About half of all restaurants fail within the first three years, Return On Ingredients President and CEO Mark Kelnhofer said at the Summer Fancy Food Show in Washington, D.C. Worse, commodity prices are increasing, the economy is threatening to dip back into recession and consumer spending likely will remain anemic in the near future. In these conditions, restaurant owners need to have some kind of competitive edge to survive and prosper. Having a thought-out, numbers-based system for calculating menu prices can create this edge, Kelnhofer said.
Here are five tips from Kelnhofer for restaurant owners to develop an effective pricing system.
Back up your prices up with numbers. It sounds obvious, but many restaurant owners fail to follow this piece of advice. When asked how they determine a price for a given dish, restaurant owners often mention the flavor profile or presentation but fail to consider the cost of ingredients, labor and overhead. “It’s great that you have passion for the dish, but let’s get some numbers behind it,” Kelnhofer said. “Recipe costing is a science; everything can be accounted for.”
Every dish on a menu essentially requires two recipes: one for execution and one for costing. One mistake that restaurant owners often make is that they create a recipe that outlines how to make a dish without identifying what goes into it.
Take hidden costs into account. Some materials are wasted during the preparation of nearly every dish. It’s the restaurant owner’s job to find out how much these lost ingredients cost. For instance, when you pay for a banana, you don’t use the whole fruit because you throw out the peel. Other costs such as labor and overhead also should be calculated into the price of a dish.
Kelnhofer said he considers a stopwatch an essential tool, as he uses it to time the preparation of every dish in various situations and locations. It’s not enough to know a dish’s preparation time in a controlled setting; you should know how long it would take on a Saturday night when the restaurant is on a wait, and the kitchen staff is weeded.
When you take an item off the menu, replace it with another that has an equal or lower cost percentage. A dish’s cost percentage is a calculation that compares the amount a dish costs to make with the amount for which it sells. If you replace a dish that has a low cost percentage with one that has a high cost percentage, you are putting pressure on your restaurant to sell more items to make up for the decrease in profit on each item sold. This is a risk that can quickly get restaurant into trouble.
Don’t rely entirely on Microsoft Excel. While Excel can certainly be an effective accounting tool, it is not meant to be used as a supply-management system. There are software programs geared specifically toward restaurant owners. If you are serious about creating an effective menu-pricing system, you should invest in one.
Put some thought into it. This is perhaps the most important tip. Menu pricing is a tedious but necessary procedure. Getting the initial price database up and running can be especially daunting, but those who fail to put in the effort are leaving a significant amount of money on the table.