Pricing your menu items correctly is crucial for the success of any restaurant. Setting prices too high can deter customers, while pricing too low can lead to insufficient revenue to cover operational costs. Understanding and implementing effective food costing strategies is essential to navigate this balance and ensure your restaurant’s financial health.
One fundamental concept in menu pricing is your food cost percentage. This metric reveals the proportion of your sales revenue allocated to ingredient and food supply expenses. Regularly monitoring your food costs is vital for informed menu pricing and maximizing your restaurant’s profitability.
In this guide, we will walk you through the essential steps of food costing, covering:
- Understanding what food costs are
- Setting up a budget for effective food costing
- Calculating food cost percentage
- Determining food cost per serving
- Strategies to lower food costs
- Setting profitable menu prices
But first, let’s clarify what exactly restaurant food costs entail.
What is Restaurant Food Cost?
Food cost represents the ratio between a restaurant’s expenditure on ingredients (food inventory) and the income generated from selling menu items made from those ingredients (food sales). It’s typically expressed as a food cost percentage, a concept we will explore in detail below.
While food cost focuses on ingredient expenses, some restaurants prefer to use the Cost of Goods Sold (COGS) which provides a broader view, encompassing the total value of inventory used in a dish, including items like toothpicks, napkins, and garnishes. Regardless of the method, understanding these costs is paramount.
What to Do Before You Start Food Costing
Effective budgeting is foundational to successful business management. It’s not just a one-time task during business planning but an ongoing process critical for maintaining restaurant profitability. Regular budget reviews help you monitor financial performance and steer your restaurant towards success.
Dealing with numbers might seem daunting, but budgeting doesn’t have to be complex. Managing your cash flow and restaurant budget can be simplified with the right tools, providing you with clarity and control over your finances.
Accounting software can significantly streamline managing your financial records, inventory, and transactions with speed and accuracy. If your Point of Sale (POS) system includes inventory management, you can synchronize data with your accounting software for automated tracking and reporting.
For those preferring a traditional approach, here are key budgetary considerations:
- Comprehensive Tracking: Monitor all financial figures, whether manually or via your POS system, to understand your prime cost—the ratio of sales to expenses.
- Define Accounting Periods: While a four-week period is common in restaurants, choose a timeframe that best suits your business cycle.
- Establish Budget Targets: Budgets should not only reflect current financial status but also guide your restaurant toward enhanced efficiency and profitability.
- Weekly Operational Budgets: Alongside high-level financial overviews, focus on weekly budgets for a detailed view of operations, facilitating easier tracking of expenses at a manageable scale.
With a robust budgeting system established, you are well-prepared to delve into food costing.
Food Cost Percentage Explained
Many successful restaurant operators understand the critical importance of food cost percentage. Keeping this percentage as low as possible without compromising food quality is key to maximizing gross profit, which can then be allocated to cover other expenses and contribute to overall revenue. Let’s break down food cost percentage:
- Definition of food cost percentage
- Importance of calculating food cost percentage
- Ideal food cost percentage benchmarks
- Step-by-step calculation of food cost percentage
- Practical examples of food cost percentage calculation
What is Food Cost Percentage?
Food cost percentage is the proportion of food costs relative to revenue, expressed as a percentage. This figure is instrumental in setting appropriate menu prices that ensure profitability.
How to Calculate Food Cost Percentage
To calculate food cost percentage accurately, you’ll need the following figures for a specific period, typically a week or a month:
- Beginning Inventory Value: The monetary value of your food inventory at the start of the period.
- Purchases: The total cost of food inventory purchased during the period.
- Ending Inventory Value: The monetary value of your remaining food inventory at the end of the period.
- Total Food Sales: The total revenue generated from food sales during the period, obtainable from your sales reports.
Food Cost Percentage Formula
The formula to calculate food cost percentage involves several steps. First, determine your total food cost by adding the beginning inventory value to your purchases and then subtracting the ending inventory value. Finally, divide this total food cost by your total food sales to get the food cost percentage.
