How To Win The Menu Pricing Game
Of all the business
decisions a restaurateur has to make in the startup phase of the
restaurant, the one that causes considerable anxiety is pricing the
menu. At first blush, it seems like a numbers game. Simply fire up
the business calculator or spreadsheet program and determine what
you need to gross in order to reap a reasonable return on the
business after all costs are figured. If pricing were only that
In fact, the pricing process is
more of an “art” than a “science.” That does not mean that you
should price your menu simply by intuition. Just because something
is an art does not mean that it is not a discipline. The point is
you need to understand how your guests perceive your operation. The
psychology of your customer is a significant factor. This requires
observation and asking questions. Consider your last visit to a flea
market, antique mall, or garage sale as either a buyer or seller.
You dealt with the uncertainty of pricing when you were deciding how
much to charge or what you thought was an acceptable price that
would motivate you to buy. At the end of the day, pricing is all
about what someone else is willing to pay for your product or
service. If you have ever sold a home or car, you probably found
that what you thought you should receive and what you ended up
taking were not the same. While most folks form an opinion of the
value of an item based on experience and research, in many cases the
right price is a matter of perception. You need to be aware of how
customers perceive your prices, and ways that you can influence
But I Need to Cover My Costs!
It has been said that it is the
buyer, not the seller, who ultimately determines the price.
Customers don’t care about your costs, and what margin you need to
stay in business. Sure, you want to keep your costs as low as
practical so that you can reap as great a return as possible. And
clearly, as we will discuss, you need to know your costs. That said,
banish from your vocabulary the term “cost-plus” pricing (i.e.,
setting all your prices based on a fixed “target” margin over your
costs). It does not apply in this business.
When I gave a talk several years
ago at the New York Hotel and Restaurant Show, I began with several
anecdotal comments regarding what I considered extremely high menu
prices for food and drink in Manhattan and at the convention center.
After I finished my presentation, one of the restaurant owners in
the audience came up to admonish me for being so outspoken about
their prices. He said that they have higher overhead and, as a
result, must charge accordingly. “Operators in the Big Apple have to
cover costs and make a profit, or it wouldn’t be worth the risk,
investment and mental anguish of owning a restaurant,” he said.
I agreed with that statement, but
added that prices must be competitive and reasonable, too. If
customers do not feel that they are getting sufficient value for
their money, regardless of price, they will likely not return to
make another purchase. Where to start? You need to create a pricing
“continuum,” in other words, a price spectrum, which is defined at
one end by the lowest price you can charge and still make a
reasonable profit and the other end, by the highest price the market
will bear. Use this model for every pricing decision, since it will
help define your price range. It is easier said than done, but at
least will force you to take a methodical approach to pricing. More
importantly, because pricing involves a measure of subjectivity,
there is great value in determining your absolute boundaries.
So How Low Can You Go?
Determining the lower end of the
pricing continuum requires careful consideration of all costs
involved in bringing that item to the table, including the costs
involved in preparing and presenting an item, or bringing customers
in the door, for that matter. As we said, you cannot base your
pricing solely on cost; however, you better know your actual costs
before embarking on your pricing journey.
Let’s review your cost centers.
Your direct costs are the ingredient used in each item. It is vital
to know the food cost of each item, and to manage those costs with
as much certainty as possible. This includes accurate portioning and
weighing of ingredients.
While the labor to prepare an item
is a significant menu cost, many restaurants treat it as an indirect
cost. The time and motion studies to determine the exact labor that
goes into each item are more involved than most restaurateurs are
willing to wade through. Still, try to bear in mind the time and
labor involved in producing a particular made-from-scratch specialty
versus pre-made items that require minimal preparation. Common sense
tells you that such “convenience” items do not require as high a
markup as others requiring processing and handling, to be
Indirect costs are those that
cannot be assigned to specific menu items but often involve aspects
of your business that customers perceive as “value-added,” and are
weighted in their decision to choose your restaurant over a
competitor. These include overhead, such as costs related to
providing customer service and ambience, and certain amenities, such
as a fancy restroom or crayons for kids. You would not allocate
these overhead items to your menu pricing, but you would monitor
them carefully to ensure that they are in proper proportion to your
gross sales. (See “How to Evaluate Your Prime Cost,” at the bottom.)
And though indirect costs are not
typically allocated to specific menu items in a restaurant, they can
be recouped indirectly, if they create added value that can justify
higher prices. For example, if your marketing efforts (which are
overhead) have helped positioned your restaurant as the most
interesting and desirable place of its type in the market, you can
price more aggressively than if you were just considered a ho-hum
“follower.” The atmosphere and decor of a restaurant adds much to
the enjoyment of any meal. The perception of value is enhanced when
the restaurant is beautifully and tastefully decorated. The service
commitment can be the element that makes your restaurant
“competitively distinctive” from your competition. This intangible
is recognized as an added value by the customer and can be reflected
in the prices charged.
