Having trouble pricing your menu?
If you set your prices too low, you run the risk of short-changing your establishment. On the other hand, if you set your prices too high, you may very well lose customers – especially to your competitors.
So how do we find the delicate balance between the two? Let’s explore three of the most popular pricing methods: cost-plus pricing, willingness to pay and competitive-based pricing.
1. Cost-Plus Pricing
Cost-plus pricing combines the cost of producing the dish with your desired mark-up to ensure a profit. For many restaurants, it’s a common pricing strategy because it takes very few resources.
For restaurant owners who do not have direct competitors (for example, those in isolated areas) or are initially unfamiliar with their market, cost-plus pricing is a great starting point.
Your restaurant or cafe’s cost of production can be readily determined by adding up food costs, labour costs and overhead expenses. From there, you can easily place your ideal margin on top of this sum – giving you a good framework to base your menu prices on.
While this theoretically guarantees a positive rate of return, it can however discourage restaurant owners to conduct market research to further propel their business.
More importantly, this pricing method fails to take into account a customer’s willingness to pay.
2. Willingness To Pay
So what exactly does this term mean?
Fundamentally, it’s the highest price a customer will pay for a product or service – in this case, dishes on your menu.
There are several elements influencing a customer’s willingness to pay. The most apparent, of course, is the quality of your restaurant’s food and its presentation.
If your menu features fine dining with unique flavours and premium ingredients, customers are more likely to agree to its high prices – say, if they were looking at a pub menu. It’s no wonder why you’ll find food enthusiasts flocking to cafes to pay top dollar for photo-worthy brunch dishes.
What’s even more interesting are the factors beyond your actual menu. In 2017, a study by the University of Denver’s Daniels College of Business found that ambience and service had more of a positive impact on a consumer’s willingness to pay than the quality of your food.
If we can take away anything from this, it means that customers care more about value than cost. As such, you should also factor in the value of the overall dining experience into your menu’s prices – from your decor to little professional touches like matching staff uniforms.
As well as that, it’s important to consider the context of the paying customer. If your restaurant is located in a high-end hotel complex, there’s all the more reason to presume that a hotel guest would be willing and able to pay for a more expensive meal.
3. Competitive-Based Pricing
Another way to competitively price your menu is, well, by looking at your competition. By basing your prices on your competitors, you stand to achieve a relatively high profit margin.
It seems like a no-brainer, but to effectively use this pricing strategy, you need to compare your restaurant to others with similar offerings and operating expenses. This way, you can consider your own pricing relative to accurate alternatives in the market.
For example, if you’re finding that a woodfired pizza tends to fetch anywhere between $22-28 on your competitors’ menus, pricing your pizzas at $25 is an ideal midway point.
Conversely, if your restaurant or cafe offers a sought-after dish that others don’t, this will justify a higher price on your menu.
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