Why a 3-Time Markup Doesn’t Work: The Truth About Menu Pricing
By David Scott Peters
Too many restaurants follow an old-fashioned model to price their menu: the three-time markup. This is an outdated profit-killing practice. There is a much smarter and more effective way to price your menu.
The three-time markup is where you take the total cost of the product you put on the plate and then multiply it by three times and that’s how much you charge for that item on your restaurant’s menu. This idea is also based on the advice from organizations such as the National Restaurant Association that your food cost should be around the average of 34%, which is also wrong.
There are two problems with this pricing strategy.
- Your restaurant is not average. Are you on the same street corner with the same price point, same style of service, same quality of product, same labor cost, the same set of core values? The answer is no, so an average would include a pizzeria with a seafood restaurant. How could they possibly both be shooting for a 34% food cost?
- If you priced everything at a 34% food cost, there are items that you’d never be able to sell because they’d be too expensive and your customers would never buy them. Don’t forget about adding labor cost to that. You might need to shoot for a 24% food cost to make money because labor is so high.
Here are five steps you need to take to price your menu properly and put yourself in a place where you can make money.
- Start with a budget. Budgeting is critical to your success. How will you know where your food cost should be if you don’t have a budget? You have to understand a calculation called prime cost, which is total cost of goods sold plus total labor costs including taxes, benefits and insurance. Your prime cost target needs to be based on your restaurant. I teach restaurant owners to aim for 55% or lower if they do at least $850,000 a year in sales. How you get there can be very different from another restaurant. You could run a higher cost of goods sold and a lower labor cost or vice versa or dead on the same. But without a budget, without seeing your numbers, you don’t know where you need to be to set your food cost target.
- Use accurate, up-to-date recipe costing cards. This is critical. I often tell people the two most important systems any restaurant should have are budgets and recipe costing cards. You’ll never guess what the two systems are most restaurants never have… a budget and recipe costing cards. Why? The excuse I get all the time is because they’re too hard. Are you freaking kidding me? You’re in the toughest business I know and as the leader of your business, you must know this data. You must have a plan for success. You must know what you’re selling and what it costs you to charge properly for it.
- Calculate your ideal food cost. Using your product mix – what your customers actually purchased – combined with your recipe costing cards, you can find your ideal food cost, which is what your food cost should be if there was no waste, no theft, no spoilage, if you ran a perfect restaurant (which does not exist). Put that into a spreadsheet I’ve created called Menu Profitability Monitor and it gives you your ideal cost.
- Decide where you’re going to price your menu in the marketplace. Are you going to undercut your competition and be the dive bar, which I do not recommend, or are you going to price like every one of your competitors? Or are your service and product that much better than the competition so you can charge more?
- Re-engineer your menu. Sort the data in your Menu Profitability Monitor in descending order from the items you sell the most of to the least and then you can decide if you’re going raise the price on your top one to three items in each one of the menu’s sections, if you’re going to drop losers, or add new items. You can look at ways to decrease costs such as buying smarter or decreasing portion sizes. You can add new items to the menu and move your mix around to influence your customers’ choices. Scientifically re-engineering a menu can get you to the food cost target you need.
Using the three-time markup approach is a terrible way to go about pricing your menu. To price your menu profitably, you must have a budget and accurate, up-to-date recipe costing cards. This is why you’ll hear me say the two most important systems any restaurant should have are budgets and recipe costing cards.
David Scott Peters is an author, restaurant coach and speaker who coaches restaurant operators how to stop being prisoners of their businesses and to finally financial freedom. His first book, Restaurant Prosperity Formula: What Successful Restaurateurs Do, teaches the systems and traits restaurant owners must develop to run a profitable restaurant. Thousands of restaurants have worked with Peters to transform their businesses. Get his three principles to restaurant success at http://www.davidscottpeters.com.
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