For example, if your operation is
considered the top steakhouse or Italian restaurant in your market,
you will be able to charge more than the “customary” menu prices.
Similarly, if your service is head and shoulders better than most of
your competition, you can charge a little more than the average
In other words, there are certain
things that you do better than most that give you a competitive edge
over your competition and you can charge a little more than your
competition. Examples of other indirect cost factors that could
allow you to adjust prices upward (the absence of these items would
work the opposite in the pricing decision). These include ambience,
location, amenities, product presentation, customer demographics,
and specialty menu items. There are further adjustments that one
would make to fine-tune menu prices that involve your desired check
averages and the high and low price points of your various menu item
The High Side
At the other end of the spectrum,
you need to study your market and customer before pricing at the
higher end of the pricing continuum. The tough question, and the one
that can only be answered using judgment and observation, is whether
you should price an item on the high or low side of the continuum.
Again, apply common sense. Your gut will not always be right, but it
will never intentionally mislead you, and more often than not, it
will tell you if an item’s price is too high. If you would not pay
that price for the item, most likely your customers would feel the
same way. But realize that pricing menu items can rarely be
completely objective. In addition, avoid the temptation to
under-price a menu item. In a business in which success and failure
is often measured in pennies, under-pricing can be as much of a
dilemma as overpricing. You don’t want to leave money on the table,
anymore than you want customers grousing about your pricing, and
eschewing your business for a competitor that is perceived a better
And it’s another reason why basing
your pricing on cost alone can be problematic. Take this very simple
illustration. Consider a cup of beef bouillon as an example. The
food cost of a 5-ounce cup would be about 10 cents. If it were
priced to achieve a 40 percent food cost (a markup of 2.5 times its
raw food cost) it would be under-priced at 25 cents. Since this item
is usually served in white-tablecloth operations, the “customary
price point” could be $3.95 and it would not be considered
overpriced by patrons. In fact, one technique for boosting the
profitability of your menu is to offer low-cost, but popular items.
The margins can be extraordinary, and boost the profitability of the
Again, you need to look at each
item separately, and determine which price seems reasonable.
Applying a single markup method or marking up each item to return
the same profit will result in items being overpriced and
under-priced over what the customers see as “customary” in the
market. If, for example, your cost to produce a common menu item
like a hamburger was twice the cost of other restaurants, your price
could not be twice the price of your competition. Your cost is
excessive and customers would not pay your price. You could only
charge the “customary market price” for a hamburger unless you
turned it into a “specialty” item. Markup is tempered by other
factors besides food costs and desired profit.
More Advice on Picking the Right Point on the Pricing Continuum
While pricing is mostly art,
sometimes you need to rely on a little science. For a minute, let’s
play economist. (Economics is called the “dismal science,” so you
may need to crease your forehead and frown a little at this point.)
With the pricing continuum in mind, pricing can be either “market
driven” or “demand driven.”
Market-driven pricing is just what
it sounds like — the market determines the price. If you stray even
a little above what the market is willing to pay, sales plummet.
What items are driven by the market? If the menu item is a
“commodity” in the economic sense, that is, it is available just
about everywhere and quality differences are nominal, a definite
price point exists in the market and in the mind of the customer. A
quarter-pound hamburger might fall under this category. There is
only so much anyone will pay for that burger. While you might try to
“add value” to your hamburger (as we will discuss below) to make it
a more demand-driven item, you need to really be honest with
yourself whether your customers perceive your burger as any better
of a product than the guy’s down the street. And for the most part,
a lot of folks have a pretty set idea what they are willing to pay
for a burger. Price it more than a few cents above that limit, and
they will head down the street, unless it’s a pretty special burger,
sold in a pretty special place.
Some other examples of commodity
menu items would be your basic pepperoni pizza or barbecue ribs. If
there is nothing special about the taste, preparation methods, or
presentation, the price charged must fall close to prices of your
competitors. This perspective on pricing is also used when
introducing new menu items before any substantial demand has been
established. Prices that are market-driven tend to be on the
moderate to low side of the pricing continuum.
Demand-driven pricing is based on
the notion that you have more “flexibility” in the price you can
charge, based on demand for your product or service. As an example,
consider the price of a ticket to a sold-out concert or sporting
event. Scalpers sell tickets for double and triple their face value
to those who really want to attend. The buyers will gladly pay the
premium for the tickets. In the context of foodservice, airport and
sports stadium concession food and beverage prices are more
expensive than you would pay for the same items in restaurants near
your home. Part of the reason is the high overhead of restaurant
concession space and the fact that they have a captive clientele.
