Pricing coefficient and selling price

What it is and why it matters

The selling price has to cover the raw materials, every other cost of the business and the profit you want. That is why it pays to treat the desired profit as one more cost and set it before deciding to open.

The method uses a coefficient: it multiplies each product's standard cost (from its recipe card) and then adds taxes and fees on sales. The result is a theoretical price you must compare with the competition and adjust with commercial judgment.

The formula

• Non-raw-material costs = salaries + payroll charges + rent + utilities + general expenses + amortization
• Amortization = investment ÷ 36 months
• Desired net profit = investment × annual return % ÷ 12 + monthly draw
• Profit before tax = net profit ÷ (1 − 35%)
• Coefficient = 1 + (non-raw-material costs + profit before tax) ÷ COGS
• Net price = standard unit cost × coefficient
• Menu price = net price × (1 + VAT + gross income tax + cards + health & safety)

What each value means

Costs not related to raw materials

Staff (with payroll charges), rent, utilities, general expenses and amortization of the investment.

Desired profit

The return you expect on your investment plus what you want to draw for your work, before income tax.

COGS

Cost of goods consumed in the month.

Standard unit cost

The raw material cost of a product, from its recipe card.

Step by step

1. Add up the costs that aren't raw materials.
2. Set the desired net profit and convert it to profit before tax.
3. Work out the cost of goods consumed in the month.
4. Work out the coefficient.
5. Multiply each product's standard cost by the coefficient.
6. Add taxes and fees on sales to get the menu price.

Worked examples

Study notes

• Tip

  Don't price with the "rule of 3" or just by looking at the competition: combine the cost study, competitors' prices and your commercial judgment.

• Tip

  If your price is well below the market, you can raise it; if it's well above, review the product or take it off the menu.

• Tip

  As a benchmark for the minimum return, ask your investment for well above what the same money would earn in a risk-free alternative, such as a fixed-term deposit or a government bond.