The food industry abides by a cost-to-menu price standard, which is 28% to 32%. This means that for any given menu item the restaurant should charge at least double. For example, if you buy something from McDonald's and pay $1 then it has been marked up around 200%, but usually, we see higher markups on special items only available during certain days or times of the day such as Daily Specials.
The industry standards dictate how much markup restaurants can have based on their costs; this ratio varies between 28%-32%.
Menu pricing and restaurant markups are the engines behind the success of restaurants, as sales are the sole source of revenue for most restaurants. Pricing food items directly affect the ability of the restaurant owner to fund essential aspects of business, including equipment, utilities, labor costs, average ingredients, and other operating expenses.
Restaurants, whether a casual restaurant or a full-service restaurant, are businesses like any other, and they've put a lot of thought into their portion sizes and prices/cost of food. This is affected by menu item sales; and markups cover the kitchen staff, the wait staff, the rent, the decor, the music, the advertising, as well as the food and drink. Restaurants also have to respond to their competitors' pricing and pricing strategy, so markups don't always remain constant. In general, a food restaurant's price is about three times its wholesale cost - a 300 percent markup.
Let's take hamburgers for example. The cost of ingredients in a typical hamburger include:
|Cost of Production
|Average Menu Price
If the restaurant business owner is smart, they will calculate the markup based on the most expensive version of the retail price of the food (the cappuccino with soymilk, rather than the one with plain 2 percent milk). Managers also pay attention to the average food cost percentage, the ratio obtained by dividing the preparation cost by the selling price. But not all markups are created equal. Some items have higher prices to balance out some other items.
Markups of breakfast buffets might sometimes be smaller because the buffet setup allows a restaurant to have fewer wait staff on the floor. Labor costs are correspondingly lower.
Bar markup is typically high -- often 200 percent -- and up to 575 percent at one restaurant. Markup acts as a bit of an equalizer among drinks. It's typically lower for the drinks that have a higher wholesale cost, and higher for those with a lower cost. The markup on alcoholic drinks has grown more pronounced in recent years, as the wholesale prices of many foods have spiked. In many cases, restaurants have opted to give their customers the impression of a deal on food, recouping the loss by raising the price of alcohol.
The average restaurant profit margin is around 3-5% but can range widely from 0-15%. However, like many things in the restaurant industry, there is no hard and fast answer as to what a restaurant profit margin should be for a business.
How Do You Calculate Profit Margin On Food?
Margin is another way of talking about profit and figuring out the price. The formula is very simple:
Margin = Selling Price – Food Cost
Margin Percentage = Margin / Selling Price
How to Calculate the Gross Profit Margin of Your Existing Menu Prices
If you already have your menu prices set, you can calculate the gross profit margin for each item on your menu with the same equation:
Gross Profit Margin = (Menu Price – Raw Cost)/Menu Price
Gross profit is an essential part of the equation that figures out your net profit, otherwise known as your bottom line. The equation below shows you how to determine your net profit:
Gross Profit – (Labor Cost + Operating Costs) = Net Profit/Loss
As you can see, the greater your gross profit, the more you may have leftover after deducting labor and operating costs. Therefore, it’s important to make sure you have high profit items and to sell these items specifically.
Calculating your food costs and target percentages gives you a foundation for your pricing strategy. As you’re getting a handle on your cost of food sold and profit margins, don’t forget the following considerations.
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