Food Cost Percentage Example
Let’s illustrate with an example from Johnny’s Burger Bar. Suppose Johnny has the following values for a week:
- Beginning inventory value = $11,000
- Purchases = $7,000
- Ending inventory value = $15,000
- Total food sales = $8,000
Using the formula:
Food cost percentage = ((Beginning Inventory + Purchases) – Ending Inventory) / Total Food Sales
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 revenue is spent on ingredients. This is slightly above the average for burger restaurants, prompting Johnny to consider adjusting his menu prices.
To make an informed decision, Johnny needs to calculate his ideal food cost percentage and compare it to his current percentage.
How to Calculate Ideal Food Cost Percentage
To determine your ideal food cost percentage, you need two key figures:
- Total food costs (the actual cost of ingredients used)
- Total food sales (revenue from food sales)
Let’s assume Johnny’s Burger Bar’s total food costs are $2,500 and their total food sales, as previously noted, are $8,000. To calculate the ideal food cost percentage, divide total food costs by total food sales.
Ideal food cost percentage = Total Food Costs / Total Food Sales
Ideal food cost percentage = $2,500 / $8,000
Ideal food cost percentage = 0.31, or 31%
Johnny’s Burger Bar’s ideal food cost percentage is 31%. Comparing this to their current food cost percentage of 37.5%, it’s evident that Johnny is potentially losing out on 6.5% of revenue.
What is a Good Food Cost Percentage?
For a restaurant to operate profitably, a common target for food costs is between 28% and 35% of revenue. However, it’s important to recognize that there’s no universal “ideal” food cost percentage. It varies depending on factors such as the type of cuisine, overhead costs, and operating expenses.
A common misconception is that every restaurant should aim for a single, perfect food cost percentage. In reality, a healthy percentage can fluctuate significantly based on your menu items, food cost control practices, and the market you serve.
Food Cost Percentage Examples for Restaurants
For instance, a steakhouse might operate with a food cost percentage closer to 35% due to the high cost of premium ingredients like steak. Conversely, a pasta-focused restaurant, where the primary ingredient is relatively inexpensive, might aim for around 28%. Both percentages can be considered acceptable within their respective restaurant contexts.
Each restaurant should calculate its own food cost percentage rather than relying on general averages. Generally, the higher your total restaurant expenses, including food costs, the higher your menu prices need to be to maintain profitability.
Food Cost Per Serving Explained
Before setting menu prices, it’s essential to determine the cost of preparing each dish. Specifically, you need to calculate the food cost per serving for every item on your menu. This section will guide you through calculating food cost per serving.
Food Cost Per Serving Formula
To calculate the food cost per serving, simply sum up the cost of each ingredient required for one serving of a dish.
Cost Per Serving Example
Johnny from Johnny’s Burger Bar wants to calculate the food cost per serving for his signature Johnny Burger. The burger includes 8 ounces of ground beef, one sesame seed bun, one tablespoon of special sauce, two slices of cheese, two tomato slices, and two potatoes for a side.
Johnny purchases ingredients in bulk. For example, he buys 5 pounds of ground beef for $19. He calculates that 8 ounces of ground beef for one burger costs $1.90. He performs similar calculations for all other ingredients:
- 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
Therefore, the ingredient cost to make one Johnny Burger is $4.40.
Why is Food Cost Percentage Important?
Understanding your food cost percentage is crucial for assessing your restaurant’s financial performance. It informs key decisions about menu pricing, dish profitability, overall cost management, and areas for optimization. The more you know about your food cost percentage, the better equipped you are to make strategic decisions for your restaurant and menu.
Benefits of Calculating Food Cost Percentages
Understand Your Food Costs and Pricing Strategies
When was the last time you thoroughly reviewed your kitchen inventory and ingredient costs? Calculating food cost percentage requires a detailed examination of your ingredient purchases and their individual costs. You might discover that certain ingredients have become more expensive than anticipated, potentially impacting the profitability of dishes that use them. With a clear understanding of food costs, you can price your menu items more effectively and ensure profitability.
Experiment with New Recipes Profitably
If your food cost percentage analysis reveals that certain menu items would need to be priced too high to maintain profitability, it might be time to reconsider the ingredients used in those dishes. Understanding your food costs opens the door to data-driven recipe adjustments. You might explore alternative, more cost-effective ingredients to reduce menu prices or enhance dish profitability. Experimenting with different ingredients can help you find the ideal balance that aligns with your target food cost percentage.
