PRICING YOUR MENU

Deciding what price to charge for each dish is often quite difficult, especially when starting a new food operation. Charging too little results in a lost opportunity to make more profit, while charging too much keeps customers away. You have to strike a tricky balance between maximising your profits and keeping customers happy. However, there are some ways to make the task easier, and these are explained below.

Recipe costs

Every dish you sell should be costed so that you know the total ingredient costs of each. You should include the price of all ingredients including spices, garnish and sauces etc. You will need to set standard weights/ volumes for each ingredient and use these for all future dishes (see the section, ‘Portion Control’, below). The easiest way to do this is to use a simple spreadsheet that you can update easily to take into account price changes. It is useful to update these records at least on a quarterly basis to keep up to date.

Required GP%	Multiply dish cost by:
30%	1.679
35%	1.808
40%	1.958
45%	2.136
50%	2.350
55%	2.611
60%	2.938
65%	3.357
70%	3.917
75%	4.700
80%	5.875

Once you have established your dish cost you can use industry standard gross profit percentages (GP%) quoted earlier in this chapter as a guide to setting your price. You can use a multiplier to find your VAT inclusive selling price for different gross profit percentages. These are shown in the table below, together with an example.

For example: If your dish costs £ 2.50 to make and you wish to achieve a gross profit percentage of 60%, multiply £ 2.50 by 2.938 to give a VAT inclusive * selling price of £ 7.35.

You can verify this with the following calculation:

Selling price (inc. VAT)	£ 7.35
Selling price (exc. VAT)	£ 6.25 (100%)
Less: Cost of goods sold	£ 2.50 (40%)
Equals: Gross Profit	£ 3.75 (60%)

(ie gross profit divided by selling price (exc. VAT) x 100 = 60%)

*Note: VAT-registered businesses selling food that is ready to eat should charge VAT at the standard rate. But you are not normally required to charge VAT on cold take-away food.

Know the market you operate in

Although the above cost-based approach to setting prices is relatively straightforward, it is your customers that will ultimately determine what you will be able to charge. Bear in mind that your customers are not concerned with your gross profit calculations; their decisions whether to pay a certain price are based on their perceived value of the dish and any added value they obtain by eating in your pub.

You need to understand your target customers in terms of their levels of disposable income, the eating establishments they frequent, and the prices they are used to paying. You also need to know what your competitors are charging and what they offer. Look at their food operation and compare it with your own:

• location (prime site or back street?);
• food quality;
• portion sizes;
• service;
• décor;
• atmosphere;
• access;
• reputation.

Use your competitors’ prices as benchmarks but be prepared to adjust the price of your own dishes in line with the above. Customers will be willing to spend more for your dishes if your food quality, service and facilities are superior to your competitors. Conversely, if they are inferior, don’t expect customers to pay the same price as they would in your competitors’ establishments.

Examine your sales

Studying your food sales provides you with useful information. It is good practice to keep a record of sales for each dish you sell. If you are selling a large percentage of higher-priced items, this can indicate that your customers are not so ‘price sensitive’ (influenced by price) and that their buying decisions are influenced by other factors.

Other ways to establish prices

Your staff often have a very good understanding of your customers through the large amount of interaction they have with them. They are present when customers order their meals and can see their reactions to the menu. This is useful feedback for you. Regular comments about the expense of certain dishes may indicate that customers consider them to be overpriced. Alternatively, comments like ‘great value’ may mean that these dishes are perceived as being underpriced.

Specials boards can also be used to test the water of dishes prior to adding them to your main menu. They provide an opportunity to test levels of demand for dishes at different prices. For example, what is the effect on demand if the price is increased or decreased by 50p or £ 1? (It is much easier to change the price of a dish on a specials board than on a printed menu.)