Choosing an effective food pricing strategy is one of the most important things you will do as the owner of a food business.
Because sales are a food business’ primary revenue source, the cost of your food directly affects the amount of money your business can make. As such, you should consider the different pricing strategies available when determining how to maximize your profit.
Whether you’re just starting your business or have been selling food for years, these four pricing strategies can help you grow your food business in 2022.
1. CALCULATE YOUR PRICES BASED ON IDEAL FOOD COST PERCENTAGE
Food cost percentage is a statistic used by food businesses to show how much of their revenue is used to purchase ingredients. It can also be used to help you determine the best prices for your menu items.
To calculate your ideal food cost percentage, divide your total food costs by your total food sales. Most businesses’ ideal food percentage falls between 28%–35%, meaning that 28%–35% of their revenue goes toward purchasing new supplies every week. You can also simply choose a number as your ideal food cost percentage.
Sometimes a business’ actual food cost percentage is greater than the ideal. In these cases, it’s important to consider what can be done to reduce the amount of revenue spent on ingredients every week. Often, the solution can be found by purchasing less expensive ingredients or reducing portion sizes, but sometimes the best solution is to increase your menu prices.
To determine what your menu price should be to meet your ideal food cost percentage, divide your cost per serving by your ideal food cost percentage. The result is how much you should be charging for that menu item.
2. CALCULATE YOUR PRICES BASED ON IDEAL GROSS PROFIT MARGINS
Gross profit margin is a statistic used to show the amount of money a business makes after it’s expenses have been paid. It’s an important statistic to know because without a high enough profit margin, your business won’t make enough money to keep it’s operation running.
You can calculate your gross profit margin for your food business by subtracting your food cost from your menu price and dividing it by your menu price. Multiply that number by 100 and the result is your gross profit margin, or the amount of money your food business makes for every dollar a customer spends on that item.
Healthy gross profit margins for food businesses can be anywhere between 50% to 70%. If your gross profit margins are less than that, you may want to consider changing your pricing to make it more profitable. Depending on your operation, you may be able to reduce your costs, but sometimes the best way to increase your gross profit margin is to simply increase your menu prices.
To calculate the ideal menu price, input your ideal gross profit margin and cost per serving into the gross profit margin equation and solve for the missing value. As a warning, it does require you to do a little algebra, so let’s look at an example.
Let’s say your ideal gross profit margin is 60% or .6, and your cost per serving is $3.50. To find the ideal menu price, or in this case “x”, the equation will look like this:
0.6 = (x – 3.50) / x
First, multiply each side by “x”
0.6x = x – 3.50
Second, subtract “x” from both sides
-0.4x = -3.50
Lastly, divide both sides by the left side value, in this case -0.4. The result is the ideal price for that menu item
x = 8.75
3. CALCULATE YOUR PRICES BASED ON COMPETITION
If you operate in a highly saturated, competitive market, you may want to consider using the menu prices of other food vendors when determining your own prices. Doing so can help you stay relevant and maintain your share of the market.
There are three strategies to choose from when basing your prices off the competition: matching the competition’s price, going lower than the competition’s price, or going higher than the competition’s price. Each strategy has advantages and disadvantages, so you should consider them carefully when pricing your menu.
This is a good option when competitors have a similar business concept or product as you. It allows you to keep up with the businesses around you without increasing or decreasing your share of the market.
Lower prices are appealing to customers looking for a good deal. However, it can also lead to a poor business perception. Lowering your prices too much can also reduce your profit margin and make it difficult to stay in business.
Higher prices oftentimes connote higher quality, which is appealing to some customers and can set your business apart from the competition. However, you can lose the interest of customers looking for a deal.
4. CALCULATE YOUR PRICES BASED ON SUPPLY & DEMAND
On the other hand, if you operate your food business in an area with little or no competition but with a high demand for your food, you may be able to price your menu higher than normal. This is a common practice for food vendors in areas like airports, food stadiums, and event centers, where customers cannot look elsewhere for better prices.
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Choosing an effective pricing strategy is one of the most important things you will do as the owner of a food business. Hopefully these strategies have helped you find a way to increase your profits and grow your business in 2022.
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