Food Math is Still Overwhelming, Part III
Perhaps the most common question beginning operators ask is how much they should charge. Pricing is a crucial aspect of any restaurant business, particularly in the fast-casual sector where competition is fierce and customer expectations are high. Setting the right prices can make the difference between profitability and financial struggle. Price your food too low and you will soon be out of business. Price it too high and customers will not return. Here, we will explore the key strategies and formulas necessary for correctly pricing your food in a fast-casual operation.
Basic Cost Plus Margin Formula
The foundation of pricing in any restaurant, including fast-casual operations, is the cost plus margin formula. Here’s how it works:
Cost of Goods Sold (COGS)
COGS includes the cost of all ingredients used to prepare a dish. This encompasses main ingredients, garnishes, sauces, and any sides.
Calculating Labor Cost per Dish
To accurately determine the labor cost per dish, use the following formula:
Labor Cost per Dish=Preparation Time (in minutes) divided by 60×Hourly Labor Cost
This formula converts the preparation time from minutes to hours and then multiplies it by the hourly labor cost.
Example Calculation
For instance, if a dish requires 5 minutes to prepare and the hourly labor cost is $15:
Labor Cost per Dish=5 minutes divided by 60×$15=$1.25
In this example, the labor cost per dish is $1.25, which represents the portion of the hourly labor cost allocated to the preparation of a single dish.
Total Cost
The total cost of a dish includes both COGS and labor costs.
Total Cost=COGS+Labor Cost per Dish
Desired Profit Margin
To determine your selling price, you need to add a desired profit margin to the total cost.
Selling Price=Total Cost×(1+Desired Profit Margin)
For instance, if the total cost of a dish is $5 and you want a 30% profit margin:
Selling Price=5×(1+.30)=5×1.3=6.50 dollars
Including Labor in COGS
Including labor costs in your calculations is vital to ensure profitability. Here’s why:
- Accurate Cost Calculation: Labor is a significant expense for any restaurant. Ignoring it can lead to underpricing, which can result in losses.
- Competitive Pricing: Knowing your true costs helps you set prices that are competitive yet profitable. If competitors are also accounting for labor, you need to do the same to stay competitive.
- Menu Engineering: By understanding the labor cost of each dish, you can optimize your menu to feature items that are not only popular but also profitable.
Market Analysis and Competition
When determining your margin, it's crucial to conduct market analysis and consider your competitors.
- Competitive Pricing: Compare your prices with those of your competitors to ensure you are competitive while maintaining profitability.
- Market Demand: Adjust prices based on demand. For example, demand-driven pricing involves increasing prices during peak hours or for popular items.
Overhead Costs
In addition to COGS and labor, you can also account for overhead costs such as rent, utilities, marketing, and other operational expenses.
To incorporate overhead into your pricing, calculate your daily overhead and divide it by the number of customers you expect to serve each day. This gives you the overhead cost per customer, which should be factored into your pricing.
Example Calculation
Let’s demonstrate the pricing process with a concrete example:
COGS and Labor Costs
- COGS for a burger: $2.50
- Labor cost per burger: $1.25 (calculated from a preparation time of 5 minutes at an hourly wage of $15)
- Total Cost: $2.50 (COGS) + $1.25 (labor) = $3.75
Desired Profit Margin
- Target profit margin: 30%
Selling Price Calculation
To determine the selling price, use the following formula:
Selling Price=Total Cost×(1+Desired Profit Margin)
Substituting the values:
Selling Price=3.75×(1+.30)=3.75×1.3=4.88
Overhead Costs
- Daily overhead expenses: $1,000
- Estimated customer traffic per day: 150 customers
- Overhead cost per customer: $1,000 / 150 = $6.67
Adjusted Selling Price
To account for overhead, add the overhead cost per customer to the preliminary selling price:
Adjusted Selling Price=4.88+6.67=11.55
To present a more appealing price to customers, you might consider rounding it to $11.99.
Understanding Pricing Strategies
Once we have the foundations of pricing calculations, it's essential to understand the various pricing strategies that fast-casual restaurants employ. This is where one operator can break away from the competition despite having similar products and thus, similar costs.
Value Pricing
Value pricing involves enhancing the perceived value of a product while maintaining or reducing its price. This can be seen in upsizing options, such as supersizing drinks or fries, where customers get more for a slightly higher cost.
Penetration Pricing
Penetration pricing involves setting initial prices low to attract a broader audience and increase market share. This strategy is often used when introducing new menu items.
Customary Pricing
Customary pricing follows industry standards, where prices are set based on what competitors are charging. This helps in maintaining market share and avoiding price wars.
Bundle Pricing
Bundle pricing combines multiple items into a package, often at a lower total cost than purchasing each item separately. This strategy encourages upselling and increases the average transaction value.
Conclusion
Pricing your food correctly in a fast-casual operation is a complex task that involves multiple factors, including COGS, labor costs, overhead, and market dynamics. By using the cost plus margin formula and ensuring that all costs are accurately accounted for, you can set prices that are both competitive and profitable.
Remember, regular review and adjustment of your pricing strategy are essential to maintain profitability and customer satisfaction in the dynamic fast-casual industry.
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