Make Informed Menu Adjustments
Effective menu management is vital for a restaurant’s success. Supplier prices change, ingredient costs fluctuate, and customer preferences evolve. Regularly calculating your food cost percentages equips you to make smart, data-backed menu adjustments to maintain and improve profitability.
Identify Top Performers and Underperforming Items
Do you frequently sell out of certain dishes? Are there menu items that are rarely ordered? Are your most popular dishes also your most profitable? Access to this information is invaluable for menu analysis. There might be dishes that are inexpensive to make yet highly profitable. Understanding your food costs helps you gain a clearer picture of menu performance, allowing you to optimize your offerings.
Analyze Food Costs Across Locations
If you operate multiple restaurant locations, food costs can vary between branches. Therefore, it’s essential to calculate and understand the food cost percentage for each location individually. This allows you to compare performance across locations and identify variations in menu item popularity and profitability in each restaurant.
How to Lower Restaurant Food Costs
Find Cost-Effective Vendors
Can you source the same quality ingredients at a lower price from a different vendor? Could focusing on local suppliers reduce transportation costs and improve freshness?
Another approach is to negotiate better terms with your current suppliers. Engage in open discussions to find mutually beneficial solutions that lower your costs without negatively impacting your suppliers. Consider options like increasing order volume, making upfront payments, or exploring long-term contracts to secure better pricing. These strategies can provide cost savings while ensuring suppliers have a stable, predictable customer.
Leveraging bulk purchasing or committing to long-term partnerships can lead to more favorable pricing and terms, ultimately reducing your overall food costs.
Buy Ingredients Collectively or Join a Group Purchasing Organization
If bulk purchasing is unaffordable on your own, consider partnering with other food businesses to buy ingredients together. This collaborative approach 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, strengthening your negotiating power with suppliers. This also fosters a supportive community among businesses, potentially leading to further collaborations and mutual growth.
Group Purchasing Organizations (GPOs) offer another avenue for cost savings. By enrolling in a GPO, you gain access to collective buying power alongside other members. GPOs negotiate contracts with suppliers on behalf of their members, leveraging combined purchasing volume to secure lower prices on food, beverages, kitchen equipment, and other supplies.
If you’re in the United States, consider exploring GPOs like:
- Foodbuy
- Avendra
- Dining Alliance
- Buyers Edge Platform
Remember that GPOs typically charge membership or service fees, so factor these into your cost analysis to ensure overall savings.
If you’re a member of restaurant trade organizations, network with other members for recommendations on reputable buying groups to join.
Optimize Your Menu Planning
Review and refine your menu to ensure you are offering dishes that are both popular and cost-effective.
Design your menu to include dishes that share overlapping ingredients. This reduces waste and simplifies inventory management. Focus on seasonal dishes that utilize ingredients at their peak availability and affordability.
In some cases, streamlining your menu by reducing the number of items can be beneficial. Concentrate on your best-selling dishes to better control food costs and maximize revenue from your most popular items.
Consider Maynard, a restaurant specializing in local, high-quality vegetarian and vegan cuisine. Maynard maintains a concise, focused menu by ensuring that every dish resonates with their customers and has a high turnover rate.
“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 relies on POS reports to gain 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.
Adjust Portion Sizes
Reducing portion sizes can decrease food waste and require fewer ingredients per dish, directly lowering your food costs.
Returning to Johnny’s Burger Bar, Johnny could consider reducing the burger patty size from 8 ounces to 6 ounces to lower portion costs and overall food cost per serving.
This not only reduces ingredient expenses but can also enhance the perceived value of your meals. Customers often appreciate well-prepared, appropriately portioned dishes that emphasize quality over quantity.
Invest in Technology Solutions
Restaurant owners consistently report that investing in technology, particularly a robust restaurant POS system with inventory management capabilities, yields significant cost savings. The right technology saves time, provides essential data, and quickly identifies discrepancies like theft, spoilage, or waste.
Beyond streamlining operations and automating manual tasks, a capable restaurant POS system offers valuable data insights and trends that inform smarter decisions about menu items and ingredient management.
Peter Marzulli, Director of Operations at RH Gold Hospitality, highlights how their POS system (Lightspeed) has significantly improved 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
Johnny’s Burger Bar’s Johnny Burger costs $4.40 to make, and their current food cost percentage is 37.5%, resulting in a menu price of $11.70. To reduce his food cost percentage to the ideal 31%, how should Johnny adjust the burger price?
