How to Price a Restaurant Menu: Food Cost, Margin and VAT, with a Worked Example

How to price a restaurant menu in five steps

1. Cost one portion. List every ingredient in the recipe by weight or count, including oil, sauce, garnish, bread and the takeaway box, and price each line.
2. Correct for yield. Raise the cost of anything you trim, peel, bone or cook down, so the sheet reflects the usable weight, not the purchased weight.
3. Pick a target food cost percentage. Divide the portion cost by it to get the price before VAT.
4. Add VAT and round. Multiply by 1.15 in Saudi Arabia or 1.05 in the UAE, then round to a price that reads cleanly on the menu.
5. Sense-check. Look at the contribution margin (price before VAT minus portion cost), compare with similar dishes nearby, and ask whether guests will see the value.

Steps 1 to 4 give you a floor, not the final answer. Step 5 is where a price becomes a menu decision rather than a calculation.

Step 1: cost one portion with a recipe costing sheet

A recipe costing sheet is a standard recipe with a price next to every line. Write down how much of each ingredient goes into one portion, the unit cost from your latest supplier invoice, and multiply. The sum is the portion cost.

Three things owners commonly leave off: frying oil and marinade (small per portion, real over a month), the bread, rice or fries served alongside, and packaging for takeaway and delivery. If a dish always leaves the kitchen in a box, the box is part of its cost.

The sheet is only as good as the portioning. If one cook puts 90 g of chicken in a sandwich and another puts 120 g, you have two different dishes at one price. Weigh portions when you build the sheet and keep a scale on the line.

Step 2: yield and waste, the step most guides skip

You buy ingredients as purchased (AP) and serve them as edible portion (EP). The difference is trimming, bones, peel and the weight lost in cooking. Basic Kitchen and Food Service Management, an open textbook from BCcampus, gives the method:

• Yield % = EP weight ÷ AP weight × 100. In the textbook's example, a 2,500 g whole tenderloin trims down to 1,750 g: a 70% yield.
• Cost factor = 100 ÷ yield %. For 70%, the factor is about 1.43 (the textbook rounds it to 1.42).
• EP cost = AP cost × cost factor. Tenderloin bought at $23.00/kg really costs about $32.66 per usable kilo.

Cooking loss stacks on top of trimming. In the same textbook's cooking loss test, a 3,750 g leg of lamb ends up as 1,600 g of saleable meat after trimming, roasting and deboning. Bought at $6.50/kg, it costs $15.24 per kilo of meat you can actually serve, more than double the invoice price.

Shawarma is a good example of why this matters in the Gulf: marinated meat on a spit loses weight as it cooks, and the trimmings at the end of the day are part of the cost. Use the weight that goes into sandwiches, not the weight that went on the spit.

Step 3: food cost percentage, and what target to use

Food cost percentage is the share of the selling price spent on ingredients:

The same formula works as a markup multiplier: 1 ÷ target %. At 30%, multiply the portion cost by 3.33.

What target? There is no rule that fits every restaurant. Resy's pricing guide cites US Foods putting the average for full-service and limited-service restaurants at 28% to 32%. Those are US figures. The BCcampus textbook's examples run from about 25% to 48%, and it has each kitchen set its own desired percentage from its own past results. A coffee shop selling mostly drinks often runs lower than a grill selling lamb and steak, and that is fine as long as the cash covers rent, wages and profit.

Check the real number every month

Recipe costing gives you a theoretical food cost. The kitchen's actual food cost comes from stock, using the formula in the BCcampus chapter on monthly food costs: opening stock + purchases − closing stock = cost of food used. Divide by food sales before VAT for the month.

If the actual percentage sits well above what your costing sheets predict, the menu prices are not the problem. Look for over-portioning, waste, staff meals that are not recorded, theft, or invoices that went up without anyone updating the sheet.

