If you've avoided an evaluation of your hospitality venue's prices for a long period of time, chances are that you're not as profitable as you could be. Welcome the opportunity to ensure the continued success of your business.
There is no exact formula when it comes to calculating food costs but there is a range of factors you should consider.
1. What are your Cost of Good Sold (COGS)?
Let's take the example of producing one hamburger. The costs would include:
- Each individual salad item
That means that before you even consider any other overhead costs you have to charge at least $15.
The cost of producing each item also includes any other expenses directly related to purchasing the food and can include:
- Delivery fees
- Return charges
2. How much do you spend on overheads?
Wages are a big part of a hospitality business expenses but also consider things like:
- Utilities: gas, water, electricity
- What costs do I incur as I make more sales (variable costs)
- What costs do I incur regardless of whether or not I make a sale (fixed costs)
As an example:
- On average you serve 100 customers per day
- The total cost (variable and fixed not including COGS) to run your business based on serving 100 customers per day is $1000
- This means your daily overhead per person is $10
Depending on your hospitality business this may or may not cater for you target customer. If it doesn't then consider not using as many ingredients or substitute for a cheaper product.
3. How much is your customer willing to pay?
Depending on the hospitality venue that you operate a customer might be willing to pay more or less depending on the following factors:
- How often they expect to visit
- How much time they expect to spend in your venue
- How much food they expect to order
To increase customer perception of how much you should be charging consider advertising how ingredients are grown, whether it is organic or free-range. Using these words to describe a menu item can often command a premium. So too can items that require more effort, artistry or talent to prepare.
Your business location as well as general supply and demand also play a crucial part in how much you can charge, with these factors being more difficult but not impossible to influence.
4. What's your competition doing?
The are a number of different strategies you can employ when pricing yourself against the competition
- Undercut the competition with the aim of bringing in more business
- Charge more by providing a higher value offering
5. How often do you change your menu? - Seasonality
6. Can you limit the consequences when increasing prices?
Consider the following tactics:
- Decrease the portion size of the menu item but keep the price the same
- Create a more attractive name, add a special sauce or theme to the food
- Ensure the more profitable items are given prominence on your menu
- Increase menu items by small increments
7. How can you add to the experience?
Customers are more likely to judge a restaurant on the quality of your food, the level of customer service and how it is perceived by others before they worry about price.
Finding ways to add more value to the experience of dining at your establishment gives you more leeway when setting menu prices for your hospitality business.