According to the National Restaurant Association, the Consumer Price Index for Food Away from Home increased by 8.6% between October 2021 and October 2022. That means menu item prices have also increased in response. The reason?

Rising food and wage costs are forcing operators across the country to revisit their margins in an effort to deter losses and protect their bottom line and employees. For restaurateurs, learning how to raise menu pricing, protect your ideal gross profit margin and still keep guests happy is crucial — but it’s also an art form.

Here are some restaurant menu pricing methods that can help you get a handle on your costs.

Different methods for creating menu prices

Every restaurant is unique. You get to choose how you’d like to price your menu items, but, there are some common restaurant menu pricing strategy options to employ as you make this important decision:

The food cost percentage method for menu pricing

Food cost percentage is one of the most important metrics in the restaurant world. It’s also known as the Cost of Goods Sold (COGS), which reflects the total price of all the ingredients in a specific recipe or used during a specific time period.

Understanding your food cost percentage is key to maximizing your restaurant’s profitability and protecting your profit margins. It will help you determine how much you need to charge customers that will cover the raw food cost, your expenses and a suitable amount of revenue.

While the average food cost percentage differs by restaurant type (quick service vs. fine dining, for example), Budget Branders recommends restaurants aim for an average food cost percentage of 28-35%.

How do you calculate the ideal food cost percentage?

To determine your food cost percentage, use this formula:

• Food Costs ÷ Food Sales x 100 = Food Cost Percentage

So, if you spent $3,000 on ingredients and your food sales were $10,000, the calculation would be:

• Food Costs ($3,000) ÷ Food Sales ($10,000) x 100 = Food Cost Percentage of 30%

To use food cost percentage to price your menu items, simply add up the cost of all the ingredients included in a particular recipe, divide that total cost by your existing or ideal food cost percentage, then round off the price (if necessary). So, if you have a dish that costs $6 to make and your target food cost percentage is 30%, the calculation would be:

• $6.00 ÷ .30 = $20

Examples of this model type

Let’s look at another example from an imaginary restaurant to determine their food cost percentage. If this restaurant spent $5,000 on ingredients and their food sales were $15,000, this is how they’d find their food cost percentage:

• Food Costs ($5,000) ÷ Food Sales ($15,000) x 100 = Food Cost Percentage of 33%

Then, they would take the cost to make each meal and divide it by .33:

• Meal Cost ($7.00) ÷ .33 = $21.21 

This is a very efficient way to decide your menu pricing, but it’s not the lone option. Let’s take a look at how to take competition into the decision. 

What is the competition-based pricing strategy?

Just as the name suggests, competition-based menu pricing uses your competitors’ prices as a starting point. The idea is to understand and analyze what market pricing for similar items is like and use that information to make an educated decision regarding your own pricing. This can help you either become the cheapest option should you go on the lower side of other similar restaurants, or highlight value if you choose to price a bit higher.

Using this strategy, you can:

• Match your competitors’ pricing.
• Undercut your competitors by pricing similar dishes slightly lower and attracting customers looking for value.
• Go for a slightly higher price and emphasize value over savings.

While competitor-based pricing looks like it relies solely on comparison pricing to help you make a decision, the smarter play is to look at the bigger picture. Use competitor pricing in conjunction with factors like your overall marketing strategy (are you value-oriented or aiming for a high-end guest experience?) and food costs to stay on brand and on budget.

An example of a competition-based restaurant menu pricing strategy

A classic and well-known example of this type of menu pricing strategy is Pepsi and Coca-Cola. Both brands are extremely similar and offer customers almost the same features, quality and taste. However, on average, Pepsi is slightly cheaper than Coke. So, people get to choose if they’d rather choose a cheaper option to save money (Pepsi) or pick a slightly more expensive option (Coke) because they prefer the taste. 

The last pricing method is a way to offer your customers a great experience without having to sacrifice quality.

What is the good-better-best pricing strategy?

The good-better-best pricing strategy, also known as the tiered pricing method, gives customers three options for a product at three different prices. Each offering centers on a core product with higher-priced tiers including an additional item or incentive to entice customers to pay that higher price.

An example of this might be:

• Option 1: Hamburger.
• Option 2: Hamburger with fries.
• Option 3: Hamburger with fries and a drink.

Each tier adds value and allows the restaurant owner to increase the price while giving customers more choices, avoiding the ultimatum-like feel that comes with a single option. Airlines and movie theaters use the same concept. The economy, business class or first-class seating customers purchase to get to their destination includes different perks and packages based on the price of the seat.

You see the same concept with software companies, too. Just need basic features? The basic membership is probably fine. But having two additional tiers with more features and a higher membership cost increases customer choices while also boosting revenue.

Good-better-best restaurant menu pricing works because it empowers customers while also helping operators avoid missed opportunities. Opting for a single price all but guarantees you’ll miss out on revenue because there will always be people who would’ve paid more. Plus, people generally want options when it comes to food.

So, if you’re a fine dining restaurant, you could offer:

• Good: An early-bird menu that caters to morning people with a discounted three-course menu only served before 6:30 pm.
• Better: Your regular menu with its own strategic pricing.
• Best: An exclusive chef’s table experience.

What are some examples of the tiered pricing method?

To figure out your own good-better-best pricing strategy, follow the “rule of three”:

• Good pricing: Most inexpensive option.
• Better pricing: Mid-range item.
• Best version: Highest price tag.

