This is a guest post from Ian Said, founder of idealsoftware.co.za, a software development company specializing in Inventory Control and POS reporting solutions. Follow Ian on Twitter @costofsale or email Ian info@idealsoftware.co.za.

Using Inventory Control Effectively

August 2012 Issue of Ideal Software's Niche Notes, our FoodService industry newsletter.

IdealSoftwareNicheNotesAugust2012

7 Tips in Determining Restaurant Menu Content and Prices

There is one question that every restaurant owner has to address when setting up their business, and that is “How do I determine my restaurant menu content and prices?” While there are a number of considerations that can help you in answering this question, you need to be aware of the fact that it is by no means a static question.

In other words, setting the cost of the items on your menu (or resetting the cost of them) is something that will need to be done multiple times over the course of your establishment’s lifespan. But where do you start? The seven tips listed below should help you in getting started.

1) Determining COST:

In order to correctly determine the prices on your menu, it is important to be able to price your menu items properly. To do this it is imperative that you understand how to determine the cost of your products. This includes everything from wholesale product costs to delivery fees (when the item first shows up in your establishment) to cooking costs as well as wages and overhead in order to determine exactly what it costs for you to be able to provide this particular dish. While it may seem like a lot of work to do for every item on your menu, you may well be surprised to find out how much you are underselling. Once you have determined the costs you can then (taking into account your competition of course) determine a profitable price point.

2) It's All About the Price Point:

When you are starting out in the restaurant business, a good rule of thumb is to take the cost of each dish (see tip #1) and then double it or triple it (In South Africa, an acceptable cost of sale for food overall should be 32- 40% and beverage 25 – 35% giving an overall cost in the 30 – 37% range- if other costs such as labour and rent are below 10% each, you will still be able to be profitable with a food cost in the 45% region). Of course you will want to take into account what your competitors are charging for the same or similar items. In fact, when it comes to things like specialty desserts and coffees it is not unusual to see a 300% markup. So don’t be afraid to add a little extra. If you track your sales you will quickly be able to determine what the public is willing to pay and can adjust your prices accordingly.

3) Understanding the Price Barrier:

There is a point above which most customers will not go. This point is called “The Price Barrier.” While you may find some individuals who will buy the item, the bulk of those who eat with you will not touch it as it is not a good deal for them. While you may be able to get away with a slightly higher price if you specialize and produce something with a little extra (a steak with all the extras for example) most of your middle income customers will stay below this barrier.

4) Knowing Where to Display your Prices on the Menu:

The art of displaying your menu prices is one that depends a great deal on your individual establishment. While having a standard dish/price column may be expedient for diners to determine whether they can afford a dish, if you’re selling upscale foods you may want to have the price listed below the description of the item to make sure your customers read about the food before dismissing it out of hand.

5) Take Demographics into Consideration:

While considering the demographics may seem like something you would expect from a corporation of chain restaurants, know this; being able to determine what the class of diners that your establishment appeals to can help you determine what you should set for prices, and even how your menu should be designed. Upscale clients tend to pay more on the whole and prefer reading about their food before they decide whether or not to order it as opposed to those for whom price is the primary concern.

6) When Food Doesn't Sell:

It’s a horrible feeling when your food isn’t selling. However, there are ways to ensure that even the worst failure of a dish brings you some sort of return. One of the best ways to do this is to make the dish a “special” by placing it in a high visibility area of your menu, having your servers bring it to the diner’s attention, and by lowering the price (or even offering 2 for 1 deals) in order to get it moving. You can even take advantage of your Twitter or Facebook page or send out special email runs to regular customers in order to advertise your special. Who knows, you might have a sleeper hit brewing that just needs a little nudge!

7) How Prices Affect Establishment Image:

Keep in mind that choosing the price for your menu is a direct reflection on your establishment. It’s true! As much as we might not like to admit it, upscale establishments almost always cost more than middle or lower class establishments. The higher the prices, the fancier your clientele is going to expect your establishment to be. Can you deliver? Do you have the ambiance and the service to back up the high menu prices? If so, then go ahead and raise your prices; however, be prepared to lower them if your clientele decides that there is a point above which they cannot go.

These seven tips are by no means the only factors to be considered as you determine the pricing of your menu. However, by following the advice listed above, you will most certainly see a change in the profitability of your establishment. In a few short months you will see positive changes that you might never have thought possible. All it takes is a little time and attention to detail.

For more info on Ideal Software’s Inventory Management system for controlling food cost follow the link IdealStockControl