Food Cost vs. Contribution
When you talk with Chefs and Managers about pricing menu items, the first thing that usually gets thrown into the conversation is Food Cost Percentage. We have all been taught and trained to believe that running a low Food Cost Percentage is the Gold Standard when it comes to pricing our menus and being successful.
Without question, running a low Food Cost percentage is important to running a successful operation. The Food Cost percentage of a menu item and your period Food Cost percentage are great tools to measure how well you’ve utilized and protected your investment. It is also an indicator that each menu item was properly measured and priced and the correct portion sizes are being used.
What running a low Food Cost percentage doesn’t necessarily equate to is increased bottom-line profit.
Food Cost is the measure or ratio that raw cost makes up of the selling price. If your target food cost is 28% and it cost you $4.48 to create a dish, the selling price would be $15.95. Meaning, your $4.48 in raw cost makes up 28% of your selling price.
Raw cost ÷ Selling Price = Food Cost Percentage
Using the same formula, you now have another dish with a raw cost of $9.45. If you cost it out to a 28% food cost, the price for this dish would need to be $33.75. The question becomes, will my customers find this to be a value? You can either lower the selling price and miss your 28% target or you can choose to remove the item from your menu.
You decide to lower the selling price to $25.75 which increases your Food Cost percentage to 37% for this dish. Almost 10 points above your target food cost of 28%. In comparing the items by Food Cost percentage, you can easily see that your cost is running higher for the second dish. But, is it less profitable than the first dish? If you compare just the cost percentages, then the answer is yes, but the food cost percentage doesn’t give you the full story.
When you look at the dish with a 28% food cost you make $11.47 on each dish sold. Now comparing the dish with a 37% food cost, the profit margin is $16.30. This is an increase of nearly $5.00 more in profit per item sold.
Simply stated, the contribution is a measure of profit margin. The contribution of a dish is the amount of profit it generates and is calculated with the simple formula of
Selling Price – Raw Cost = Contribution.
So the question becomes:
What’s more important, running a low food cost percentage or increasing your profit per sale?
No doubt the goal is to still maximize profits by running the lowest food cost percentage possible, but what’s more important is the amount of profit per item sold. Running a low food cost percentage does no good if you are not generating enough profit to cover the operations expenses.
If you fill your menu with items that have a low food cost, you could be hurting your profit margins. It is not uncommon for people to make selections based on cost. If these items are returning less profit than higher-cost items, you are missing out on potential profit.
Designing a menu that utilizes both contribution and food cost percentage to determine pricing is far more effective and efficient than relying just on hitting a target food cost percentage. While controlling cost is an important part of what we do, putting dollars to our bottom line should be our main objective.