But the other part of the equation is based on demand. Once you are
in the airport or stadium, it is unlikely you’ll leave to get a
meal. If you are hungry your demand for food is disproportionate to
the supply. It’s simple economics.
How else do we shift demand? One of
the objectives of advertising is to increase consumer demand for
product and services. If you spend millions of dollars convincing
the public that your can of carbonated water and syrup, which cost
you pennies to produce, is really special, you can sell that can for
50 cents. In the context of a restaurant, a really special concept
can have the same effect as advertising. Consider that pepperoni
pizza sold in a nice but unremarkable family restaurant tucked away
in a strip mall. Now consider the same pizza in a family restaurant
with a huge arcade and a floor show with mechanical cartoon
characters that delight young children. You can probably charge more
for the same pizza, because of the demand created by the
entertainment. (Remember what we said about recouping indirect
costs?) In fact, like the advertiser, you will have to charge more
for the same pizza, so cover the added costs. Your goal will be to
charge enough and bring in enough traffic to make that concept
Think back to what we said about
how your indirect costs influence your pricing. Again, in the
context of a restaurant, demand-driven pricing can be used on menu
items where the operation has a monopoly, as few competitors offer
the “specialty” menu items, or, as illustrated above, concept. This
is a short-term advantage in the restaurant business because no
matter how special your food or service, competition will eventually
cancel out the competitive advantage. But if you have an exciting
concept or have been successful in creating a menu or ambience that
is considered unique in your marketplace, your overall pricing can
be demand-driven when you have long waiting lines to get a table in
your operation. You can be aggressive in your pricing and be on the
high side of pricing continuum. However, if you charge the highest
price you think your clientele will pay, expect your customers to be
more critical of food quality and service. In addition, you better
be on the leading edge of new menu items, decor, service and food
quality; your customers are paying for it. The aspect of product
presentation proclaims, “Sell the sizzle, not the steak.” Product
presentation is very important in forming the value perception of
the customer. A beautiful plate presentation, custom-designed china
and glassware can really enhance the appearance of the food and
drink served and a higher price can sometimes be charged. These are
just a few of the “subjective” factors that need to be considered in
the pricing decision.
One thing to always keep in the
back of your mind is that no restaurant will be able to sustain
demand-driven pricing over the long run. Competition will eventually
add your special items to its menus, or match your concept. If you
are able to pack your house with a unique concept and menu, and
charge a fortune for items, it will only be a matter of time before
a competitor shows up to tap into your market. When you are the
higher-priced restaurant, you need to constantly scan the horizon
Also, keep in mind that you need to
create parity between your pricing and your desired customer base.
If your restaurant is near business offices and luxury condominiums,
and the inhabitants of those buildings are your target customers,
your prices can — and should — be higher than if you were in a
suburban area and your customer base was middle-income families, for
The take-home message: You need to
keep your eyes wide open, and be aware of your market and how it is
changing. It is very difficult to recover from gross errors in
pricing judgment. You cannot radically increase your pricing without
chasing away customers. If you develop a reputation as being
overpriced, that will be as hard to eradicate as a bad tattoo.
Psyche Out Your Customers
Psychological aspects of menu
pricing reflect the attitudes and images in the minds of the
customer. There are several psychological aspects of menu pricing:
odd-cents pricing, mental accounting, reference pricing, and
Odd-cents pricing is a technique
used in retail pricing of everything from clothing to cars and real
estate. Prices are stated in amounts that end in a number nine or
five. Psychologically, it will be seen as a lower price than if the
price ended in a zero. For example, $9.95 is preferred to $10.
Psychologically, it is rounded to $9 rather than $10. The element of
low-price perception is an important pricing strategy. I recommend
that you set your menu prices with digits ending in .25, .50, .75,
and .95 or .29, .59, .79 and .99. When incremental increases move
the item to the next highest price, e.g., $8.25 to $8.50, it is
rarely detected by the customer. It’s a way to gain pennies without
Another psychological aspect of
pricing is related to the customer’s process of “mental accounting”
when making a purchase. Customers will sort food purchases into
budget categories of groceries, entertainment, or social
expenditures. Each budget category is controlled to some degree by a
spending restraint. Consequently, the amount spent on a meal
purchased away from home will vary depending on whether the
expenditure is debited to the grocery or entertainment expense
Generally speaking, there is freer
spending if the entertainment or social account is being debited.
For example, eating out during the week instead of cooking at home
takes money from the grocery budget, not the entertainment budget.
