Every restaurant or cloud kitchen, whether it be in Malaysia or anywhere in the world, aims to skyrocket their profits and be the leader of the pack in an already crowded industry. One of the key aspects that is integral to achieving this is menu pricing.
Like many other nations, the F&B industry in Malaysia is drastically changing and menu pricing has become more important than ever as many businesses are clamouring to grow their customer base through innovative methods. But, even if you use all the tricks out there, your prices will play a pivotal role in determining your success.
You may be wondering how to stay competitive by retaining loyal followers and attracting new customers. We at Kitchen Connect have got your back with our comprehensive guide on menu pricing and how it can boost your business.
What’s the right way to price your menu?
There are a number of ways menu pricing can be done, but regardless of which path you choose, it requires an organised and clearly thought out plan where you have to calculate a few things that will help ensure you are profiting on every dish available on your menu.
- Food cost percentage & cost of goods sold (COGS)
- Gross profit margin
Know your food cost percentage
For any item your restaurant or cloud kitchen sells, it is essential that you know your food cost percentage. Let’s imagine you are running a Malaysian eatery and one of the best sellers is the nasi lemak. You need to know what your food cost will be and abide by it. In this case, let’s keep it at 25%.
Know the cost of goods sold (COGS)
Now that you have your food cost percentage, you have to work out how much it will cost to prepare the nasi lemak dish. This will include the cost for the raw ingredients and sauces. Let’s say it costs MYR 5 for one portion. The next step will be to find out what your food needs to be priced at on the menu.
Let’s put it into the formula
You can use the following formula to help you with your menu pricing:
Price = COGS / Ideal Food Cost
Price = MYR 5.00 / .25
Price = MYR 20
Having used the formula above, you now have a clear indication that you need to sell your nasi lemak dish at MYR 20 if you want to achieve your food percentage cost goal of 25%.
But, this is not the only way menu pricing can be done as there is another way to do it.
Gross profit margin and menu pricing
Gross profit margin is the percentage of total sales made from one particular item that is profit. If we were to keep using the nasi lemak dish as an example and assume it has a profit margin of 30%, this means that out of every dollar spent creating it, 30 cents is profit.
Using gross profit margin to work out your menu pricing
A simple formula exists that can tell you what prices dishes need to be on your menu. Before working this out, you need to have a rough idea of the menu price for each item, along with the raw food cost and gross profit margin you are aiming for.
In the case of the nasi lemak dish, you may want it at MYR 15 on the menu, while the cost to make it is MYR 5, as mentioned before. As for the profit margin, let’s say you want it to be 60%.
When inputting this information into the formula, it will look like this:
Gross Profit Margin = (Menu Price – Raw Food Cost) / Menu Price
Gross Profit Margin = (15 – 5) / 15
Gross Profit Margin = 66.6%
So, if you were to price your nasi lemak speciality at MYR 15, your profit would be more than the 60% you want, which is terrific!
How is buffet menu pricing done?
In terms of buffets, it is a little different that one particular dish as there are a few things that need to be kept in mind, including:
- Diners usually eat approximately one pound of food
- The total cost for all the ingredients needed for that one pound of food (COGS)
- The food cost or gross profit margin you are aiming for
To keep this simple, let’s assume one pound of food has a COGS of MYR 10, which includes everything from the various meats to side items like french fries. If you are chasing an ideal food cost of 30%, you can plug it into the following formula:
Price = COGS / Ideal Food Cost
Price = MYR 10 / .30
Price = MYR 33.3
In regards to gross profit margin, let’s say you have a figure of 80% in mind and you price your buffet at MYR 20. Using the formula below, you can calculate whether the price is enough to reach your gross profit margin objective.
Gross Profit Margin = (Menu Price – Raw Food Cost) / Menu Price
Gross Profit Margin = (20 – 10) / 20
Gross Profit Margin = 50%
From this formula, it is clear that you have to increase the pricing on your menu in order to get to that 80% gross profit margin mark. To get there, you will need to charge customers MYR 50.
What exactly can impact your menu pricing?
Numerous factors can have a direct impact on your menu pricing. Whether it’s the fluctuating costs of raw ingredients or your competitors’ prices, you have to be aware of everything. Essentially, your restaurant’s or cloud kitchen’s profitability depends on bringing an increasing number of customers in. To accomplish this, keep these things in mind:
1. Direct costs
The amount you pay for your raw materials constitutes your direct costs. Given how important it is, you definitely can’t ignore this when pricing your menu. When thinking about your direct costs, pay attention to the following:
- How much is paid for raw materials, excluding labour and transportation costs
- What is your food waste cost, which includes raw ingredients or food that doesn’t get used
- The cost for different portions, which will differ for each item on your menu
If your direct costs are high, you are already in a spot of bother as your menu pricing has to rise in order to ensure your F&B business remains profitable.
2. Indirect costs
When it comes to indirect costs, it first and foremost includes labour costs. This is a lot higher if you operate a traditional restaurant as cloud kitchens need less staff.
On top of the salaries paid to your employees, everything else needed to make the dishes on your menu, such as pots, pans, cutlery, electricity, gas and water, should be added to your indirect costs.
3. The customer’s way of thinking
It is important to keep the customer in mind when pricing your menu as you want to ensure they don’t feel like they are being taken advantage of. If your dishes are too expensive, your patrons will go eat elsewhere.
On the flip side, if your items are priced too cheap, your customers might be concerned about the quality of the food and the hygiene standards of your restaurant or cloud kitchen. Therefore, you need to find the perfect balance and ensure your prices are competitive enough to keep people coming back for more.
4. Menu engineering
This revolves around getting as much profit as possible out of the top-selling items on your menu.
When utilising this concept, there are two things you will be aiming to achieve:
- Reducing the food costs for your most popular dishes
- Ensuring those dishes stand out more by making them more visible on the menu through the use of promotions and discounts
To get to this point, a thorough inspection of your costs, profit margins and sales patterns are needed. It may sound like a ton of work, but it can pay off big time!
5. The pricing of your competitors
Whether in Malaysia or any other part of the world, you will have competitors in the F&B industry. What you need to do is keep a close eye on their prices and make sure you can compete with them.
If your food is pricier and has nothing unique about it, people won’t want to fork out their money. But, if there is something about your food that gives you a special edge, some customers will think the bigger price tag is worth it.
In simple terms, you need to make as much profit on every item on your menu. If you know that your prices are higher than that of your competitors, you have to get creative and cut back on your food costs without dragging down the quality or taste.
Set your price
Having seen the benefits of menu pricing, it is important that you do it properly and keep a number of key things in mind, namely your cost of goods sold (COGS) and gross profit margin. If you apply this to every dish, the sky’s the limit in regards to how successful your restaurant or cloud kitchen can be. If you are interested in finding more ways to spice up your menu, feel free to read our in-depth blog.
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