Cost-plus pricing is a pricing method in which a business calculates the cost of a product or service and adds a predetermined markup to establish its selling price. In restaurants, it can be used as a starting point for menu pricing, but the calculation must include the relevant costs and should be checked against market conditions, guest value and the restaurant’s financial objectives.
The basic formula is:
Selling price = Cost × (1 + Markup rate)
If a dish has a defined cost of $6.00 and the restaurant applies a 200% markup, the calculation is:
$6.00 × (1 + 2.00) = $18.00.
The markup is $12.00, or 200% of the cost. The gross profit before other operating expenses is $12.00, and the gross margin is 66.7% of the selling price.
Markup is calculated as a percentage of cost. Gross margin is calculated as a percentage of selling price. They are not interchangeable. A 200% markup does not mean a 200% gross margin; the margin in the example above is 66.7%.
For a menu item, the starting figure is often the recipe or plate cost, including ingredients and relevant yield loss. A broader cost-plus model may also allocate packaging, direct labour or other costs, depending on the business’s pricing method. Be explicit about what is included so that the resulting price is not mistaken for a full measure of profitability.
A price based only on cost and markup may not reflect guest willingness to pay, competitor pricing, perceived value, demand, menu mix or the contribution needed to cover rent and other operating expenses. Review the selling price alongside food-cost percentage, contribution margin and sales performance.
Example: A restaurant calculates a dish’s recipe cost at $6.00, applies a 200% markup and obtains an $18.00 starting price. Management then reviews portion value, competitor offerings, demand and the dish’s contribution before finalising the menu price.
Chef’s tip: Use cost-plus pricing as a transparent calculation, not as the only pricing decision. Accurate yield tests and recipe costing are essential for a reliable starting cost.
Key distinction: Cost-plus pricing adds a markup to cost. Target-margin pricing calculates the selling price needed to achieve a specified gross margin.
This term is one of hundreds covered in depth across OCS courses, learning paths, and 1-on-1 coaching with Chef Eric.
