and have a high turnover.
“We have a small space and a small kitchen, so we have to keep our menu small to stay in control. Everything has to be streamlined. If something isn’t selling enough, it doesn’t stay on the menu,” explains Owner and chef Brodie Somerville.
Brodie closely monitors POS reports to glean actionable menu insights.
“[Lightspeed Reports] are a really great feature, particularly the product reports. With product reports, I can see what products are selling or not selling,” Brodie adds.
Reduce Portion Sizes
Reducing portion sizes leads to less waste and requires fewer ingredients per dish, lowering your food costs.
Returning to Johnny’s example, he could serve a 6-ounce burger instead of an 8-ounce burger to reduce portion sizes and food cost per serving.
This not only decreases ingredient expenses but also potentially increases the perceived value of your meals. Customers may appreciate the quality and presentation of a well-crafted, appropriately portioned dish over sheer quantity.
Invest in Technology
Restaurant owners consistently report that investing in technology, such as an effective restaurant POS system with an inventory management system, has saved them significant money. The right technology saves time, provides essential data, and immediately identifies discrepancies like theft, leakage, or waste.
Aside from streamlining operations and automating manual tasks, the right restaurant POS can provide insights into data and trends to help you make smarter decisions about menu items and ingredients.
Peter Marzulli, Director of Operations at RH Gold Hospitality, notes that their POS (Lightspeed) has significantly enhanced their cost management strategies.
“Indirectly, [Lightspeed] has helped me reduce costs in a fair amount of ways. From analyzing menu items and whether they sell, whether there’s waste from following the inventory.”
Peter adds, “It’s very helpful [to be able to identify top-selling and underperforming menu items]. It’s good to have an instinct knowing something doesn’t sell, but it needs to be backed up with firm data. [Lightspeed] is an easy way to do it.”
How to Set Menu Prices
The Johnny Burger costs Johnny’s Burger Bar $4.40 to make, and their food cost percentage is 37.5%, resulting in a current menu price of $11.70. How much should he charge for his burger to reduce his food cost percentage to 31%?
Use this formula to determine the new price:
Menu item price = 4.40 / 0.31
Menu item price = $14.20
Based on their ideal food cost percentage (31%), the menu price of the Johnny Burger should be $14.20, a $2.50 difference!
While this might seem small, that extra $2.50 per burger adds up quickly. Selling 75 burgers a day translates to over $65,700 in additional revenue per year. Now, imagine if Johnny optimized the food cost percentages for each menu item, not just his burgers.
Clearly, Johnny was underpricing his burgers. He decides to increase the price to $14.20 and track its impact on sales and profitability.
Tracking Menu Pricing’s Effect on Sales
Successful restaurants regularly track menu prices and sales, making ongoing adjustments as food costs fluctuate.
After comparing his current food cost to his ideal food cost, Johnny increased the menu price of the Johnny Burger to $14.20. The higher price could affect sales in two ways:
Scenario 1: Burger Sales Slow Down
In this scenario, sales of the Johnny Burger have decreased since the price increase.
This could mean that the price is too high for customers. If Johnny wants to reduce the menu price to increase sales, he should do it strategically. He could explore partnering with cheaper vendors, reducing portion sizes, or using less expensive ingredients to justify lowering the burger’s menu price.
Scenario 2: Burgers Sell Like Crazy!
Conversely, if the Johnny Burger is selling well at the new price, customers might be able to afford another price increase.
To increase the price further without outpricing customers, Johnny could aim for a food cost percentage of 28%, pricing the Johnny Burger at $15.70.
In either scenario, vigilance is key. Monitor how your adjustments impact sales. A point of sale system with analytics capabilities, like Lightspeed’s Advanced Insights, can provide a detailed breakdown of your menu’s performance and the impact of price changes.
Ideally, the menu price should be affordable for customers and maintain a manageable food cost. When done correctly, sales will cover ongoing restaurant expenses and leave a healthy profit margin.
Key Takeaways for Managing Food Cost Percentage
While it might seem tedious, carefully controlling your restaurant’s food cost percentages ensures your restaurant can pay its bills and profit from each sale. In an industry with notoriously low profit margins, every cent counts.
To recap, here’s how to price menu items at your restaurant for financial success:
- Determine your food cost per serving for each menu item.
- Calculate your current food cost percentage.
- Find your ideal food cost percentage.
- Adjust menu items to match your ideal food cost percentage.
- Monitor how sales react to those adjustments.
- Explore alternatives to lowering food costs.
Once you decide on menu prices, you can revisit your menu design and reconsider how you’re positioning each dish, from how you describe menu items to the layout you choose. Believe it or not, the way a menu is designed has a proven correlation with increased sales.
Maximize Your Profits with Technology
With Lightspeed’s restaurant POS, you can offer tableside ordering, start a loyalty program and view reports to see what’s working. Chat with one of our restaurant experts to see how software can help you streamline your operations and make informed decisions.
FAQs about Food Cost Formula
How do you calculate food costs?
To calculate food costs, you determine the total cost of ingredients used to make a dish and can use the basic food cost percentage formula:
Food Cost Percentage = (Cost of Ingredients / Selling Price) x 100
What is the formula for cost per portion?
The formula for cost per portion is:
Cost per Portion = Total Cost of Ingredients / Number of Portions
What is the formula for costing?
In a broader sense, the formula for costing a product or service often includes direct costs (like ingredients or raw materials), indirect costs (like overhead), and labor. A simple way to express this is:
Total Cost = Direct Costs + Indirect Costs + Labor Costs
What is the formula for labor cost per meal?
The formula for labor cost per meal is:
Labor Cost per Meal = Total Labor Cost / Number of Meals Served
This calculates the labor cost associated with each meal served, helping businesses understand and manage their labor expenses relative to their sales volume.
What is a good food cost percentage?
A good food cost percentage typically ranges from 28% to 35% in the restaurant industry, though this can vary based on the type of restaurant, the cost of ingredients, and the pricing strategy. Fast food restaurants may aim for lower percentages, while fine dining establishments might have higher percentages due to the cost of premium ingredients.
What is the standard price method?
The standard price method involves setting a predetermined cost for ingredients, labor, and overhead expenses based on expected standards or historical data. This method is used for budgeting and variance analysis, helping businesses identify where actual costs differ from expected costs.
What is the standard costing model?
The standard costing model is an accounting method used to estimate the expected cost of production in advance. It involves calculating a standard cost for materials, labor, and overheads, which serves as a benchmark for evaluating actual production costs. Variance analysis is then used to identify and manage differences between actual costs and standard costs, enabling more effective cost control and decision-making.
