Restaurant income starts with revenue -- the number of customers times the average-dollar order. You deduct food and beverage costs -- the cost of goods sold -- from revenue to arrive at the gross margin. You deduct labor and all other expenses, such as rent, from the gross margin to determine the income. Setting the right prices is critical to operating a successful restaurant.
Ingredients in the dish are the basis for using the cost of goods sold method of setting menu prices. Measure and list the cost of each ingredient. Don't skip what you feel are inconsequential amounts such as a tablespoon of olive oil. For example, say one of your more popular dinner items is seared pork loin with fingerling potatoes and fresh asparagus with a lemon butter sauce. The 4 ounce pork loin is $2, 6 ounces of fingerling potatoes are $1.50, 4 ounces of asparagus are $1. One lemon, 2 tablespoons of butter and various seasonings add up to another $1. The cost of the dish is $5.50. A good rule of thumb in the restaurant industry is to mark up food dishes about three times the ingredient cost, so the dish would be priced at $16.50.
Beverage refers to both non-alcoholic and alcoholic drinks. You typically price non-alcoholic drinks, such as milk, soda, juices and ice tea, between $1 to $2.50. Upscale restaurants price higher than family-focused restaurants. Alcoholic drinks are classified as bottled drinks such as wine, beer and coolers, mixed drinks such as cocktails and premium-label alcohol. The markup is about double for bottled drinks. Customers know what their favorite beer and wine costs at the store, so take that into consideration when pricing. Cocktails are priced based on the cost of the ingredients and marked up four to five times the cost.
Food and beverage aren't the only costs involved. You must pay the cooks, wait staff, host and other employees. While food and beverage costs about one-third of revenue, labor is another one-third. That means out of every sales dollar, 66 cents is gone before you even pay for your other expenses such as marketing, utilities, lease and insurance. Increasing the price while keeping costs steady means every additional dollar goes straight to the bottom line.
Your Competition's Pricing
It's tempting to price menu items with the highest markup possible, but you may be pricing your restaurant out of the market. Customers have a good feel for what a menu item should cost and balk when the prices are much higher than expected. For example, a $6 hamburger is budget-friendly in a full-serve restaurant. Pricing much above $10 and customers go to your competitors. Unless you can show that your burger is worth the extra money -- such as it comes topped with sauteed portabella mushrooms, apple-smoked bacon, heirloom tomatoes and aged imported cheddar cheese.
Brian Hill is the author of four popular business and finance books: "The Making of a Bestseller," "Inside Secrets to Venture Capital," "Attracting Capital from Angels" and his latest book, published in 2013, "The Pocket Small Business Owner's Guide to Business Plans."