How to price your menu without guessing

A price is a calculation, not a feeling

Ask ten owners how they arrived at their prices and nine will point at the menu down the street. That is fair enough, because that place pulls the same people off the same road. What you cannot see is what happens in their kitchen: what they buy, whether they prep it themselves, how many staff are on, and whether they are making anything on it at all. You copy a number without the calculation underneath it.

Your price has to carry rather more than what is on the plate.

• Ingredients: everything the dish literally costs, down to the sauce and the garnish.
• Labour: the hours in your kitchen, at the counter and at the sink afterwards.
• Fixed costs: rent, energy, insurance, the write-down on your equipment.
• VAT: the Dutch btw is 9% on food and non-alcoholic drinks, 21% on alcohol.
• Channel: packaging for takeaway and delivery, plus commission when the order arrives through a platform.

The order of this article is the order you work in. VAT off first, then food cost, then margin, and only after that the question of what your guest makes of the number.

Strip the VAT out first

In the Netherlands, menu prices are quoted including VAT. That is pleasant for your guest and awkward for your sums, because the amount that comes in is not all yours. Part of it passes straight through to the tax office.

So divide your menu price by 1.09 for food and non-alcoholic drinks, or by 1.21 for alcohol. What is left is your net revenue, and that is the figure every calculation below runs on.

Two glasses at the same price therefore do not earn the same. Put a soft drink and a lager both at €3.50 and the soft drink leaves you €3.21 while the lager leaves you €2.89. Nothing on your menu shows that gap.

Work your food cost out against the price including VAT and every dish looks roughly a tenth healthier than it is. With alcohol the distortion is larger. It is the kind of error you only notice when the annual figures land.

Food cost: what the plate costs against what it earns

Your food cost percentage is the share of net revenue that goes on buying food. It is the first thing you want to know about a dish, because margins in hospitality are thin enough that a few percentage points separate a good month from an empty one.

A worked example

If you bought €2,500 of food this week and sold €10,000 of food excluding VAT, your food cost is 25%. That is the number for the business as a whole.

Per dish it works the same way, except you add the ingredients up yourself. If that pizza costs you €4.50 in dough, sauce, cheese and topping, and it sits on the menu at €15.00, you calculate against the net price of €13.76. Your food cost is 33%. Had you used the €15.00, you would have landed on 30% and quietly given yourself three percentage points.

There are rules of thumb per category doing the rounds. They come from the international restaurant industry rather than from Dutch research, and they say nothing about your supplier, your kitchen or your street. Use them to see whether you are far off the pace.

• Starters and sides: around 10%, and rarely sensible above 20%.
• Main courses: somewhere between 25% and 40%.
• Drinks: around 15%, with alcohol usually coming out lowest.

A dish sitting above its band is not automatically a reason to put the price up. It is a reason to find where the money leaks: the portion, the waste at the end of the night, or the one ingredient that cost half as much last year.

From food cost to gross margin

Food cost tells you what share of the price goes on ingredients. Gross margin tells you what is left, and that is the number your rent comes out of. The sum is: net price minus ingredient cost, divided by the net price, times one hundred.

Take a pasta dish at €15.00. Net, that is €13.76. The ingredients cost you €4.00, so €9.76 is left. Divided by €13.76 that is a gross margin of 71%. Of every euro arriving after VAT, a little over seventy cents remains to pay for your kitchen, your staff and your building.

A percentage pays no bills, though. A sandwich at €7.00 on exactly the same 70% leaves €4.50, against €9.76 on that pasta. So read the percentage and the amount together, and multiply that amount by how often the dish actually goes out.

What to do with a dish that earns too little

• Raise the price, if your street and your competitors will carry it.
• Cut the portion and hold the price, as long as nobody leaves with half a plate.
• Change the recipe: a different brand, a different cut, a seasonal vegetable instead of an import.
• Take it off. A dish that sells little and earns little mostly costs you stock.

The dishes that come out well deserve the opposite treatment: top of their category, with the photograph on your ordering page. Do not attempt the whole menu in one weekend. Take your ten best sellers, because that is where most of your revenue sits and therefore most of the money you are leaving on the table.

