In today's challenging economic landscape, the cost of living is soaring and food prices are skyrocketing, with the overall price of food and non-alcoholic beverages rising by approximately 25% between January 2022 and January 2024*. Lightspeed’s State of Hospitality Research has highlighted that diners are noticing significant changes in restaurant pricing and portion sizes, a direct repercussion of the rising living costs**. And so, managing restaurant costs has never been more crucial for the hospitality industry.
But, while these facts and figures can seem daunting for managers, restaurateurs, servers, and even customers, the industry is brimming with innovation and hope for the future.
Lightspeed's guide on restaurant food cost formulas and menu pricing offers valuable insights that can help owners navigate these challenging times, and continue to maximise profit and minimise wasted costs on food inventory. So, let’s cover the key points to provide practical strategies for UK restaurateurs aiming to maintain profitability and thrive despite rising expenses.
Food costs and their impact
At the heart of a successful restaurant’s pricing strategy is a good understanding of food costs. Any chef and restaurateur will know that food costs are a huge determinant of menu prices, and finding the right balance between cost and pricing is essential to cover overheads and ensure financial stability as well as profitability.
Key steps to strategic menu pricing
1. Determine the cost per serving:
It’s great to start by calculating the cost of each ingredient in your dishes. For example, if you operate a burger joint, you need to break down the cost of each component to the dish, from the beef, bun, cheese, and sauces. Knowing the precise cost per serving helps set a baseline for your menu prices, and gives you the best chance of getting the most accurate statistics for inventory insights and data collation.
2. Choose your desired food cost percentage:
The food cost percentage is the ratio of the cost of ingredients to the revenue generated from a dish. Typically, restaurants aim to keep this percentage between 28% and 35%. By optimising this ratio, you can ensure that each menu item contributes to covering overheads like rent, utilities, and labour.
3. Price your menu items accordingly:
Once you have determined your food cost per serving and your desired food cost percentage, you can set your menu prices. For example, if a dish costs £4.40 to make and you aim for a 31% food cost percentage, the price should be set at £14.20. This calculation ensures that your pricing covers costs and contributes to profitability. Now, this is all well and good, but customers too are grappling with the fallout of the cost of living crisis…
4. Track the effect of price changes on sales:
Here is where the help of technology, data collation, and insights comes in handy. Making changes is crucial, but without understanding the impact of menu alterations and food costs through accurate data, making good choices for your restaurant’s profit becomes challenging. With Lightspeed Inventory and Advanced Insights, your ePOS allows you to track accurate purchase price histories for your ingredients, reduce food waste by ordering only what you need, and get a detailed breakdown of your menu performance to prominently feature your best dishes. What’s more, understanding how your customers respond to your menu offerings through this data can guide more strategic pricing and help tailor your offerings to better meet their needs, driving both satisfaction and revenue.
In the current UK economic climate, where costs are rising across the board, strategic management of restaurant expenses is more important than ever. By understanding and applying food cost formulas, setting appropriate menu prices, and continually monitoring and adjusting your menu to cater to the best performing dishes, restaurant owners can navigate these uncertain times with more ease.
Discover Lightspeed’s Guide to Pricing Your Menu to Turn a Profit***
*www.ons.gov.uk/economy/inflationandpriceindices/articles/costoflivinginsights/food#:~:text=The%20overall%20price%20of%20food,beverage%20prices%20rose%20by%209%25
**www.lightspeedhq.co.uk/blog/2024-state-of-the-uk-hospitality-industry-data-that-brings-innovation/
