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Pepe Stepensky
Click here to read the previous column in this series, about the importance of taking inventory.
Editor’s Note: This is the 17th edition of a regular column on www.elrestaurante.com. Pepe Stepensky, a veteran restaurateur and a long-time member of the el Restaurante Advisory Panel, is offering his advice to any el Restaurante reader with a question. When he does not have a specific question to answer, he will write about the steps to opening and running a restaurant. Click here to email him a question.
By Pepe Stepensky
Setting prices in a restaurant — whether it’s a sit-down spot or a fast food operation — is one of the most critical and complex decisions a business owner faces. Price too high, and customers may walk away. Price too low, and you may fill seats but lose money. The challenge is finding that “sweet spot” where customers feel they’re getting good value and the restaurant earns a sustainable profit.
So how do restaurants — from local burger joints to national chains — figure out what to charge?
Start With Your Costs: The Foundation of Pricing
Before you can price anything, you have to understand what it costs you to produce it. That means breaking down the food cost — the total cost of ingredients that go into a dish. For example, if a chicken burger costs $2.75 to make including the chicken, bun, lettuce, sauce, napkins, salt & pepper pockets and utensils,that’s your starting point.
Most restaurants aim for a food cost percentage of around 25–35% of the menu price. That means if your sandwich costs $2.75, you’d price it around $7.85 to stay within a 35% food cost range. An easier formula that I use for my menu cost is food cost times 3 -- in this case the burger cost will be $8.25.
But food cost is just the beginning. You also have to factor in labor, rent, utilities, supplies, marketing, and waste. This total is often called your prime cost (food + labor), and keeping it under 60–65% of total sales is typically recommended in the industry.
Know Your Market: What Will Your Customers Pay?
Once you know your costs, the next step is understanding your market. What do similar restaurants charge for similar items? Are your customers value-driven (looking for low prices), quality-driven (willing to pay more for better ingredients or experience), or convenience-driven (focused on speed and location)?
Fast food restaurants, for example, often compete on price and speed, which means their margins are slimmer but their volume is higher. Sit-down restaurants may offer more premium dishes and rely on a higher check average per guest.
In my case, we always tell our customers that we make “fresh food not fast food.”
Local demographics, competitor pricing, and menu positioning all play a role. You don’t want to be the cheapest unless your model is built entirely around high volume. And you don’t want to be the most expensive unless you’re clearly offering something others aren’t.
I constantly check the prices at similar restaurants and concepts within five miles of my locations, and I do it every time that I’m changing prices.
Psychological Pricing: The Art of Perception
Many restaurants use psychological pricing tactics to influence customer perception:
• $9.95 vs. $10.00 – That five-cent difference may seem small, but research shows customers perceive the item as significantly cheaper. There a new theory about not adding a price sign($) and the decimals in smaller numbers.
• Bundling items (e.g., burger, fries, and drink for one price) can increase perceived value while improving profit margins.
• High-priced “decoy” items can make mid-tier items seem more reasonably priced.
• Menu design and layout also impact pricing strategy — most people scan menus quickly and focus on highlighted items or those at the top.
Testing and Adjusting: The Role of Data
No pricing strategy is perfect out of the gate. Successful restaurants test and adjust prices regularly based on customer feedback, sales data, and profit margins.
Key data points include:
• Sales volume of each item
• Profit per plate
• Customer feedback and reviews
• Trends in check averages over time
If a dish is popular but isn’t making enough margin, it may need a price increase — or a reevaluation of its ingredients or portion size.
Balancing Value and Profit: A Strategic Approach
Restaurants must strike a balance between value and profit. This often means:
• Using high-margin items (like beverages, sides, and desserts) to balance out lower-margin entrees.
• Offering limited-time specials or combo deals to increase average spend.
• Raising prices strategically, not across the board, but selectively — maybe just on top sellers or items with rising ingredient costs.
It’s also common to create “anchor items” — popular, reasonably priced dishes that get customers in the door — while encouraging them to spend more through upsells like premium toppings or alcoholic beverages.
External Pressures: Inflation, Supply Chain, and Labor
In today’s market, inflation, supply chain disruptions, and rising wages all put pressure on restaurant pricing. The cost of ingredients can shift dramatically month to month. Many restaurants are forced to re-price menus multiple times per year just to keep up.
Fast food brands sometimes adjust by shrinking portion sizes rather than raising prices — a tactic known as “shrinkflation.” Others focus on loyalty programs and mobile app discounts to maintain customer traffic without lowering menu prices.
In my case, I never change the size of portions or sacrifice quality. I think is a mistake because customers are not fools and in the long term you lose customers and revenue.
Conclusion: Pricing Is a Constant Balancing Act
There’s no one-size-fits-all formula for menu pricing. It requires a deep understanding of your costs, your customers, and your competitors — combined with smart strategy and constant adjustments.
In essence, pricing is a dance: too high, and you lose customers. Too low, and you lose money. But when done right, pricing becomes a powerful tool to drive revenue, build loyalty, and grow a sustainable food business — whether you’re running a taco shop, a burger chain, or a fine dining destination.
Smart pricing isn’t just about numbers — it’s about knowing your story, your value, and your guest. And that’s what turns a menu item into a moneymaker.
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