The costs that are not on the plate

Food cost is half the story. The other half is labour, and the two pull against each other: a dish with cheap ingredients that takes half an hour of work is dearer than it looks on paper.

In the United States, many owners keep food and labour together under roughly 60 to 65% of revenue. That is an American rule of thumb, and with Dutch collective-agreement wages it lands differently here, so do not adopt the figure. The thinking behind it does hold: your two largest cost lines are read together.

Your cost also changes the moment the dish leaves the building. A container, a lid, a bag and a pot of sauce can easily cost more than the garnish. Deliver it yourself and your driver’s time goes on top.

Then there is commission. When an order arrives through a delivery platform, a percentage comes off the whole amount, including the part you had already spent on packaging. The same dish that makes money in your dining room can come out at nothing by that route. Orders that arrive directly on your own ordering site carry no commission at all, which is precisely the amount that was otherwise coming off your margin.

Four channels, four answers for one dish. That is usually the moment an owner decides the online menu does not have to carry the same prices as the table.

Three ways to choose the price

The calculation gives you a floor. What you charge above it comes from one of these three approaches, and in practice from all three at once.

From demand

Prices are allowed to move with what people want and with what is cheap to buy. Your order data tells you enough to do it with some confidence.

• Find your best sellers. A dish that goes out ten times a night at too low a price costs you money every night.
• Give the quiet hours their own prices: a shorter lunch menu, an early set menu, a standing Tuesday offer.
• Follow the season. What is at its peak is cheaper to buy, and guests choose more readily when a dish is described as seasonal.
• Run limited-time dishes. Four weeks on the menu and then gone keeps your stock small and your regulars curious.
• Work with what is happening locally: a home match, a festival, the last warm Sunday of the year.

From the competition

Your guest compares you with the three places they could also have ordered from, not with the whole city. So look at who is fighting for the same guest. And do not copy a price without putting the portion beside it, because two dishes with the same name are rarely the same dish.

From your guest

The third approach appears in no table: what is your guest willing to pay. You read it only in your own figures. Raise a dish by fifty cents and if you sell just as many in the weeks after, you were priced too low. If something does change, you put it back.

Test one thing at a time. Change four prices in the same week and at the end of the month you still know nothing.

Price psychology on a Dutch menu

How you write the number changes nothing about your costs. It does change how often the dish gets chosen, which is reason enough to think about it once.

• 12,50 with no euro sign: the symbol is a reminder of paying, the bare number rather less so.
• 12,- on a menu of round prices: calm to read and quick at the till.
• 11,95: reads as keenly priced and suits takeaway, lunch and family deals.
• €12.50 written out in full: suits a place that does not want to position itself as the cheapest.

Pick one convention and hold it across the whole menu, online included. A menu carrying 11,95 next to €12,- next to 13 euro reads like a menu written in three sittings.

Where the number sits

Put the most expensive dish in a category at the top. Everything underneath it then looks reasonable, and that is the cheapest price rise there is: you have changed nothing except the order.

There is an old theory about printed menus and where the eye lands first, somewhere in the top right. On a phone that story has largely gone, because everyone reads top to bottom and some guests never scroll past the first category. What is at the top gets chosen. Treat those top few lines as the most expensive square centimetre you own.

• Keep categories short. Seven lines can be chosen from, twenty get skimmed.
• Do not set your prices in a neat column, or your guest starts comparing prices instead of choosing dishes.
• Give the photograph to the dish with the best margin, not the one you are proudest of.
• Publish your menu as ordinary text on your site rather than as a PDF. A PDF is unreadable on a phone and search engines make little of it.

A price is also a quality signal, incidentally. In an American university study, tasters were served the same wine once with a low price attached and once with a high one, and the dearer version was rated better. That is American research and no licence to add a euro for nothing, but it does show that being too cheap says something as well.

What to do on Monday

You do not have to reinvent the whole menu. One morning with your supplier invoices and your sales figures gets you further than an afternoon staring at the menu down the street.

Pricing is not a decision you take once. Your costs move, so your menu moves with them. Book a morning for it twice a year and you never need one large rise again, because that is the change guests do notice.

On your own ordering site that adjustment takes a minute, and the whole price you charge there stays yours.