How to Start a Food Truck 11: Calculate Profit Margins

Financing

In last week’s “How to Start a Food Truck” post, we talked about setting goals for your food truck business. Goals are an important component of every entrepreneur’s journey. They dictate where you’re heading, and in an industry as complex as the food truck business, you need a clear direction and roadmap to keep your truck from getting lost in the middle of nowhere.

However, planning for your food truck journey is about more than dreaming and imagining what success will look like; it’s also about doing the research and performing the necessary calculations to know whether or not a food truck is really a viable business option for you. Determining the profit margin you’ll need to succeed is a key ingredient to that understanding. And that’s the lesson we’ll tackle today: we’re going to show you how to calculate the profit margins you’ll need to thrive as a food truck owner.

If you read our earlier article on writing a food truck business plan, today’s lesson will help you find many of the answers you need to complete that document. Figuring out how much you need to sell and how much you should charge for each item on your menu is very much related to the “Marketing and Sales” and “Financial Projections” sections of your business plan—and the answers to these questions will also help you ensure that a food truck is really right for you.

First up on today’s agenda, we’ll look at the key factors that determine how much you should charge.

What Goes Into Pricing?

How much is a thick, organic beef hamburger with all the fixins worth? How about two scoops of artisanal maple ice cream on a candied walnut sugar cone? Because food trucks come in all sizes and styles, prices can run the gamut from seriously cheap eats to indulgent, only-affordable-once-in-a-while treats. That makes pricing especially tough for anyone who’s just getting into the industry. You’ll have to find the sweet spot between prices that are low enough to attract customers and prices that are high enough to still turn a profit—and truthfully, finding that perfect price point is probably going to involve some trial and error.

Of course, our mission here at FoodTruckr is to remove as much guesswork from the equation as possible! With that in mind, we suggest taking the following six factors into account as you begin setting and testing prices.

1. Cost of Materials and Ingredients

This is an easy one, and it’s where most people begin their pricing journeys. Your final menu prices should be based heavily on the cost that goes into preparing each item.

First, you need to know how much the ingredients cost for a batch of your famous cayenne pepper queso or a dozen of your peanut butter and banana cupcakes. If you’ve been following along with “How to Start a Food Truck” at home, you should already have an idea, but here’s a quick refresher: in Lesson 03, we talked about some of the best places to source your truck’s ingredients and how to save money while shopping. Then, in Lesson 04, we explained how to track your costs when you’re at the grocery store and how to figure out what the cost per serving is for each item on your menu.

Before you start plugging that figure into your pricing equation, remember—ingredient costs and the cost per serving for each menu item can vary dramatically based on all kinds of factors that are out of your control such as bad crops, poorly preserved meat, and even fluctuating prices at your local ingredient depot.

You may also have to prepare replacement meals for unsatisfied customers or throw away ingredients that went bad before you got to use them. According to a 2012 infographic by LeanPath, a technology company focused on tracking food waste, restaurants throw away approximately four to ten percent of all food they buy before it ever reaches a customer’s plate. That’s a huge percentage of food going straight in the trash—and though you can (and should!) focus on tossing as little as possible, some waste is inevitable.

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Account for some shortage and food waste in your equation so that you have a buffer to work with. If possible, go conservative with your estimates and plan for around 15-25 percent wasted product as you’re starting out. As a new food truck owner, you may be more prone to waste than established trucks and restaurants because you’ll still be learning how to prep, store, and cook food for huge groups of people. With practice, you can bring those waste margins down and use more of the food you buy.

2. Time Invested

Once you’ve figured out the literal cost of each item on your menu, it’s time to account for a variable that’s a little less clear-cut—the value of your time. Unfortunately, this part of the process is where many entrepreneurs shortchange themselves. It’s tempting to base your prices on the cost of materials plus a small profit margin because you believe it will be easier to sell more items at a lower price.

