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Pricing formula

Question:

I have always heard that the correct formula for pricing is 3 to 1. If you buy it for one dollar, you sell it for $3.00. Is this true?

– Buddy Sherman, Owner, Southport Raw Bar & Restaurant, Fort Lauderdale, FL

Answer:

Pricing is a little more complicated than that. Many restaurants do shoot for a 30-to-35 percent overall food cost, probably the origin of this rule of thumb. One way to ensure that your prices are in line with that food cost is to triple the food cost of the item. So if the beef, bun and other components for a hamburger cost $2.50, your menu price would be $7.50 or, more likely, $7.95 or $7.99 to build in some wiggle-room and make for a more attractive menu price.  

That formula is okay, but breaks down in two key ways:

  1. Not every restaurant is equal. High volume, low-priced restaurants such as QSRs typically have a higher food cost percentage than fine dining restaurants, where labor costs run higher. Consider, for example, a $1.99 burger (perhaps 40% food cost, low labor cost) versus a $12.95 homemade butternut squash gnocchi (perhaps a 20% food cost, high labor cost).  Even restaurants in the same segment may have different food cost targets. A family restaurant that does all their baking in house will have a lower food cost (eggs, flour and sugar are cheap) but a higher labor cost (bakers are expensive) than a restaurant who buys their desserts from a wholesale bakery.
  2. Your target food cost is an average. If you price strictly by using a 3:1 ratio you’ll end up with an unappealing pricing structure. Some items will be priced high above your competition and others will be ridiculously low. This is where the art of pricing comes in. There may be an item that needs to have a low price (and correspondingly high food cost) to be competitive and work as a loss leader, getting people into the restaurant to spend money on other things. For example, a 25 cent wing promotion may have a 100% food cost, but may be worth it overall if it helps you sell beverages (at perhaps 20% beverage cost). Conversely, a menu item like rice pudding may cost 50 cents per portion but if the other desserts on the menu sell for $3.99 and up, it would be unusual to sell it for only $1.50. So the food cost percentage of rice pudding would be 13% priced at $3.99 with the others.


So like a lot of restaurant wisdom, there is a grain of truth to the 3:1 formula, but there are problems with making it a rule for running your restaurant.

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