Download presentation

Presentation is loading. Please wait.

Published byBeryl Perkins Modified over 4 years ago

2
Cost Approaches to Pricing Chapter 8

3
Pricing Questions n n Which Costs Are Relevant in the Pricing Decision? n n What Is the Common Weakness of Informal Pricing Methods? n n What Are Common Cost Methods of Pricing Rooms?

4
Pricing Questions n n What Are Common Methods of Pricing Food and Beverages? n n How May Profitability and Popularity Be Considered in Setting Food Prices?

5
Pricing Questions n n Will Departmental Revenue Maximization Result in Revenue Maximization for the Hospitality Firm?

6
Pricing Questions n n What Is Integrated Pricing? n n What Is Price Elasticity of Demand?

7
Price Elasticity of Demand n n Measures How Sensitive Demand Is to Changes in Price n n Either Elastic or Inelastic

8
Price Elasticity of Demand n n Computed by Dividing % Change in Quantity Demanded by Base Quantity BY % Change in Price by Base Price (Q2 - Q1) / Q1 (P2 - P1) / P1

9
Price Elasticity of Demand n Assume Hotel Sells 1,000 rooms @ $30 n Changes Price to $33 and sells 950 (950 - 1,000)/1,000 (33 - 30)/30 = - 0.05 / 0.10 = -0.50 Inelastic

10
Price Elasticity of Demand n n If Less Than 1 - Inelastic (Demand Is Insensitive to Price Changes) – –An increase in price is offset by a smaller decrease in demand – –Normally results in more profits with a price increase – –An decrease in price is offset by a smaller increase in demand – –Normally results in less profits with a price decrease

11
Price Elasticity of Demand n If Greater Than 1 - Elastic (Demand Is Sensitive to Price Changes) –An increase in price is offset with a higher decrease in demand –Normally results in less profits with a price increase –An decrease in price is offset with a higher increase in demand –Normally results in more profits with a price decrease (up to a point)

12
Price Elasticity of Demand n n Competition, Uniqueness Affect Elasticity n n When Change Prices, Test for Elasticity

13
Informal Pricing Methods n n Competitive n n Intuitive n n Psychological n n Trial and Error n n Follow The Leader

14
Informal Pricing Methods Four Modifying Factors n n Consider First: n n Historical Price Changes n n Guest Perceptions (Price/value) n n Competition n n Modify by Rounding

15
Mark Up Approaches n n Ingredient Mark Up n n Determine Ingredient Costs n n Determine Multiple to Use n n Multiply Costs by Multiplier n n Adjust Using Qualitative Factors

16
Multiplier n n 1 / Desired Food Cost Percentage n n Example 1 / 40% = 2.5

17
Alternative to Multiplier n n Divide Costs By Desired Food Cost Percentage n n Example $3.00 Cost / 40% = $7.50 Selling Price

18
Ingredient Up Approach Ingredient Mark Up Approach n n If total ingredients cost $1.32 and you have a 40% desired Food Cost – –Multiplier = 1/0.4 = 2.5 – –Suggested Price = $1.32 * 2.5 = $3.30 – –Would suggest rounding to $3.50

19
Mark Up Approaches n n Prime Ingredient Mark Up n n Determine Prime Ingredient Cost n n Some Versions Add in a Fixed Dollar Amount for Other Ingredients

20
Mark Up Approaches n n Prime Ingredient Mark Up (Continued) n n Determine Multiple to Use - Higher Than Mark up (Arbitrary) n n Multiply Costs by Multiplier n n Adjust Using Qualitative Factors

21
Prime Ingredient Mark Up Approach n n If Prime Ingredients cost $0.59 and you have a Prime Multiplier of 7.8 – –Suggested Price = $0.59 * 7.8 = $4.60 – –Would suggest rounding to $4.75 – –Note, the Prime Multiplier is based on history or industry standards there is not a formula for it. It is usually higher than the ingredient multiplier

22
Rooms Pricing Traditional Method n n $1 Per $1,000 Cost Per Room n n Doesn’t Consider Current Value n n Doesn’t Consider Other Services n n Assumes 70%occupancy n n Assumes Profitable Food and Beverage

23
Rooms Pricing Traditional Method n n If $100,000,000 to build a 5,000 room hotel = 100,000,000 / 5,000 = 20,000 per room = 20,000 per room / $1,000 = $20.00 per room rate

24
Rooms Pricing Hubbart Formula n “Bottoms Up” n Start With Profit n Determine Pretax Profit

25
Rooms Pricing Hubbart Formula n Add in Fixed Charges n Add in Undistributed Operating Costs n Estimate Non Room Income (Loss) n Sum Is Rooms Department Income

26
Rooms Pricing Hubbart Formula n Rooms Revenue Equals Rooms Income Plus Rooms Department Costs n ADR = Room Revenue / Rooms to Be Sold n See page 371 for example

27
ADR to Single and Double Rates n (Singles Sold * Single Rate) + (Doubles Sold * (Single Rate + Price Differential)) = Average Rate * Rooms Sold n Solve for Each Rate

28
Rate Calculation n n Assume 200 room hotel with occupancy of 75% and double occupancy of 40% with ADR or 68.71 (doubles are $10 more than singles n n Sell (.75 * 200) 150 rooms per day 90 singles 60 doubles