However, this path isn’t sustainable in the long run. You absolutely must account for your time when setting prices. Though you’re probably not entering this industry with the intention of becoming a millionaire, you do need to plan to earn a reasonable, livable wage from your food truck business. After all, FoodTruckrs work long hours, and you’re not going to have the time (or energy!) to work another job on the side.

If you have employees or if you’re planning to expand your team in the future, remember that you’ll also need to account for their salaries or hourly wages. From grocery shopping to updating your Facebook page to garnishing dishes, the average time it takes someone to perform each task on your truck needs to be accounted for in your menu prices.

3. Anticipated Volume

Now that you’ve determined how much each item will cost to make and added in the cost of your time, consider how many meals or menu items you’re planning to sell. Your anticipated sales volume shouldn’t determine your pricing structure on its own, but it should absolutely play a role in the final prices you set.

There are a couple ways to think about your anticipated sales volume. Ask yourself the following questions:

  • Who are your customers? Are you targeting health-conscious customers who care about organic ingredients and eco-friendly cooking practices? Or are you serving up fast casual, fried meals that could appeal to anyone who happens to walk on by? When your menu is geared toward a smaller, more exclusive customer base, you can set your prices a little higher than if you’re planning to make your profit by selling hundreds of dishes each day to the general masses.
  • What kind of brand do you have? Similarly, you also need to consider your brand before you begin setting prices. Is your truck positioned as a high-quality, innovative mobile restaurant that creates gourmet dishes on the go? Or are you selling your truck as a value-driven stop where customers can feed the whole family for a single Andrew Jackson? Think about what kind of experience you’re trying to create and set your prices accordingly.

4. Loss Leaders

As you’re estimating potential sales volume scenarios, it’s also important to remember that some items will sell better than others—and that some items will have a much wider profit margin than others.

Think of it this way: small add-ons like drinks and side dishes may be the cheapest items on your menu, but they’re also likely to have the largest profit margin because they don’t cost you much to make. Grilled cheese sandwiches may be the bread and butter of your food truck business, so to speak, but each individual sandwich costs more to prepare than a simple order of fries because of the quality and volume of ingredients. Because the material cost of the sandwich is higher to begin with, you typically can’t add on the same type of profit margin that you could add to a simple side dish. On the other hand, fries are cheap to prepare in bulk—and while it doesn’t cost much to prepare several batches, you can sell each order at a substantial profit margin for a few dollars apiece.

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However, customers aren’t lining up at your truck’s window for the french fries—they’re following you on Twitter and tracking you down because they desperately want a brie and bacon melt on crispy Texas toast. But even though the sandwich is what they set out for, once they’re at your truck, many of the customers won’t just buy the sandwich. They’ll also want the fries, a drink, and a delicious double fudge brownie for dessert.

When customers start buying add-ons that are marked up at a high profit margin, you can afford to lose a bit of cash on the headline-making stars of your menu—your loss leaders—that drew them there in the first place. You don’t need to turn a huge profit on every item on your menu. You just need to be sure you’re selling enough low-cost items at a high profit margin to make the items that cost more to prepare worthwhile.

5. Competitors’ Prices

Still unsure of where your prices should start? Wondering if nine dollars for a sandwich is too high? Take a look at what the competition is charging, including everything from other food trucks in your city to local fast food joints and chain restaurants that serve similar meals.

Before you start looking at your competitors’ prices, be prepared—you’re probably going to find prices all over the map. If you spend too much time worrying about what other people are charging, you’ll begin to lose sight of the value of what you have to offer. Don’t get caught up in trying to compete on price with major chain restaurants (because you won’t be able to beat them and stay profitable), and don’t worry if your prices are a little higher than a similar local truck because you’re using better ingredients. With a clear brand identity, the right marketing, and enough people who have tried and loved your food, customers will understand what they’re paying for at your truck—and most importantly, they’ll be willing to pay every penny.

