Food Pricing Strategies

For food vendors, pricing decisions are among the most important you will make as a small business. Price your food product too low and you're leaving money on the table. Price it too high and it won't sell at volume high enough to cover your costs, let alone turn a profit. Developing the right pricing strategy is especially important in the food business, where many items are perishable and will spoil if you don't price them to sell.

Price the food based on the ingredients, your time preparing the dish and your desired profit margin. Include packaging and delivery costs as well. Most restaurants use a 25 percent to 30 percent cost of food basis to arrive at a retail menu price. For example, suppose a steak dinner with a baked potato and fresh asparagus costs around $10 to prepare -- including all of the ingredients, not just the main ones. In this case, the restaurant would charge customers $30. This leaves $20 to cover labor, other costs and your profit margin.

Pricing on what the market will bear simply means pricing your food at the level where you achieve the greatest sales without sacrificing profit. The market -- potential customers -- determine the price. The philosophy is that the average customer doesn't care that your muffins are the only ones in the city that are gluten-free, sugar-free and lactose free. She will not pay more than $3.50, $4.50 or whatever the threshold is for that muffin. If you price the muffins higher than what the market will bear, your sales will drop. The trick is to reduce your own costs on the muffin so you can price it according to the market and still earn a profit on it.

One common pricing strategy for food vendors is to price one of your products well below the competition and market rate, or even below your own cost, as a way drawing in customers. This is known as a "loss leader" because even though you might lose money on that product, you can make up for it by boosting sales in other areas. For example, suppose you own a deli and you offer a special discount price on a certain kind of popular cheese. Customers will show up at your store to take advantage of the promotion, and while they are there might also purchase higher-margin products such as deli meats and artisan breads.

Take a look at nearly any shelf in a food store. The prices for similar products have a wide price range. For example, jams and jellies might range from a couple of dollars a jar for everyday grape jelly to $6 or $7 a jar for gourmet cherry preserves or lemon curd. Premium pricing sets the price at the upper end of the scale. This will help cover your cost of using more expensive ingredients in the jam, the extra labor required to make it, and the more upscale packaging you probably want to use. The premium price also tells consumers that this is a high-end product that merits extra money. This in itself can be an effective marketing technique because many consumers equate price with quality and prefer to pay a premium price for a premium product.