How to calculate cost of goods and set pricing

Get your pricing right from the start

Figuring out what to charge for your food and drink isn't just a guessing game. To build a successful business, you need to know exactly how much each menu item costs you to make. This is called the 'Cost of Goods Sold' or COGS. Once you know this, you can set a price that not only covers your costs but also ensures you make a healthy profit on every sale.

This process might seem a bit fiddly, but it’s one of the most important steps in building a profitable food business. Let's break it down.

Step 1: Calculate the cost of a single menu item

Your first job is to work out the exact cost of all the ingredients in a single serving of one of your dishes. We'll call this the 'cost per portion'.

1. List every single ingredient: For one recipe, write down absolutely everything that goes into it. Don't forget the little things like a splash of oil, a pinch of salt, or the garnish on top.
2. Find the cost for each ingredient: Using your supplier's price list, find the cost of the bulk amount you buy (e.g., the price for a 10kg bag of flour).
3. Work out the cost for the recipe amount: Calculate the cost for the exact amount of each ingredient used in the recipe. For example, if a 10kg (10,000g) bag of flour costs £8.00, the cost per gram is £0.0008. If your recipe uses 150g, the flour cost for that dish is £0.12 (150g x £0.0008).
4. Add it all up: The total is your cost per portion, or your COGS for that item.

Example: Costing a simple cheese sandwich

Let's see how this works in practice. Here’s a breakdown for a basic cheese sandwich to be sold in your café.

Ingredient	Amount Used	Cost per Portion
Bread (from a loaf with 10 slices costing £1.50)	2 slices	£0.30
Cheddar Cheese (from a 2kg block costing £14.00)	50g	£0.35
Butter (from a 250g block costing £2.00)	10g	£0.08
Side Salad Garnish	A handful	£0.20
Total Cost of Goods Sold (COGS)		£0.93

Step 2: Set your menu price

Now you have your COGS, you can set your final menu price. To do this, you need to decide on your target 'food cost percentage'. This is the portion of the menu price that the ingredients (COGS) account for.

A typical food cost percentage for a successful UK food business is between 25% and 35%. A lower percentage means a higher profit margin for you.

The formula is simple:

Cost per Portion (COGS) / Target Food Cost % = Menu Price

Using our cheese sandwich example with a COGS of £0.93 and aiming for a 30% food cost:

£0.93 / 0.30 = £3.10

This is your base selling price. You might round this up to £3.20 or £3.25. This price covers the ingredients and leaves a 70% gross profit margin to cover all your other business expenses (like rent, staff, and energy) and, most importantly, your net profit.

A quick word on VAT

Remember that if you are registered for VAT, the price you display to the public must include it (currently 20% for most food items). So, if you sell your sandwich for £3.25, the amount you actually keep is £2.71 (£3.25 divided by 1.2). The remaining 54p is for HMRC. Always factor this into your final calculations.

Best practices for pricing

• Stay competitive, but don't just copy: It's wise to know what your local competitors charge, but don't simply match their prices. Their ingredient costs, quality, and overheads will be different from yours. Price based on your numbers.
• Sell the value: If you use high-quality, local, or specialist ingredients, make sure your customers know. People are often happy to pay a little more if they understand the value they are getting.
• Review your costs regularly: Supplier prices can change quickly. Get into the habit of reviewing your COGS for every menu item every few months to make sure your prices still give you the profit margin you need.

Repeat this process for every single item on your menu. It’s a vital piece of work that puts you in full control of your business finances and is the foundation of a profitable future.