Contribution margin: why the percentage is not the whole story

Contribution margin is the selling price minus the portion cost: the cash a dish leaves you to pay rent, wages and everything else. You bank riyals and dirhams, not percentages, so this is the number that pays the bills.

The karak has the better percentage. The grill platter leaves you about nine times more cash per sale. If you pushed the platter's price up only to bring its percentage down, you might sell fewer of them and end up with less money. The BCcampus menu engineering chapter makes the same point with a chicken dish at 27% and a steak at 38%: the steak puts $3.00 more into the till each time it sells.

Use the percentage to catch dishes that are badly costed. Use the margin, together with how often each dish sells, to decide what to feature, reprice or drop. That popularity-and-margin analysis is called menu engineering, and our menu engineering guide walks through it.

VAT-inclusive prices in Saudi Arabia and the UAE

In both countries, the price the guest sees should be the price the guest pays.

• Saudi Arabia, 15%. ZATCA's guide to the 15% VAT rate, in force since 1 July 2020, says retail prices displayed to buyers must include VAT. It also gives the formula for the VAT inside a VAT-inclusive amount: total × 15/115.
• UAE, 5%. Under Article 38 of the VAT law and Article 27 of its Executive Regulation, taxable supplies to the public must be advertised at VAT-inclusive prices, according to Habib Al Mulla and Partners (August 2025). The same analysis puts the penalty at AED 5,000 per violation since Cabinet Decision No. 49 of 2021. The Federal Tax Authority publishes VAT guidance and a 5% VAT calculator.

Menus also have other rules in Saudi Arabia, such as calories and allergens; see Saudi menu requirements for prices and the rest of the checklist.

Do the pricing maths on the price before VAT

The VAT in your menu price is not yours: it goes to the tax authority. So food cost percentage and margin must be calculated on the price excluding VAT. To get there from a menu price, divide by 1.15 in Saudi Arabia or 1.05 in the UAE.

Delivery apps are a separate case: they usually take a commission on the order, which comes out of your share. Cost delivery prices with the commission deducted, not with your dine-in margin.

Worked example: pricing a chicken shawarma sandwich

1. Target food cost: 30%. Price before VAT = 4.60 ÷ 0.30 = 15.33 SAR.
2. Add 15% VAT: 15.33 × 1.15 = 17.63 SAR.
3. Round to a clean menu price: 18 SAR.
4. Check: 18 ÷ 1.15 = 15.65 SAR before VAT. Food cost = 4.60 ÷ 15.65 = 29.4%. Margin = 11.05 SAR per sandwich.

Now skip the yield step and cost the chicken at the raw invoice price: 90 g × 22 SAR/kg = 1.98 SAR instead of 3.05. The portion cost drops to 3.53 SAR, understated by about 23%, and every price you build on it is too low.

The same method works for drinks. For the karak in the table above: 0.98 AED for tea, evaporated milk, sugar, spices, cup and lid; at 5 AED on the menu, that is 4.76 AED before 5% VAT and a 20.6% cost.

Pricing methods: cost-based, competitor and value

The food cost formula gives you a floor. Two other views decide where above the floor the price should sit.

Most restaurants combine them. The food cost formula also ignores labour, so a dish that takes a lot of prep or a skilled cook should sit further above its floor than one that is assembled in a minute. A cappuccino or a falafel sandwich is a price guests know by heart, so stay close to the neighbourhood and earn your margin elsewhere. A signature dish with no equal nearby can sit well above its cost-based floor. If a dish cannot reach its floor at a price guests accept, change the recipe or portion, or take it off.

Psychological pricing: what the evidence actually supports

Much menu-psychology advice is repeated without evidence. Two findings are well documented, with clear limits:

• The left digit matters. In five experiments, Thomas and Morwitz (Journal of Consumer Research, 2005) found that a price ending in nine feels lower than one a cent higher only when the leftmost digit changes, as in 2.99 against 3.00. So 19 against 20 SAR may matter; 17 against 18 changes nothing in that sense.
• Currency signs may nudge spending down. A Cornell study (2009) of 201 diners at a Culinary Institute of America restaurant found guests spent about 8% more when prices were plain numbers than when they carried a dollar sign or were written out in words. It was one café, so treat it as a hint, not a rule.