The key to looking at your competitor’s prices is simply to get a feel for how your customers may perceive the value of your truck. When you’re armed with an understanding of what people are paying elsewhere, you’ll have a better idea of what you can charge, what you should charge, and what you need to do so that people will gladly pay it.

See, as a food truck owner, you’re going to be selling more than just food—you’re also selling an experience, great service, and that intangible “something special” that they just can’t find anywhere else. When you devote yourself to selling a superior product, a superior brand, and superior service, you earn the opportunity to set your own prices without concern for the competition.

It doesn’t matter whether you deliver top-tier service by remembering your customers’ names and orders, throwing in a freebie every now and then, or laughing it up with everyone who comes to your window, you simply need to offer the kind of service that makes people truly smile. If you can do that, people will happily pay more for the extra good feeling they get when they go to your truck.

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6. Your Investment Costs and Overhead Expenses

Finally, you also need to keep your overall expenses in mind before you start setting prices. You’ll be investing a lot of money in starting a food truck, and it’s essential to keep those costs in mind as you figure out what you’re going to charge.

Be sure to factor in everything that goes into running your truck, including:

  • The cost of the truck
  • Maintenance and repairs
  • Fuel and insurance
  • Business licenses
  • Commissary fees
  • Parking expenses
  • Kitchen equipment
  • Paper goods and cleaning supplies
  • Social media and website setup
  • Professional services

These costs are known as your overhead, and you’ll need to add a margin to each menu item to cover them.

Finding the Pricing Sweet Spot

Okay—so you’ve figured out how much each item will cost to prepare and accounted for some of the factors that play into your final pricing structure. Now it’s time to start running the numbers. Set several sample prices for a few of the items on your menu and figure out how much you would need to sell of each one on an average day in order to break even and to make a profit. Then, figure out how those numbers would translate to an average week, month, and season. We recommend doing the math for several possible profit scenarios for each time period—and we also suggest estimating your profits on the low side so that you have some wiggle room for unanticipated expenses.

This handy profit margin calculator from Farmers & Merchants Bank makes it easy to work out the math for various products based on their material cost and what kind of margin you’re planning to add. Use this tool to estimate various cost scenarios and to analyze what level of sales you’ll need to achieve in order to run a profitable food truck business.

Once you’ve established some base price guidelines for each item on your menu, remember that you’ll likely still need to try them out and adjust after you see what does and doesn’t work for your market! That means you shouldn’t rush out and have any to-go menus printed with your prices until you’re really certain they’re going to work. Pricing is a big variable for any business, and you won’t know for sure that you have a sound plan until you can actually get your truck on the road and see how the menu performs at the prices you’ve set.

Planning for Profits

When you’ve created a pricing plan for your food truck menu, you’re one step closer to making it as a successful FoodTruckr—congratulations! We know this month’s lessons on business planning are pretty intense and require a lot of serious thought, and we’re really proud of you for sticking with it.

If you’re feeling a little uncertain about your chances of creating a profitable business after this week’s realistic look at pricing, then next week’s lesson is for you. In a brand new lesson on emergency funds, we’ll talk about why it’s important to have a safety net in place before you take the leap into entrepreneurship. Stay tuned to learn about what kinds of expenses can arise, how much you should have in savings, and the best way to put an emergency fund into place.

In the meantime, we’d love to hear how your food truck journey is going! Leave us a comment below or send us a message on Facebook and tell us where you are in the “How to Start a Food Truck” series and what you’d like to see us cover next!

image by Kiwithing

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About the Author

FoodTruckr

FoodTruckr is the #1 online destination for current and aspiring food truck owners looking to succeed in the mobile food industry. Self described “food truck devotees,” the FoodTruckr team enjoys reading about successful entrepreneurs, salivating over photos of burritos on Twitter, and long walks through food truck parks. Chat with FoodTruckr on Facebook or check out the FoodTruckr School podcast for more awesome tips to level up your business.

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