29
Rate Calculation n n Let X = Single Room Rate n n 90x + 60(x + 10) = 67.81 * 150 n n 90x + 60x + 600 = 10,171.50 n n 150x = 9,571.50 n n x = 63.81 Single Rate x + 10 = 73.81Double Rate

30
Yield Management Increasing the Rooms Revenue

31
Yield Management n Take the Guess Work out of Your Rooms Inventory n The Business of Selecting the Most Profitable Reservations n Yield Management Is the Process of maximizing the total revenues, rather than selling more rooms

32
Why Yield Management ? n Increase Room Revenues n Improve Total Corporate Profitability n Enter New Markets With Strategic Pricing n Identify and Respond More Quickly to Changing Market Trends n Manage Distribution Channels More Effectively

33
What We Gain Is: n Assume 100 room hotel and you can sell either to business or group: –Business - ADR = $80 –Business books 1 week out, and have 40 business guests already booked and can book 55 more in the next 3 weeks –Group - ADR = $55 –Groups books 3 week out –It is 4/1/02 and a group wants to book 20 rooms for 4/21-11/02

34
What We Gain Is: n Option 1 Accept the Group Group Rooms 20 * $55.00 = $1,100 Business Rooms 80 * $80 = $6,400 Total $7,500 n Option 2 - Reject the Group Business Rooms 95 * $80 =$7,600 n Since only $100 difference look at the overall revenue that will be generated from each option (ie food and bev)

35
Menu Engineering A Tool to Increase Food and Beverage Profits

36
Breaking Out of the Box n Is It Really Important to Sell Each Guest a Selection From Each Part of the Menu? n Is Food Cost Percentage the Best Measurement of Performance?

37
Breaking Out of the Box n Can We Determine the Exact Labor Cost for Each Item Sold on the Menu? n Should Selling Prices Be Determined on a Consistent Mark-up Basis?

38
Selling the Entire Menu n Drives up Check Average and That Is Good n Additional Points of Service Reduces Seat Turnover n Waiting Time for Table May Cause Loss of Customer

39
Selling the Entire Menu n Would You Rather Serve a Dessert at a Cost of $2 for $5 or an Entrée at a Cost of $4 for $10?

40
Food Cost Percentage n Ratio of Cost of Goods Sold to Sales n Gross Profit Is Sales Minus Cost of Goods Sold n Objective Is to Increase Gross Profit

41
Food Cost Percentage n Do You Deposit Percentages or Dollars? n Item “A” Costs $4 and Sells for $12 or 33% n Item “B” Costs $8 and Sells for $20 or 40% n Which One Would You Rather Serve (All Other Things Being Equal)?

42
Labor Cost n Labor Is a Mixed Cost - a Fixed Component and a Variable Component n Customer Demand Is Variable on a Daily Basis n Daily Labor Is Scheduled Based on Forecasts Which Inherently Are Imprecise

43
Labor Cost n Therefore, Exact Labor Cost Quantification on a Per Item Basis Is Impossible to Compute n Can Rank Labor Cost Per Item (High or Low Relative to the Items in the Mix)

44
Menu Engineering n Smith and Kasavana n Analyzes Popularity and Contribution Margin n Two by Two Matrix n Classified Items As Stars, Dogs, Puzzles, or Plowhorses

45
Popularity n Item Is Popular If Individual Item’s Sales Mix Exceeds 70% of the Average Popularity n Average Popularity = (100% / Number of Items) * (70%)

46
Popularity Example n 10 Items n Average Popularity = (100% / 10) * (70%) = 7% n If Individual Sales Mix Is > 7%, The item has HIGH Popularity n If Individual Sales Mix Is < 7%, The item has LOW Popularity

47
Contribution Margin n Selling Price Minus Variable Costs or Gross Profit n Compute for Each Item

48
Weighted Average Contribution Margin Calculation n Compute Individual Contribution Margin n Multiply Item Contribution Margin by Number of Item Sales n Result Is Total Contribution Margin

49
Weighted Average Contribution Margin Calculation n Divide Total Contribution Margin by Number of Sales n Result Is Weighted Average Contribution Margin

50
Contribution Margin n Compare Against Weighted Average Contribution Margin for Menu Section Engineered n If Item CM Is > WACM - Label “HIGH” n If Item CM Is < WACM - Label “LOW”

51
Classifications n n Star - High Popularity & High CM – –Continue promoting item n n Plow Horse - High Popularity & Low CM – –Re-price the item to increase CM n n Puzzles - High CM & Low Popularity – –Promote the item to increase popularity n n Dogs - Low CM & Low Popularity – –- Drop the item from the menu

52
Menu Engineering Concerns n Ignored Variable Portion of Labor Cost n Inconsistent With Performance Evaluation n Difficult to Collect Data n Extensive Calculations n “So What” Theory

53
Adjust Sales Mix Without Cost n Create Signature Item High in Contribution Margin n Train Staff on Contribution Margin Principles n Provide Periodic Tastings to Public for Items Low in Popularity but High in Contribution Margin

54
Adjust Sales Mix Without Cost n Use Internal Marketing Tools n Reevaluate Pricing Strategies Using Data, Profit Factor, and Elasticity of Demand n Consider Profitability When Printing Menus

Similar presentations

© 2019 SlidePlayer.com Inc.

All rights reserved.

To make this website work, we log user data and share it with processors. To use this website, you must agree to our Privacy Policy, including cookie policy.

Ads by Google