According to the American Restaurant Association, there are 990,000 restaurant locations in the U.S. But that doesn’t stop thousands of people from starting up new locations, and one of those people could be you.

Despite the fact that you are a good cook or have worked in the business before, the challenge of running a restaurant calls for skills you may not have. Even the most successful of restauranteurs, like Danny Meyer who started the popular New York restaurant Union Square Cafe, the flagship of his restaurant empire, can run into challenges like rising rent that he says can’t be overcome.

Here’s another challenge: How do you come up with the price of a menu item?

The restaurant supply company Food Service Warehouse provides a guide on various ways restaurant owners can approach that challenge.

Here are some of the things they suggest:

Step One: Figure out your costs

  • Direct costs. These are the ingredient costs. Make sure to factor in purchase price, measurement/portion size and food waste from error.
  • Indirect costs. These are costs that reflect aspects of your restaurant that add perceived value or quality. These may be locally grown ingredients, labor and preparation or unique features such as live music.
  • Overhead. The basics: décor, product presentation, amenities and marketing/advertising.
  • Service type. Are you fast-casual or full service? A full service hamburger is always going to cost more than a fast-casual burger thanks to (usually) better service, ambience and ingredients.

Step Two: Knowing your costs, use one of these methods

  • Ideal food cost pricing method. Depending on location, preparation, and supply and demand, the direct cost of a menu item should reflect 20-35 percent of the price. So, if you purchase your hamburger ingredients for $3.45 and you decide you want direct costs to be 30% of your price, then you’d simply divide 3.45 by 0.3 and get $11.50 for the menu price. The other 70% compensates for indirect costs, overhead, service and your profit.
  • Competition pricing method. This process is a little simpler and requires you to look from without. See what other restaurants in your area are charging for the same dish and price accordingly—less if you want to bring people in with a bargain but more if you want to bring them in for higher quality food and service.
  • Demand-driven pricing method. Supply and demand: Are you offering a dish or dishes that is/are unique to your area? Or are you in a location that allows you to raise your prices? Like with competition pricing, study the market and your customer base. This will give you great insight into whether or not you can charge more—and make more.

(Photo: Windell Oskay via Flickr)