Food Pricing: Ratio Price Method

Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

In this lesson, we will briefly review how restaurants can use the ratio pricing method to calculate menu item prices that adequately account for costs of food and restaurant operations while still meeting profit goals.

Ratio Pricing Method

Dave wants to price his restaurant's menu in a way that allows him to cover his costs and make sure a profit is made on each item. The ratio pricing method of food pricing would be appropriate for him in this situation. Let's take a look at how Dave can determine prices based on the ratio price method and see how the method is applied.

Definition and Process

The ratio pricing method is used to calculate a price for menu items based on the ratio of ingredient costs to all of the restaurant's other non-food costs plus room for profit. First, Dave must determine these numbers, which can often be found by looking at monthly or annual budgets. Then, he needs to decide on what profit margin he needs to make. Without a profit margin built into the formula, the restaurant would merely break even after expenses, leaving no profit for Dave as the owner.

The ratio for the pricing method is calculated by dividing non-food costs and required profit by total food costs. The ratio of food to non-food costs is then multiplied by the standard food cost of a specific menu item. Standard, in this context, refers to the idea that the food costs of any given menu item should be known because of the use of standardized recipes. The result is added to the food cost for a given menu item and then added to the standard food cost. This gives us a base selling price, which represents a minimum price that will fully accommodate the cost of ingredients and non food expenses as well as lead to the desired profits.

Calculation Example

Now, let's see how Dave can apply the ratio pricing method to his menu. According to his annual budget for last year he spent $300,000 on food for his restaurant and all other expenses such as rent, labor, and utilities totaled $800,000. Dave's profit goal for the year is to make $100,000.

The formula for figuring out his ratio looks like this:

(Non food costs + Required profit) / Food costs

($800,000 + $100,000) / $300,000 = $3.00

If Dave's cheeseburger combo has an ingredient cost of $2.25, that amount would be multiplied by the ratio of 3.00.

$2.25 x 3.00 = $6.75

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