Brian Erickson - Consultant & Commercial Advisor at ESG Realty Advisors
A large percentage of foodpreneuers consider that the answer to how to price their menu items is to charge whatever everyone else is charging (market competition), and not to deviate too much from their neighbors. But evaluating ALL your costs, and in particular your food cost, is the ONLY way to price your menu items.
The issue with pricing according to competition is that you are not considering what works for you & your business. If you have a business predicated on what your competition is doing and predicting what you think their/your customer is going to pay for your food, it's not a healthy way to run a business.
Yes, pay attention to your competition, and certainly listen to your customers, but don't allow them to dictate your pricing strategy.
How do you know what your competition pays for their food? How do you know what vendor deals they've negotiated? How do you know how much they take in salary? How do you know what profit margin is acceptable to them? There are too many questions to consider. And regarding your projections onto your customers, the "Oh, they'll never pay that for my sandwich" will never, ever work. Price it to make money, always.
At the end of the day, if your product is not priced at a margin that works for you, your business is not sustainable. You will either have to close your doors, or best case scenario live with frustration because you're not making the money you want. And that frustration will translate into all aspects of your business. Your employees and customers will be able to tell if the business has "lost its soul, and sales will inevitably suffer.
So, if you're ready to conquer food costs, realize that it's a simple formula based on whether or not you will choose to take it on. So if you're ready, read on...
A simple google search on how to calculate your food cost will yield you the results of a relatively simple formula to find out how much of your profit is going toward the cost of your food.Step one is always to calculate.
You take the cost of what you paid for an item (including all ingredients), and divide it by what you charge for an item. Food cost should typically be no more than 30% of the total price of a menu item.
I have seen many foodpreneurs multiply the cost of an item by three to determine what to charge the customer. However, a more precise formula (if you want to determine what to charge for an item and keep it at 20%, is to take the cost of an item, and divide it by the goal-cost percentage (in decimal form) that you are looking to make.
These spreadsheets and videos on Wiki-How and Food Handler HQ simply and effectively give you the tools you need.
Well, the catch-22 is that making money is usually not 100% related to how much you paid for the actual food item. It's related to ALL the other non-food-related costs associated with doing business. Those costs are included but not limited to:
You may have heard that to achieve success in life, you're going to have to release your control. Delegate delegate delegate, right? Well, that's true in one respect (you do need to give your employees autonomy), you absolutely have to set up effective cost-control systems to measure and track costs and profits. You first must control so that you can then delegate that control to others.
When it comes to food, it's not what you expect, it's what you inspect.
And you can only inspect what you measure & "control."
Everything, and I mean, EVERYTHING needs to be spec'd out, measured, and cost-controlled.
Doing this is also a necessary step in conquering food cost. Steps in this process include but are not limited to:
Yes, it is POSSIBLE to conquer food costs. It is SIMPLE, yet not always easy.
The good news is that you always have the answer: You are the one ultimately in control because you are the one who gets to choose. You choose how it's going to go, what you're going to value, how you're going to price your product, how you're going to communicate that to your staff and customers...EVERYTHING is up to you!
Written by: Brian Erickson - Consultant & Commercial Advisor at ESG Realty Advisors
If you need help developing cost-control systems or business coaching, Message me through LinkedIn, Twitter, or Facebook. I offer merit-based consulting. I only get paid if you make more money, and I save clients 10% on average!