The expenditure is influenced by price and convenience. They will
spend considerably less than if they dined out on the weekend for
social and recreational reasons. With this knowledge, we can more
effectively price your menu items.
As operators, we must determine how
the customers categorize our restaurants (e.g., eat-out or
dine-out). For example, a meal at a fast-food restaurant is likely
to be considered as a food or grocery expenditure. Subsequently, if
your restaurant wanted to attract this customer during the week,
nightly specials would need to be offered and priced accordingly.
(Have you noticed that most fine-dining discounts are not honored on
Friday’s and Saturday’s?)
If we follow the logic of the
mental accounting theory, we can approach the pricing decision from
the consumer’s perspective. The objective would be to have the
expenditure classified into a higher budget category or combined
with two or more categories. The budget category can change
depending on the occasion, e.g., birthday or anniversary, and the
day of the week. Such considerations may prompt promotions such as
early bird specials and discount coupons to entice weeknight
customers on grocery budgets to eat out instead of home.
Most customers do some kind of
price comparison when they shop for shoes and clothing. It is not
surprising that they do the same when eating at restaurants. When a
competitor opens in our market we will check them out by comparing
their prices with ours. Customers do the same thing. If the prices
of the new restaurant are lower than those in our “reference”
restaurant, we perceive a good price-value. However, if they are
higher than the reference price, the price-value is diminished. The
more one pays, the more critical they will be of the food and
service provided. If you charge at the high end of the market for
comparable food and service, expect customers to be more critical of
even the little things.
The last psychological aspect of
menu pricing has to do with where and when you make your purchase.
It is called time and place. I think it is best explained in the
context of your price tolerance for a hamburger and a Coke® at a
sports stadium versus the price you would pay at your neighborhood
restaurant. Another example is your price tolerance when on vacation
versus eating out on a weeknight at home. Restaurants that cater to
a tourist market should bear this in mind. Folks on vacation expect
to pay a little extra for food.
Such knowledge is needed to
effectively determine which items to offer and how they should be
priced to appeal to your customers.
Some Questions to Consider When Pricing Your Startup Menu
The following is a checklist of
questions you should consider when pricing a menu item. Your answer
will influence whether you are pricing toward the high or low end of
the pricing continuum.
Many of the questions are
subjective rather than objective but just the same, will affect the
price you can charge on your menu. Customers will come in with
“reference” prices that they expect to pay for certain items and
will not think twice about paying $1.50 for a glass of iced tea that
has a cost of about a nickel, and complain if they feel that the
price you are charging for chicken tenders or a hamburger is
perceived as too high. If the item is on your appetizer menu, you
might have more pricing latitude than if the same item is served as
an entrée. For example, consider a shrimp cocktail with six shrimp
for $5.95. Would you purchase the same dish as an entrée for the
Each menu item will be marked up
individually and produce a range of food cost percentage from single
digits to the high 40s. Remember, it is the sales mix of all the
menu items that produces the food cost that shows up on your monthly
What kind of menu item
is it? (e.g., appetizer, entrée, dessert, side dish)
What is the direct labor
involved in its preparation? Does it require skilled preparation or
just simple heating and plating?
is the portion size?
Is it a seasonal item
with limited availability?
What are competitors
charging for similar menu items?
Is it is “commodity” or
a “specialty” item on your menu?
What is the desired food cost percentage?
Is it a demand-driven or
market-driven menu item?
What kind of restaurant
are you? (e.g., fast-food, fast-casual, limited-service,
What meal period are we
pricing it for? (e.g., breakfast, lunch, dinner)
Where is the restaurant?
(e.g., center city, suburban, office building, resort area)
What are the
accompaniments served with it?
Who is your target
market or clientele? (e.g., local residents, tourists, business
What is the perish
ability of the product and its cost? (e.g., live lobster, fresh
What is the service
delivery method in the restaurant? (e.g., table service,
What is the check
average you seek?
What are the prices of
other menu items in the same menu category and the spread among
items in other categories?
What are the prices of
complimentary and competing items of the menu?
What is the ambience of
What is the plate
presentation for the menu item?
Is there live entertainment or music in
What is the status of
the restaurant in the market? Is it one of the top restaurants in
Clearly, your customer does not weigh
each of these individual factors when sitting down at your table to
order. But he does consider them intuitively. Remember that
Americans are expert consumers. They know a deal when they find it.
Pay attention to the psychology of your customers when selecting
menu prices and you will increase your chances of being on the
Pavesic is a former restaurateur who now teaches courses on
restaurant cost control, financial management, and food
production at the Cecil B. Day School of Hospitality at
Georgia State University in Atlanta, GA.