Food Cost vs. Food Price: How Each Affects Your Profits
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Think back to a time when you were first starting out as a caterer.
Do you remember learning the difference between food price and food costs?
Whether you did or didn't, knowing how they work together can help you maximize your profits today.
Here's how:
Food cost
Food cost is simply how much you pay for the ingredient or product that you purchase. A standard no-brainer, but putting time and energy into the actual purchasing process can shape the quality and integrity of not only your menu, but the high standards that you set for your company.
Way back when (as a manager), I would challenge our employees constantly to find ways in which we could be more efficient. This doesn’t have to necessarily mean cutting costs drastically, but simply being smarter about how we were spending money on food.
Understand that there are ways in which you can get creative with food costs without opting for the cheapest - or even the most organic, expensive - product out there. Try to find that sweet spot with food cost, especially considering what exactly your markup will be in terms of pricing.
If you’re struggling to find ways to cut down on food cost, look at ways to incorporate seasonal items into your menu. Because there’s an abundance of produce in season, for example, the prices you pay will be considerably lower.
This can also be applied to items of lesser importance – think about going generic for certain condiments, or eliminating a garnish that doesn’t really add to the dish itself.
Food price
Pricing is the other side of the equation where you take that initial food cost and determine what the ultimate set markup price will be for your menus or services. This is where it gets a little more intricate, as you have to consider things such as the kitchen labor, the market value of the product, and what the perceived value of the food is.
For example, think about the contents and quality of your dish. If you went the organic, gluten-free route, you’ll want your price to reflect that. By nature, this warrants a higher food cost, so it makes sense that it would also demand a higher price.
It may also be applicable to consider your location as well. Think about the larger cities such as Miami and NYC – their restaurants typically demand a higher price as well, given the quality of experience customers receive as well as the fact that rent costs have to be offset.
Furthermore, look at what others in your market are charging for similar ingredients, and more so – if customers are happy with those prices and appear to be coming back for more.
Customers tend to accept a higher price for a higher quality product, so don’t undersell what you know you are worth! Be reasonable, but be intentional with setting your prices.
How the two relate (and benefit your bottom line)
As the two go hand-in-hand, you’ll want to focus on the sustainability of the prices you’re setting as it relates to the cost of the food. Will customers be willing to purchase your product at the prices you set? Is the markup reasonable? Will you be operating at a loss if you aim too high or too low?
Understand that perceived cost can actually benefit you if you use it to your advantage and brand your business in a way that customers are more than willing to pay for the degree of quality they receive.
As Lon Lane of Lon Lane’s Inspired Occasions eloquently explained, “A filet at Golden Corral is a lot different than a filet at Ruth’s Chris or Capital Grill. If you have a client that’s used to dining at Ruth’s Chris or Capital Grill, they’re used to paying x number of dollars a la carte for that particular filet.” The customers know that the standard of quality is both consistent and higher than that of Golden Corral, so they’re likely to pay more.
Knowing the factors that go into determining both food cost and food prices is a great way to boost your profits, and it’s worth it to continue to analyze whether or not each is doing their part to attract new and recurring clients!
Did you know SB Value specializes in helping caterers get food prices down? Our caterers save an average of 16% on their food orders. Find out how.
