4.3.2 Setting Menu Prices Explained

Key Concepts

• Cost of Goods Sold (COGS)
• Overhead Costs
• Profit Margin
• Market Analysis

Cost of Goods Sold (COGS)

COGS refers to the direct costs involved in producing the food items on the menu. This includes the cost of ingredients, labor, and any other direct expenses related to preparing the dish. Accurately calculating COGS is essential for setting a fair and profitable price.

For example, if a dish requires $5 worth of ingredients and takes 15 minutes to prepare by a chef earning $20 per hour, the labor cost would be $5. Adding these together, the COGS for the dish would be $10.

Overhead Costs

Overhead costs are the indirect expenses associated with running the restaurant, such as rent, utilities, insurance, and administrative costs. These costs need to be factored into the menu prices to ensure the restaurant remains profitable.

An analogy for overhead costs is like the maintenance costs of a car. Just as regular maintenance ensures the car runs smoothly, including overhead costs in menu pricing ensures the restaurant operates efficiently.

Profit Margin

Profit margin is the percentage of revenue that exceeds the costs of producing the goods or services. It is a measure of the profitability of a dish. A higher profit margin means more revenue is retained as profit after all costs are covered.

For instance, if a dish with a COGS of $10 is sold for $25, the profit margin is 60%. This means 60% of the selling price is profit after covering the COGS and overhead costs.

Market Analysis

Market analysis involves studying the prices of similar dishes in competing restaurants to ensure your menu prices are competitive. This helps in setting prices that reflect the value of your dishes while remaining attractive to customers.

An analogy for market analysis is like comparing prices of different brands of the same product in a store. Just as customers compare prices before buying, restaurants need to compare their prices with competitors to stay competitive.