To determine the new menu price, we use the following formula:
Menu item price = Food cost per serving / Ideal food cost percentage
Menu item price = $4.40 / 0.31
Menu item price = $14.20
Based on a 31% ideal food cost percentage, the Johnny Burger should be priced at $14.20. This is a $2.50 increase from the previous price!
While $2.50 per burger might seem small, it adds up quickly. Selling 75 burgers a day, this increase translates to over $65,700 in additional annual revenue. Imagine the cumulative impact of optimizing food cost percentages across all menu items.
Realizing he has been underpricing his burgers, Johnny decides to increase the price to $14.20 and monitor the impact on sales and profitability.
How to Track Menu Pricing’s Effect on Sales
Successful restaurants routinely track menu prices and sales, making ongoing adjustments in response to fluctuating food costs and market conditions.
After comparing his current and ideal food costs, Johnny increased the Johnny Burger’s price to $14.20. There are two potential outcomes regarding sales:
Scenario 1: Burger Sales Decrease
If sales of the Johnny Burger decline after the price increase, it may indicate that the new price is too high for customers. If Johnny wants to lower the price to boost sales, he should do so strategically. He could explore options like negotiating with cheaper vendors, reducing portion sizes, or using less expensive ingredients to justify a lower menu price while maintaining profitability.
Scenario 2: Burger Sales Remain Strong
Conversely, if the Johnny Burger continues to sell well at the new price, it suggests that customers are willing to pay even more.
To potentially increase profits further without overpricing, Johnny could aim for a lower food cost percentage, such as 28%. This would price the Johnny Burger at $15.70.
In either scenario, continuous monitoring is crucial to understand how price adjustments affect sales. A POS system with robust analytics, like Lightspeed’s Advanced Insights, can provide detailed menu performance data, enabling you to see the direct impact of price changes on your menu.
Ideally, menu prices should be attractive to customers while ensuring manageable food costs. When priced correctly, sales will cover restaurant expenses and generate profit.
Takeaways for Managing Food Cost Percentage
While it may seem like a detailed task, diligently managing your restaurant’s food cost percentages is essential for ensuring financial stability and profitability. In an industry known for tight profit margins, every cent saved and earned makes a significant difference.
To recap, here’s a step-by-step guide to pricing menu items for financial success:
- Calculate the food cost per serving for each menu item.
- Determine your current food cost percentage.
- Identify your ideal food cost percentage.
- Adjust menu prices to align with your ideal food cost percentage.
- Monitor sales responses to price adjustments.
- Explore strategies to lower food costs without sacrificing quality.
Once you’ve finalized your menu prices, revisit your menu design and consider how you are presenting each dish. From menu item descriptions to layout, effective menu design can significantly influence sales.
Maximize Your Profits with Technology
Lightspeed Restaurant POS offers tools like tableside ordering, loyalty programs, and detailed reports to help you optimize operations and make data-driven decisions. Chat with one of our restaurant experts to learn how our software can streamline your restaurant and improve your bottom line.
FAQs about Food Cost Formula
How do you calculate food costs?
To calculate food costs, determine the total cost of ingredients used to prepare a dish. A basic food cost percentage formula is:
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 context, costing a product or service typically includes direct costs (ingredients, materials), indirect costs (overhead), and labor. A simplified formula 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 expense associated with each meal served, helping manage labor costs relative to sales volume.
What is a good food cost percentage?
A good food cost percentage generally ranges from 28% to 35% in the restaurant industry. This can vary based on restaurant type, ingredient costs, and pricing strategy. Fast food might aim lower, while fine dining may accept higher percentages due to premium ingredients.
What is the standard price method?
The standard price method sets predetermined costs for ingredients, labor, and overhead based on expected standards or historical data. It’s used for budgeting and variance analysis to identify deviations from expected costs.
What is the standard costing model?
The standard costing model is an accounting method to estimate expected production costs in advance. It calculates standard costs for materials, labor, and overheads as benchmarks for evaluating actual costs. Variance analysis then manages differences between actual and standard costs for better cost control and decision-making.
