How to Set Menu Prices Correctly
Finding the Balance Between Cost, Value, and Margins
Pricing your menu isn’t just about covering costs—it’s about maximizing profit while keeping customers happy. Get it wrong, and you’re either losing money on every plate or driving diners straight to your competitors.
Here’s the kicker: Most restaurants underprice out of fear, worried that higher prices will scare off customers. But that mindset leads to razor-thin margins, burnout, and a business that struggles to stay afloat.
The real secret? Strategic pricing that balances food costs, perceived value, and profitability—so you’re not just making sales, but making money.
In this guide, we’ll break down how to set menu prices the right way—boosting profits without alienating customers.
Table of Contents
1. Know Your Numbers: Food Cost is Just the Start
Most restaurant owners guess their pricing using a simple formula:
(Cost of Ingredients) x (Arbitrary Multiplier) = Menu Price
That’s a decent starting point, but it’s far from a complete pricing strategy. It ignores labor, overhead, market demand, and perceived value—all of which impact your bottom line.
To price your menu for profitability, you need to factor in:
Food Cost Percentage: The industry standard is 28-35% of the menu price.
Labor Costs: Some dishes take twice the prep time but aren’t priced accordingly.
Overhead Expenses: Rent, utilities, and insurance—every plate needs to cover its share.
Competitor Pricing: Know what others are charging, but don’t just copy them blindly.
Perceived Value: Customers don’t just pay for ingredients—they pay for experience, ambiance, and exclusivity.
Example: The Real Price of a $15 Burger
Raw Costs Breakdown:
🍔 Ingredients: $4.50
🧑🍳 Labor: $3.00
🏠 Overhead Allocation: $2.50
💰 Total Cost: $10.00
Basic Pricing Formula (30% food cost target):
💵 Suggested Price: $33.33
But here’s the reality: No one is paying over $30 for a standard burger.
Solution: Price Based on Perceived Value
Instead of undervaluing your dish, adjust the pricing to what customers are willing to pay while maximizing margins.
✔️ Set a reasonable price point – Maybe $18 for the burger.
✔️ Increase perceived value – Add gourmet ingredients like truffle aioli or aged cheddar.
✔️ Use strategic upsells – Premium toppings, extra sides, or specialty sauces boost revenue.
💡 Pro Tip: A $15 burger with a $4 add-on for caramelized onions & smoked bacon can increase profitability without scaring off customers.
By understanding the real cost of each dish and pricing based on value—not just raw ingredients—you’ll protect your margins and increase revenue without losing diners.
Understanding the financial metrics that drive your restaurant’s success is essential for setting effective menu prices. For a comprehensive breakdown of these key factors, explore our detailed guide on The Profitability Formula.
Photo by Austin Burleson on Unsplash
2. Stop the Guesswork: Use These Pricing Strategies
Pricing isn’t just about covering costs—it’s about strategic positioning that drives profitability without turning customers away. When done right, your pricing doesn’t just protect margins—it boosts revenue, enhances perceived value, and encourages smarter spending habits from your guests.
The best part? You don’t always have to raise prices to make more money. Strategic pricing techniques can increase check averages, improve menu flow, and maximize profits—all without making customers feel like they’re overpaying.
Here’s how to price smarter and more effectively:
A. The Golden Rule: Price for Profit, Not Just Sales
Your best-selling dish might not be your most profitable. Many restaurants push high-volume dishes, thinking more sales = more profit. But if those dishes have razor-thin margins, you’re just working harder for less money.
Instead, prioritize high-margin items and subtly guide customers toward them.
💡 Hack: Use menu design tricks—bold fonts, boxes, or “chef’s picks”—to draw attention to the most profitable dishes.
📌 Example: A $12 pasta dish with a 40% margin isn’t as profitable as a $16 pasta dish with a 55% margin. Highlight the higher-margin dish, not just the most popular one.
B. Decoy Pricing: Make the Mid-Tier Look Like a Steal
Ever notice how high-end steakhouses feature a ridiculously expensive steak at the top of the menu? That’s no accident—it’s decoy pricing, a psychological tactic designed to make the next option seem like a bargain in comparison.
📌 Example: Steakhouse Pricing Strategy
🥩 Option 1: $75 Wagyu Ribeye (Decoy – sets the price anchor)
🥩 Option 2: $42 Filet Mignon (Feels like the best deal – target item)
🥩 Option 3: $35 Sirloin (Entry-level option for budget-conscious guests)
By positioning a premium option first, the mid-tier choice instantly feels like a better deal—even if it’s priced higher than what the customer originally planned to spend.
The result? Increased check averages without customers experiencing sticker shock or feeling like they overpaid.