Neither study was done in the Gulf, and neither overrides the VAT-inclusive rule or the need to show prices clearly. Treat them as small adjustments to a price that already works, not as a pricing strategy. Layout matters too; our menu design guide covers where prices sit on the page and how to list them.

When and how to raise menu prices

Re-cost a dish whenever a main ingredient's invoice price moves, and review the whole menu on a fixed schedule, for example every quarter. A price rise is due when the portion cost has climbed so far that the margin no longer covers what it should.

Suppose chicken goes up 15% and the shawarma's portion cost rises from 4.60 to 5.06 SAR:

Holding the margin in riyals needs a smaller increase than holding the percentage. That is often the fairer choice for a dish guests buy every week.

• Raise in small steps on popular dishes rather than one big jump.
• Change the dish, not just the number where you can: a new side, a better bread or a larger size at a new price is easier to accept.
• Don't raise everything at once. Start with dishes whose margin has fallen most and whose prices guests compare least.
• Check portion size before price. Sometimes the cost rose because portions grew, not because the supplier charged more.
• Update every place the price appears on the same day: menu, delivery apps, Google Business Profile and the till.

Menu pricing checklist

• Every dish has a costing sheet with weighed portions and today's invoice prices.
• Meat, fish and anything trimmed or cooked down has a yield test behind it.
• Packaging is included for takeaway and delivery items.
• Food cost % and margin are calculated on the price before VAT.
• Menu prices include VAT (15% in Saudi Arabia, 5% in the UAE) and match the bill.
• Each dish clears its cost-based floor, and compared items sit close to the neighbourhood.
• Actual monthly food cost is checked against the costing sheets.
• There is a date in the calendar for the next price review.

Updating prices on a QR menu

Re-costing is only useful if the new price reaches guests quickly. With a printed menu, every change means a reprint, so prices tend to lag behind costs. On a digital menu, the change can go out the day you decide.

• In AlaMenu, you edit a price in the dashboard and it is live the next time someone scans. The QR code on the table does not change.
• Prices show in your restaurant's currency (AED, SAR, KWD, QAR, OMR, JOD or BHD) with that currency's usual decimals.
• When a dish runs out because an ingredient has become too expensive to stock, mark it unavailable and it disappears from the menu guests see.
• Every item carries an Arabic and an English name and description, so a price change is made once for both languages.

AlaMenu does not cost recipes or track stock: keep the costing sheet in a spreadsheet and use the menu to publish the result. See how the QR menu works and the plans; the Free plan includes the menu and table bookings.

Questions

Sources

1. ZATCA, guide to the change of the standard VAT rate to 15% (Arabic, PDF)
2. Habib Al Mulla and Partners via Mondaq, “VAT-Inclusive Displayed Prices: Rule, Exceptions and Implications” (8 August 2025)
3. UAE Federal Tax Authority: Value Added Tax
4. BCcampus, Basic Kitchen and Food Service Management: Yield Testing
5. BCcampus, Basic Kitchen and Food Service Management: Cooking Loss Test
6. BCcampus, Basic Kitchen and Food Service Management: Monthly Food Costs
7. BCcampus, Basic Kitchen and Food Service Management: The Principles of Menu Engineering
8. Resy, “Restaurant Menu Pricing” (cites US Foods for the 28–32% average)
9. Thomas and Morwitz, “Penny Wise and Pound Foolish: The Left-Digit Effect in Price Cognition”, Journal of Consumer Research 32(1), 2005
10. Cornell Chronicle, “Diners spend more when menus don't use dollar signs” (9 December 2009)

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