For many cafe and restaurant owners, cooking is a labour of love. But one mistake many small businesses fall into all too often is to price their menu based on what they ‘feel’ their food is worth rather than using an actual pricing strategy.
Jens Münch, our head of strategy here at iZettle, says this is a trap that more and more small businesses are telling him that they fall into. Starting a pop-up cafe or restaurant is something business owners devote all their time, energy and love into.
But this can go both ways when it comes to pricing. Some owners may price too high because they want a high reward for their hard work whereas others may feel too humble to charge a lot and end up selling themselves short, even if their product is a beauty.
The fix: A pricing strategy
Either way, ‘emotional pricing’ rarely ends well. The chef can end up feeling undervalued or the customers can feel they were overcharged, which is never good for business.
The best way to start building your pricing strategy is to create or follow a formula. Focus first of all on your margins. It is typical to mark-up food as much as 70%.
To aim for a margin of 70%, the formula goes as follows:
Food cost / 0.30 = The minimum sale price
For some food items, it will make sense to have lower or higher margins than this, but this is a good starting point.
For example, ice cream is a product that customers are willing to pay a lot for if you consider the relative low cost of its ingredients (sunny UK days throw British logic and reserve out of the window!). So don’t rely too much on cost-based pricing if the perceived value is much higher!
Likewise, you may even afford to keep negative margins on the items that really attract customers to your food stall if you can make sure to cover your losses by also selling food with higher margins.
Just remember to keep a proper track of your margins at all times as a reference point. iZettle users can easily stay on top of this with the help of their monthly sale reports.
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We would love to hear from you. Do you have any of your own Business Hacks you use when setting your prices? Or do you have any questions for us? Get in touch with us at firstname.lastname@example.org.