Chapter 14 Menus & pricing

Menu Development Menu planners must know the establishment operation. Defines purpose, strategy, market, service, and theme. Many operations use special menus for meal time, holidays and planned events. Menu Types: A la carte: menu items are listed separately. Table d’hote: groups of items are offered at a single price. Du jour: Daily Menu Limited: Quick-service, only offer a few items. Cycle: Food items are repeated after a set # of days. California: Lists on available items at all times of the day.

Factors to consider in Menu Development Physical layout of the facility, included space for storage, preparation, and service areas. Skill level & #of the employees. Food quality and availability. Nutritional, physiological, social and psychological needs of customers. Guest expectations regarding the menu offerings & prices. Food appeal, or the combined factors (appearance, temperature, texture, consistency and flavor) that make your food appealing. Profit margin

About Menu pricing Price must cover costs: food, labor, rent, advertising Mark up is the difference between the cost of a product and its selling price. Use a low mark up = high volume Use a high mark up = low volume There are several different types of pricing strategies. It is important to understand how customers evaluate price and economic value.

Menu Pricing Value Perception Pricing Psychology Economic Influences Perception is reality Pricing Psychology Price endings of .99 more suited to qsr menus. 0 and 5 endings more suited for full service menus Economic Influences Elastic vs. Inelastic Flexible vs. Inflexible

Value Perception Cheap or Expensive? vS.

Pricing Psychology Quick Service Full Service

#1 #2 Economic Influences 1) When supply is limited, prices tend to rise vs. when supply is plentiful, prices tend to drop. 2) When demand is high, prices rise, when demand is low, prices drop. Note: Consumers may view price increase negatively or an improvement in quality. #1 #2

Pricing Strategies Status-quo pricing Sales-Oriented pricing Maintain competitive position. Match prices for similar offerings. Must have close attention to costs, prices and actual profits. All costs must be low to remain competitive. Sales-Oriented pricing Maximize sales volume not profit. Coupons may increase sales volume. Long-term = very competitive. Product must be easily produced Costs must be kept low. Profit – Oriented Pricing Establishes a profit target Cover investment costs Works best w/ short term

Pricing Methods There are many methods of pricing menu items. Range= basic to complex. Some methods are used only on a few menu items such as beverages are calculated differently than a steak entrée. It is recommended that different pricing strategies be used throughout your menu. Prices must always be adjusted to account for psychology pricing, restaurant segment, the area of the country and time of year.

Food Cost % Method You set the % of menu price that the food cost must be, and then calculate the price that will provide this percentage. Formula: Item food cost / food cost % = Menu price Food Cost Example: Cost for a Steak Entrée that includes a baked potato with sour cream, tossed salad w/ dressing, and onion ring garnish, then the cost of each item needs to be included in the item food cost. The targeted food cost % is 33% and the total cost of the entrée is $5.86. Item food cost/ food cost % = menu price. $5.86 / .33 = $17.76 = mathematical price $17.95 = competitive, $18 = premium Food Cost Example Steak $3.83 Baked Potato $0.49 Sour Cream $0.22 Tossed Salad $0.52 Dressing $0.41 Onion Ring Garnish $0.39 Total $5.86

Determine Menu Price: Using % Method The owner of Sally’s Steaks wants to add a new chicken dish to the menu in response to customer requests. She has determined that the food cost of the proposed menu item, including all the side items, is $4.93. Her current food cost percentage is 34%. Using the food cost % method, determine the mathematical price for the new chicken entrée, then suggest an actual menu price. Item food cost/food cost % = Menu price $4.93 /.34 = $14.50 $14.95 or $15.00 Pros/Cons Accurate food cost % will differ for each menu category: appetizers, salads, entrees, desserts, beverages. Can’t use the same food cost % for all menu items.

Pricing based on costs continued Pricing Factor or Multiplier: This formula gives a factor by which a food cost is multiplied to get a selling price. Formula: 100% / Desired food cost = Pricing Factor Pricing factor x Food Cost = Mathematical Price Example: Food cost is $2.73 and the desired food cost % is 35%. 100%/35%=2.86 factor 2.86 x $2.73 = $7.81 If you wanted to add labor cost at 65% with labor & food cost at $5.20: Formula: 100%/ Desired labor cost = factor Labor factor x labor & food cost = mathematical price 100%/65% = 1.54 1.54 x $5.20 = $8.01 or $8.00

Pricing Factor Method Example The desired food cost percentage for your establishment is 28% and the food cost is $1.75. Your labor cost percentage is 45% and the combined food cost is $3.80. Using the pricing factor method determine your selling price with only using the food cost and calculate a new selling price including the labor cost. How much would we be losing with out including labor? Food cost Price: ______ Labor cost Price: _____ Labor Loss: _______

Pricing Factor Answer Formula: 100% / Desired food cost = Pricing Factor Pricing factor x Food Cost = Mathematical Price 100%/28% = 3.57 factor 3.57 x 1.75 = $6.25 mathematical price Formula: 100%/ Desired labor cost = factor Labor factor x labor & food cost = mathematical price 100%/45% = 2.22 2.22 x 3.80 = $8.44 mathematical price = $8.99 or $9.00 Potential Loss: $2.19

Prime Cost Pricing Step 1: food + Direct Labor = Prime Cost A selling price by creating an desired combined food cost & direct labor cost . Prime Cost Formula: Step 1: food + Direct Labor = Prime Cost Step 2: Prime cost/ # portions = Prime cost per portion Step 3: Prime Cost per portion/ Desired Prime cost %= Selling Price Recipe: Determine a menu price using the following information and my desired prime cost is 60% Step 1: Food Cost $112.62 + Labor $55.47= $ Step 2: $168.09/30 portions = $5.60 ea. Step 3: $5.60/.60 = $9.33 or $9.50 or $9.99/$10 menu price

Prime Cost Pricing using employee time/cost Example: 60% is the desired prime cost percentage and a chef takes 1.5 hours to make a recipe that gives 30 portions. Step 1: Food Cost: The cost of a recipe that makes 30 portions $145.59 Step 2: Labor Cost: The chef makes $15.00 per hour; 1.5 x $15.00=$22.50 Step 3: Combined Cost: $145.59 + $22.50 = $168.09 (Prime Cost)

All or Actual Cost Pricing Uses Combined Food and Labor Costs: Very similar to prime cost pricing All or Actual Cost Pricing Food Cost 28% $4.12 Labor Cost 30% $4.41 Operating Cost 25% $3.68 Total 83% $12.21 Profit 17% $ 2.50 Total 100% $14.71 or $14.75

Pricing Pitfalls 1. Pricing should include more than food cost and be based on other costs such that are both variable and fixed. 2. Foodservice pricing should not ignore the economic laws of supply and demand. 3. Value perception on the part of the patrons in equating price to value of a menu item should have a greater emphasis in pricing. 4. More attention needs to be given to market information in establishing prices.

Menu Analysis Methods: Keep a count of items sold per period Items must be changed if they are not producing sales. Items with high sales volume are called LEADERS Items with low sales volume are called LOSERS Menu development is actually a continual process prices and items are almost never considered final. Methods: Keep a count of items sold per period Conduct a subjective evaluation where management analyze the menu. Develop popularity index. Evaluate profits.