Vivid-colored phycobiliproteins (PBPs) have emerging potential as food colors and alternative proteins in the food industry. However, enhancing their application potential requires increasing stability, cost-effective purification processes, and consumer acceptance. This narrative review aimed to highlight information regarding the critical aspects of PBP research that is needed to improve their food industry potential, such as stability, food fortification, development of new PBP-based food products, and cost-effective production. The main results of the literature review show that polysaccharide and protein-based encapsulations significantly improve PBPs’ stability. Additionally, while many studies have investigated the ability of PBPs to enhance the techno-functional properties, like viscosity, emulsifying and stabilizing activity, texture, rheology, etc., of widely used food products, highly concentrated PBP food products are still rare. Therefore, much effort should be invested in improving the stability, yield, and sensory characteristics of the PBP-fortified food due to the resulting unpleasant sensory characteristics. Considering that most studies focus on the C-phycocyanin from Spirulina, future studies should concentrate on less explored PBPs from red macroalgae due to their much higher production potential, a critical factor for positioning PBPs as alternative proteins.