Pricing the Menu 7.4

Pricing the Menu Critical Process for any Operation Price serves 2 main roles: It provides information to the customers Indicates market category (quality of food, level of service, atmosphere to expect, etc.) It determines profitability Management must make sure that pricing aligns with the goals of the operation and the skill level of the staff.

Profitability PROFITABILITY: the amount of money remaining for an operation after expenses, or costs, are paid For a foodservice operation, this means the amount of money left over from the sale of food and beverages after the cost to prepare them and pay for other overhead expenses like rent and heat has been subtracted. This difference is also called the MARGIN Most restaurants set a target margin for their operation

Price of a Menu Item The price of a menu item must account for all of the costs involved in producing that item for the customer: Food costs Labor costs Overhead costs Then management must build into the price how much money it wants, and can reasonably get in profit. An overpriced item will not sell enough to be profitable An underpriced item may sell well but still lose money

Item food cost / Food cost percentage = Menu price Methods of Pricing Food Percentage Method: Set the percentage of menu price that the food cost must be, and then calculate the price that will provide this percentage using this formula: Item food cost / Food cost percentage = Menu price Since food cost percentage is dependant on the costs of food and its preparation, and accurate food cost percentage will be different for each menu category (appetizers, salads, entrees, signature dishes, specials, desserts, beverages, etc.)

Contribution margin + food cost = menu price Methods of Pricing CONTRIBUTION MARGIN METHOD: Uses operation-wide data to determine a dollar amount that must be added to each major menu item’s food cost. The same contribution margin can be used for all menu items, or separate contribution margins can be used for different menu categories. 2 steps: (Total nonfood cost + target profit) / number of customers = Contribution Margin Contribution margin + food cost = menu price

Methods of Pricing STRAIGHT MARKUP PRICING: Mark up costs according to a formula to obtain the selling price. A margin is defined in terms of the selling price; a markup is determined in terms of the cost The dollar amount of the markup should be large enough to cover the operating costs of the foodservice operation and include a reasonable profit. An underlying assumption of this method is that each customer will help pay for labor, operating costs, and the cost of food, as well as contribute to profit.

Methods of Pricing AVERAGE CHECK METHOD: Managers divide the total revenue by the total number of seats, average seat turnover, and days open in one year. The result is an average check amount, which gives managers an idea of the price range of items on the menu. Managers then use this range, along with approximate food cost percentage, to determine each item’s selling price.

Methods of Pricing (for major menu items) SET DOLLAR AMOUNT MARKUP: This method simply adds a fixed dollar amount to the food cost of the item. Food Cost + Markup = Menu Price The markup is calculated based on the following: Profit per menu item + labor costs per menu item + operating cost per menu item = markup

Methods of Pricing (for major menu items) SET PERCENTAGE INCREASE METHOD: Managers calculate the markup as described for the SET DOLLAR AMOUNT MARKUP for one or several menu items. Then they determine what the percentage markup is in comparison to the item’s food costs. FOOD COST X PERCENTAGE = MARKUP MARKUP / FOOD COST = PERCENTAGE

Pricing the Extras In order to accurately price food and food costs, operations must take into account not just the food guests order, but also the food they don’t order but receive anyway. Examples: Salt and Pepper Bread & Butter/Olive Oil Ketchup Jelly packets These items are called THE Q FACTOR

Analyzing Menu Sales It is crucial to the success of an operation that managers analyze how well items on the menu are performing. The sales volume of a menu item is the number of times the item is sold in a time period. Conducting a sales mix analysis helps managers maximize profits. A sales mix analysis is an analysis of the popularity and the profitability of a group of menu items. Menu engineering is systematically breaking down a menu’s components to analyze which items are making money and which items are selling.

Menu Engineering 1.First, list all of the menu entrées in column A. 2.List the total number of purchases for each item in column B.

Menu Engineering (Cont.) 3.Divide each item’s sales by the total number of purchases (covers) to determine each item’s menu mix percentage: Item number sold / total number of purchases = menu mix percentage 4.In column K, categorize each item’s menu mix percentage as either high or low. To determine menu mix percentage, take 100 percent (1.00) and divide by the number of items listed in the test. 5.List each item’s selling price in column D. 6.List each item’s standard food cost in column E.

Menu Engineering (Cont.) 7.List the contribution margin for each item in column F. Determine the contribution margin by subtracting the item’s standard food cost (column E) from its selling price (column D): Selling price – Item food cost = Contribution margin 8.In column G, record the total revenue. Determine total menu revenue by multiplying the number sold of each item (column B) by its selling price (column D): Number sold × Selling price = Total revenue Total this column at the bottom of the column.

Menu Engineering (Cont.) 9.In column H, list the total item food cost. To obtain this figure, multiply each item’s food cost (column E) by the number sold (column B) to obtain total food cost (column H): Item food cost × Number sold = Total food cost Total this column at the bottom of the column. 10.List the total item contribution margin in column I. Determine this value by multiplying each item’s contribution margin (column F) times the number sold of each item (column B): Item contribution margin × Number sold = Total item contribution margin

Menu Engineering (Cont.) 11.Categorize each item’s contribution margin as either high or low in column J, depending on whether or not the item exceeds the menu’s average contribution margin. Determine the menu’s average contribution margin by dividing the total contribution margin in column I by the total number of items sold in column B: Total contribution margin of all menu items / Total number sold = Average contribution margin 12.Use all the data gathered to classify each item into categories in column L. Classify each menu item as a star, plow horse, puzzle, or dog.