Pricing & Elasticity
What is cost-plus pricing and where does it fall short?
Cost-plus pricing sets a menu item's price by marking up its ingredient cost to hit a target food-cost percentage — for example, pricing a dish with $3 of ingredients at $10 for a 30% food cost. It is the restaurant industry's default method because it is simple and protects margins on paper, but it prices from the kitchen's perspective and ignores what customers are willing to pay.
Cost-plus misprices in both directions. Items customers value far above their ingredient cost get priced too low, giving away margin the brand could keep. Items with expensive inputs but weak demand get priced too high and stop selling. The menu ends up shaped by commodity markets instead of customer behavior.
The practical fix is not to discard cost data — margin still matters — but to add the demand side: measure willingness to pay through elasticity, and set each price where measured demand and unit economics meet.
Why it matters
Every cost spike tempts a brand into passing costs through item by item, which is cost-plus logic. Brands that price on demand instead of cost consistently find items that can fund the increase without customer impact, and avoid pushing costs into items that can't carry them.
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