Why Prime Cost Matters For Restaurants And How To Calculate It
Looking for a way to increase profits, get control of your expenses, and keep yo...
Calculating restaurant menu pricing doesn’t have to be difficult. Nor does it have to be a “shot in the dark” or the general “3x markup” that, unfortunately, seems to be the norm.
As a restaurant owner or manager, you need to do what’s best for your business. That’s why it’s vital to base your restaurant menu pricing on cold, hard data from your establishment — not from someone else’s or from some national report.
In this article, the restaurant experts at Sling have created a list of 7 tips to help you simplify your restaurant menu pricing and maximize your business’s profitability.
National averages don’t speak directly to your restaurant and your market. If the national average is high, how do you know your market can handle that markup?
It’s much better for the business to crunch your own unique set of numbers to determine the best menu pricing.
Restaurant markets differ from city to city — and even block to block within a single city. So it’s vital to gather as much information about the area around your business as possible.
What are other restaurants charging for menu items that compare to your offerings?
When you understand the way your market functions, you’ll be better equipped to find the best price point for your food.
As essential as it is that you study the market around your restaurant, never base your restaurant menu pricing on your competition.
Your competitors may not have control of their food costs. They may not have a budget. They may not have a pricing strategy to help them operate.
In the end, they may be losing money instead of making it. All because they haven’t set the right price points for their fare.
You can never really know what’s going on with competing restaurants. It’s in your best interest to use the market as a reference but to set your prices according to what’s best for your business.
When calculating your restaurant menu pricing, focus on the food that makes your restaurant different.
This allows you to carve out a unique niche and brand within your market. From there, you can set higher prices on menu items that no one else offers.
To get an idea of what it costs you to prepare each menu item, create recipe cost cards. These cards should list all of the ingredients that go into cooking a specific dish.
It may take you a bit of time to calculate how much a teaspoon of garlic powder costs, but, once done, it will give you a hyper-accurate idea of what goes into your signature menu item.
Armed with that knowledge, you can determine the markup that moves you toward profitability.
Sometimes, it’s OK to “eyeball” amounts when combining ingredients. But inevitably, this guesstimate leads to overages that, over the long term, affect your bottom line for the worse.
Stress the need for portion control at all times by providing your chefs and cooks with the right measuring utensils for the job.
Controlling portion sizes at all stages of the process will prevent your business from amassing wasted ingredients and the negative costs that go with them.
Your prime cost takes into account everything that goes into running your business.
When you know what your prime cost is, you can set a goal — say 55%, for example — and then tweak the variables, including restaurant menu pricing (part of Cost Of Goods Sold), to reach that goal.
Here’s the formula for prime cost:
Prime Cost = (Cost Of Goods Sold / Gross Profits) + (Labor Costs / Gross Profits)
When calculating labor costs, remember to include:
Once you have the three numbers (COGS, gross profits, and labor costs), plug them into the equation and do the math.
Each calculation in parentheses will yield a decimal value (e.g., 0.28). Multiply this number by 100 to give you your prime cost percentage.
If you’re serious about setting accurate restaurant menu pricing and maximizing your business’s profitability, you need to record, track, and control labor costs.
Doing so will give you more command of your prime cost equation, which ultimately affects what you charge for each menu item.
Sling gives you unprecedented control over your team’s work schedule so you can quickly and easily create schedules one month, two months, even six months or more in advance.
When you can precisely calculate labor costs that far ahead of time, it’s much easier to set the best price point for the food on your menu.
But the benefits of the Sling suite of tools don’t end there.
Sling’s built-in artificial intelligence automatically reminds you of requested time off, double bookings, and overtime hours so there’s less back-and-forth once you’ve completed the schedule.
And with Sling’s powerful geofencing feature, you can prevent early clock-ins and missed clock-outs with the touch of a button.
Sling even lets you optimize labor costs by setting wages per employee or position so you can see how much each shift will cost you. Keep track of your labor budget and receive alerts when you’re about to exceed those numbers. This will help you save money and increase profits.
Sling is the best solution for all your scheduling, labor-cost-management, and workforce optimization needs and is a powerful ally in setting the perfect price for each item on your restaurant menu.
For more free resources to help you manage your business better, organize and schedule your team, and track and calculate labor costs, visit GetSling.com today.