C. Charm Pricing vs. Prestige Pricing: Which One Works for You?
Not all pricing is about cost—it’s also about perception. The way you format your prices can subtly influence how customers feel about value, quality, and affordability.
Here’s how to use psychological pricing to your advantage:
🔹 Charm Pricing: Using $9.99 instead of $10 makes the price feel smaller. Perfect for casual, high-volume restaurants.
🔹 Prestige Pricing: Using whole numbers ($40 instead of $39.99) signals luxury and quality—ideal for upscale restaurants.
🔑 Pro Tip: Higher-end spots should avoid cents—it cheapens the brand and makes the experience feel less premium.
Example: A luxury steakhouse should price a filet as $58, not $57.99—customers associate rounded prices with quality.
Your restaurant’s brand identity plays a pivotal role in how customers perceive value, directly impacting your pricing strategies. To delve deeper into establishing a strong brand that aligns with your pricing, check out our article on Restaurant Branding 101: How to Make Your Restaurant Stand Out.
D. Bundle & Upsell for Bigger Profits
Pairing items together enhances perceived value while maximizing profitability. Instead of relying on single-item sales, strategically bundle complementary items to encourage larger orders and increase the total check size—without adding extra pressure on the customer.
✅ “Steak & Wine Special – $5 Off the Pair” (Encourages wine purchase with high-margin steak)
✅ “Brunch Bundle: Entrée + Mimosa = $24” (Drives alcohol sales while making the deal feel like a win for the customer)
💡 Why It Works: Customers love the feeling of getting a great deal, but in reality, you’re strategically increasing total revenue per table—without adding extra costs or discounting your profits.
Photo by Samuel Regan-Asante on Unsplash
3. Avoid These Pricing Mistakes (That Kill Your Margins)
Even small pricing missteps can slowly erode your profits without you even realizing it. The good news? A few smart adjustments can turn things around quickly. Here are the most common mistakes—and how to fix them.
🚫 Underpricing Because You’re Afraid to Charge More
Many restaurant owners fear raising prices, thinking it will scare away customers. But customers don’t buy just on price—they buy based on experience, quality, and value.
📌 Fix It: Instead of racing to the bottom, focus on perceived value—enhancing presentation, service, and atmosphere so customers feel your prices are worth it.
💡 Example: A local bistro increased entrée prices by 10% but also added better plating, higher-quality napkins, and a free amuse-bouche. Customers barely noticed the price hike, but profits jumped.
🚫 Ignoring Psychological Pricing
That extra five cents might not seem like a big deal, but customers notice. Studies show a dish priced at $14.95 sells better than the same dish at $15, even though the difference is almost nothing.
📌 Fix It:
- Use charm pricing ($9.99, $14.95) for casual spots to make items feel cheaper.
- Use prestige pricing ($40, $55) for high-end restaurants to signal luxury.
- Ditch dollar signs—menus without them encourage higher spending.
🚫 Failing to Adjust for Inflation
If ingredient and labor costs go up, but your prices stay the same, your margins shrink fast. A 5-10% increase in food costs might not seem huge, but over time, it adds up.
📌 Fix It:
Review pricing quarterly—don’t wait until your profits tank.
Adjust in small increments—raising prices by $1-$2 is less noticeable than a sudden 15% jump.
Test price increases on select items before making menu-wide changes.
💡 Example: A restaurant facing rising seafood costs switched from market price listings to fixed pricing with a built-in buffer. Customers paid slightly more, but the business maintained margins.
🚫 Skipping Menu Engineering
Your menu layout alone can boost profits without changing prices. If your most profitable dishes are buried in a long list of options, you’re leaving money on the table.
📌 Fix It:
Highlight high-margin dishes—use boxes, bold text, or chef’s picks.
Remove or reprice low-margin items that don’t bring in enough revenue.
Limit menu choices—too many options overwhelm customers and lead to lower spending.
💡 Example: A burger joint increased average ticket size by 12% simply by boxing in their signature burger combo on the menu. No price increase—just better placement.
Conclusion: Take Action Today
Menu pricing isn’t something you set once and forget—it’s a living strategy that directly affects your restaurant’s profitability. The best restaurants don’t just cover costs; they use smart pricing techniques to increase revenue without alienating customers.
By understanding your numbers, leveraging psychology, and optimizing your menu layout, you can boost profits while ensuring customers feel they’re getting value.
Next Steps:
✅ Audit your menu prices using the food cost formula above.
✅ Test decoy pricing on a high-ticket item to see how it influences customer choices.
✅ Rearrange your menu to highlight high-margin dishes and guide customer decisions.
Need help fine-tuning your pricing strategy? Drop a comment below or message us—we love helping restaurants win. 🚀