- August 2, 2021
- Posted by: Morgan Ayres
- Category: Cafe, Restaurant
Pricing your menu can be one of the most challenging things for new entrepreneurs and business owners. There are many variables that play into pricing your items just right to make a profit, while managing customer perception in the market. It can be difficult to know which pricing strategy is best for you. The right prices will not only help your business meet your customers’ expectations, but you’ll be able to make a healthy profit margin—the two key ingredients for a successful business!
We work with local businesses to audit their pricing and create a yearlong strategy for pricing. Here are some tips to ensure you achieve the right price for your products and for your business.
Make the most memorable menu for your guests
Your menu should reflect your brand and offer guests different addictive items at different prices. Allow customers to come for a quick and easy meal if you are a restaurant. Or if you are a café, give them options to splurge on that amazing blended drink, or just grab a basic cup of coffee or tea. While you cannot please everyone, offering different pricing options and tiers of pricing captures MORE customers, that will come back often. Have some consistent items that are addictive and bring your customers back, while balancing those with seasonal favorites.
Price your Products Appropriately
Your pricing plays a crucial role in your business’s overall revenue. Incorrectly pricing items can jeopardize your business’s profitability, and also leave a negative impression on your customers. They will choose to not come back, if the price is too high or does not provide value. Bad reviews on Google or Yelp about pricing can and will be the death of some businesses. Base your pricing on the market and complete a lot of research on the competition. Choose your pricing strategy to either be cheaper and under-cut the competition or to be focused on service, quality and addictive flavors and be a little higher! Listen to what your customers are saying (and not saying) about prices and try your best to be profitable and offer value!
How Much Do Your Items Cost?
The first step to figuring out how to price your items is to determine your TOTAL cost of goods you sell. For each cake, cookie, or bread you make, you’ll need to factor in:
- The cost of ingredients ~How much did it cost to buy the eggs, flour, sugar, etc.?
- Your recipe yield ~ How many cookies does one batch produce?
- Cost per serving ~ This can be found by calculating the ingredient cost by the recipe yield.
- Labor costs to product ~ You’re not working for free! Be sure to factor in your hourly rate and divide it by the recipe yield to get the labor cost per item.
Once you’ve figured out these numbers, you’ll need to take your overhead costs into account. This will ensure you’ve priced your items more accurately.
The formula to calculate your COGS is: Cost per serving + Labor cost per item + Variable Costs + Fixed costs + Startup costs.
Factor in your overhead costs
Your overhead costs should be one of the most important things that influence your food and beverage pricing. It’s one thing to tally up the costs of your ingredients and labor, but if you don’t include things like your utility bills, leasing costs, equipment maintenance, cleaning products and marketing costs, you could find yourself operating with too low of a profit margin. There are two types of overhead costs you should consider:
- Variable costs – Variable costs are costs that increase once your business starts to grow. For example, you might find that you need to order more items to support sales and more ingredients as time goes on to amp up your production. Similarly, you may need to hire additional employees to keep up with demand. Labor, ingredients and packaging costs will need to increase as your output increases.
- Fixed costs – Fixed costs are costs that don’t change from month to month. These include things like your rent, utility bills and pos system!
There are many one time start-up costs that you will incur to open up your café or bakery. For example, you may need to pay to file for an LLC, buy your initial start up kitchen equipment, or pay your realtor to find the perfect location. These are all examples of Startup costs that you may need to take into consideration if they’re considerably large and need to be paid off quickly.
Leave wiggle room for the unexpected
If 2020 taught us anything, it’s to prepare for unexpected situations. For example, if your fridges break you not only have a hefty bill for replacement or to fix, you may lose a lot of product! You will risk even more loss, if you cannot repair right away or get back up and running. While you cannot plan for the unexpected, you can prepare to have the ‘just-in-case’ funds ready when needed. Also preventative maintenance is very important! Ensure you also have a maintenance schedule from day one, for cleanliness and maintenance to prevent major breakdowns and losses of revenue.
Thus, your products will need to be fully costed to incorporate the unexpected expenses of doing business.
What to Avoid When Pricing Your Menu
When starting your business, you must avoid the following things if you want to have long term success.
Never Undervalue your Skills & Experience
When you’re pricing your menu, ensure you include the value of what you do! Your experience, expertise and passion cannot be priced, but should be in the overall value of the business. For instance, if you’re receiving special orders for items such as wedding cakes, it’s a sign that your customers appreciate your work and won’t mind paying a premium for it. Simply put, if it looks good and tastes great, people will pay for it. Keep this in mind when pricing your menu items. Valuing your goods at what you feel they’re worth can help you to maintain a low-cost percentage.
Do Not Underestimate the Importance of Great Customer Service
Your café or bakery isn’t just about the products, you are also providing a valuable service. You are meeting the customer’s needs and sharing your passion. People buy your goods because they don’t have the time to make similar things themselves, or more likely, they don’t have the skill required to create professional-looking baked goods, great coffee or other offerings. They appreciate your service, and the fact that you’re making their lives easier is extremely valuable. Ensure your service matches your amazing food and you will have the winning combination!
Takeaways for Pricing your Menu
The prices you set for your menu will have a huge impact on your business, so it’s important to take the right things into account. Once you’ve set your pricing, keep an eye on how your business performs. Regularly audit your pricing to ensure it remains competitive and provides value to your customer, while managing expenses (which can change seasonally!) You can always adjust your pricing after looking at your data and insights. The word’s largest coffee chain actually raises their prices twice per year with a winning strategy that not many even know. Partner with us to learn more about this and other innovative strategies to set your business up for long term success!
Morgan Ayres – Lead Consultant with over 25 years of pricing experience!