Pricing your menu: Why you should never use a spreadsheet

Here’s why you need to stop pricing your menu by what everything costs.

If you’ve ever tried using Microsoft Excel to set prices for your menu, then chances are you’ve seen this wonderfully self-explanatory error message: “#VALUE!”

(Even Microsoft admits “the error is very general, and it can be hard to find the exact cause of it”.)

One reason the message can pop up is when you treat an item in your spreadsheet as a value but it isn’t a value at all. It’s the computer equivalent of asking someone, “What’s seven times toast?”

But misinterpreting value isn’t just a problem for computers. It’s also the reason why a lot of food and beverage businesses fail.

The value myth

When it comes to setting the price of a menu item, a lot of people immediately think it’s a maths problem and head to their nearest spreadsheet app. But it’s actually a judgement problem, and one that can be solved by asking a simple question: “What is the item’s perceived value?”

Let’s say you’re trying to set a price for one of your meals. You might try working it out by:

  • working out the cost of the ingredients, adding your labor and energy costs, and then adding a 50% margin
  • adding up the cost of the ingredients and multiplying by three
  • seeing what your competitor is charging and charging the same (or less).

But here’s the thing: consumers aren’t rational. They won’t be mentally adding up the cost of the ingredients to see whether you priced it correctly. Instead they’ll make a split-second decision based on whether they think it’s:

  • healthy/organic
  • trendy
  • convenient
  • “no bullshit” tasty.

And here’s another thing: by lowering your price, you could be making that meal less desirable to the consumer. Why? Because a lot of people associate cheap prices with poor quality. (Just think back to the last time you were looking for a nice bottle of wine and automatically rejected everything under $20.)

What Apple can teach you about value

Ever seen a stress ball, pen, bottle opener or free t-shirt with the Apple logo on it? Of course not. (If you have, I’m willing to bet $100 it was done without Apple’s permission.)

Apple’s business is all about innovation, and so their logo only goes on their products. It’s what makes an Apple product an Apple product.

And their products are all the proof we need to show consumers don’t buy what you make, but rather why you make it. Why else would people line up for hours (if not days) to get the latest Apple product when they could buy it a week later just by walking into the store?

But if they put their logo on a non-innovative product, it would lower the perceived value of every other product they make.

Price vs value

There’s a big difference between an item’s price and its value. Or at least there should be. The smaller the gap between an item’s perceived value and it’s selling price, the less likely that people will want to buy it.

So while it’s good to know what your menu items cost to make, don’t use that knowledge to set the price. Instead, base it on the item’s value to those in your target market.

And hopefully you’ll never see that error message on your spreadsheet again.