Food Pricing: Simple Markup 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 look at three different forms of simple markup pricing and show how these objective methods can be used to determine appropriate prices for restaurant menu items.

Objective Markup Pricing

Steve is planning the menu for his new restaurant and is exploring the idea of using an objective pricing method. Objective pricing applies a formula to the cost of ingredients in a standardized recipe. The simple markup method is a collection of different approaches to calculating an item price using the ingredient, prime ingredient, and markup with accompaniment methods. Each of these methods has varying degrees of complexity. The one that results in the best profit margin will vary from menu to menu. Let's help Steve understand how these different approaches work by looking at some examples of pricing calculations.

Ingredient Markup Method

The ingredient markup method multiplies the cost of an item's ingredients by a multiplier based on the desired profit margin. Let's say Steve is trying to price his ribeye plate, which includes asparagus and mashed potatoes. Steve knows that his per plate ingredient cost is $8.00; the steak costs him $5.00, the asparagus $2.00, and the potatoes $1.00.

The next step is to determine the multiplier that is needed to arrive at a final menu price. If Steve decides a 30% markup is necessary to meet his business goals, he figures out the multiplier by dividing 1 by 0.30. This gives a multiplier of 3.33. Since the ingredient cost is $8, the formula looks like:

$8 X 3.33 = $26.64. $26.64 is the selling price for the ribeye plate according to the ingredient markup method.

Prime Ingredient Markup Method

Rather than go through the trouble of figuring out the cost of each ingredient in a meal, the prime ingredient markup method instead focuses on applying a multiplier to the main ingredient in the dish. With Steve's ribeye plate, the cost has already been established as $5 for just the steak. Now Steve needs to figure out his multiplier.

Each night Steve makes $24,000 in revenue and spends $4,000 on ingredients. If we divide his revenue by ingredients we get:

$24,000 / $4,000 = 6

For the prime ingredient markup method, the multiplier in Steve's case is 6. Multiplying that by the $5 per plate for the steak gives a sale price of $30. The nice thing about this method is that it is easy to calculate a new price if the cost of the steak changes. If the price goes up to $5.25 for the steak, all Steve has to do to find the new price and have the same profit margin is multiply that by six to get a new price of $31.50.

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