For example, you can create three versions of the same or similar menu items:

• Good: Cheese pizza.
• Better: 2-topping pizza.
• Best: Pizza supreme with all the toppings.

Or you can bundle an item with other dishes or condiments to increase value and increase your profit margin:

• Good: Cheese pizza.
• Better: Cheese pizza and a dozen wings.
• Best: Cheese pizza, a dozen wings and a 2-liter of soda.

Bundling can be especially beneficial for restaurant owners because the menu items added at each tier result in a higher price tag but often lower base costs. For instance, wings are traditionally viewed as a value item and the margins on fountain drinks are very appealing. Creating a wings and drink bundle increases the revenue earned with each sale.

Although good-better-best pricing is more evident in fast food and quick-serve restaurants, it also happens in high-end establishments.

For example:

• Good: Filet mignon.
• Better: Filet mignon done Oscar style.
• Best: Chateaubriand with confit potatoes and bearnaise sauce, carved tableside.

If you’re unsure if now is the right time to change your restaurant menu prices, it’s important to look at the world around you and determine what factors play a role in your restaurant’s gross profit margin. 

Why your menu prices may need updating

You have complete control over how expensive your menu items are, but sadly, you don’t have the same freedom to sway the price of raw goods. There are many factors that play into how much money you’ll spend on the initial ingredients and food items that make up your menu. 

The main element you must pay attention to is inflation. When general price levels rise for goods, it directly impacts the farmers, wholesalers and companies that you receive ingredients from — and in response, items are more expensive. According to the Economic Research Service of the U.S. Department of Agriculture, food prices are expected to continue to rise in 2023 by about 3-4%.   

That being said, to continue to receive a decent net profit margin — your restaurant’s costs subtracted from the money earned — you may need to tweak your menu prices to combat this rise in raw food. But this process doesn’t have to be impossible. Check out the following tips to make the needed adjustments to your product offering.                                                                                                                                                                                                                                                                                                       

Tips for updating your menu prices

Ready to make adjustments to the price of your dishes? Follow these tips to ensure a smooth process:

Food cost percentage model

• Try raising your prices by a small amount and factoring this money saved into your overall profit. This can help you determine how much you need to increase your prices before officially going through with it.

• Pay attention to what menu items bring in the most money and attempt to leverage those meals. You could also replace less frequently ordered items with dishes similar to successful ones. 

• If you notice many dishes returning to the kitchen half-eaten or unfinished, maybe the best step forward is to lower your portions. This could cut costs exponentially. 

• Recreate your menu design in a way that highlights and strategically suggests more profitable items to your customers. 

• Having seasonal menus can help you save on food costs. Make small adjustments to your menu as certain food items become in-season and may be less expensive to purchase. 

Competition-based pricing model

• Even as you look to your competitors to create your prices, pay extra close attention to your individual costs. Other restaurants price things based on specific data that only they know, so you should take your own profits and expenses into account. 

• Look at leaders in your industry as well as less frequented restaurants to understand the wide range that your establishment may fall in between. 

• As you set your prices, ensure that you check back in with the successes and failures that you see and make adjustments accordingly. It may be easy to look around at other restaurants and see their positive results, but this doesn’t promise your own success. 

• Even if you base your prices on other industry competitors, don’t copy their business model or food type. Take time to nail down your restaurant business plan and make your restaurant the easy choice by offering a unique experience. 

Good better best pricing model

• Make your prices different enough to appeal to a wide array of customers and clearly separate each choice.

• Consider marketing your options separately as well as together — for instance, cross-promoting your early-bird menu with local theaters that have mid-to-late evening showings.

• Price your “better” option to have the biggest profit margin as the center choice is likely to sell the most.

• Play around with experience-based offerings or add-ons that offer an increase in perceived value without excessively denting your bottom line, like a “best” option that includes post-dinner access to your attached nightclub or personalized service from the house sommelier.

• Remember that the “good” option is not a throwaway — even the cheapest tier should offer good value and represent your brand and restaurant concept well.

How to communicate restaurant menu price increases to your customers

Menu pricing is not a “set it and forget it” endeavor.

It’s important to regularly revisit your pricing and consider whether your restaurant menu pricing strategy needs updating or if it’s time to try something totally new. Things like market fluctuations can drastically impact your pricing almost overnight.

By offering a solid mix of lower, middle and higher-priced menu item options, you can protect your inventory and your bottom line even when your expenses shift for reasons outside your control.

If or when you decide to adjust your menu pricing, try to do so incrementally to minimize sticker shock.

In situations where rapid increases are necessary to prevent significant losses to your bottom line, there are ways to navigate the change without upsetting customers — or at least reducing the likelihood you’ll get an avalanche of angry emails and Yelp reviews.

• Be honest and let customers know that you have to charge more because your suppliers are charging more, and explain why.

• Increase perceived value by upgrading the menu description, thereby making the item seem more appealing, or by adding a low-cost side dish or other “bonus” (i.e., adding a scoop of ice cream to your triple-chocolate brownie).

• Avoid changing the price but compensate by decreasing the portion size or type of ingredients used in the dish.

Strategic, effective menu pricing takes patience, practice and trial and error. Choosing a method that fits your vision and honors your branding is important, but the pricing also needs to work. If you sell more menu items, you’re onto something. If you don’t, it might be time to start tweaking again.

Looking for more ways to fine-tune your restaurant operations, connect with your community and boost your traffic? Grubhub for Restaurants offers customizable packages to help you reach your goals and bring in new customers.