1. MENUS & PRICING Chapter 14

2. 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.

3. 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

4. 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.

5. Menu Pricing Value Perception  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

6. Value Perception Cheap or Expensive?

7. Pricing Psychology

8. 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.

9. Pricing Strategies Status-quo 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

10. 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.

11. 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 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

12. 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.

13. Contribution Margin (Gross Profit)Method Works for a la carte menu items as well as grouped items: soup, entrée, salad, etc. Uses operation-wide data to determine a dollar amount that must be added to each major menu item’s food cost. Can use the same contribution margin for all items or use categories. 2 versions of the formula: 1. Food cost + contribution margin = menu price. Combination: 2. Food cost + (Total nonfood cost +Target profit/ # of customers) = menu price.

14. Contribution margin is the is the combination of nonfood costs and profit. Generally a food service operation does not know the cost on nonfood factors (i.e. rent, utilities, labor, etc.) of an individual menu item, nor do they know profit for an individual item. It uses total nonfood costs + total profit of the entire operation. Most available information is the # of customers. Depends on very accurate accounting procedures and consistent customer counts. If a large drop occurred, these costs would not be covered.

15. Example: Contribution Margin Menu Price The operating costs for a certain period are $60,000, the target profit for the same period is $7,000 and the sales volume for the same period is 10,000 customers and the food costs for the item are $5.86. Calculation: Food cost + (Total nonfood cost + target profit/ # of customers) = MENU PRICE $5.86 + ($60,000 + $7,000/ 10,000) = Menu Price $5.86 + $6.70 = $12.56 = mathematical price Pricing Psychology = $12.75 or $12.95 To determine another item using the same contribution margin to a food cost of $4.27. Food cost + contribution margin = menu price. $6.70 + $4.27 = $10.97 mathematical price….Pricing Psych: $10.99 or $11

16. The owner of Sally’s Bakery has determined that her operating costs were $125,000 for last month. The targeted profit is $15,000. The sales volume for last month was 17,500 customers. The food cost of the menu item she is trying to price is $4.93. Find the mathematical price for the menu item using the contribution margin and suggest an actual menu price.

17. Answer FORMULA: Food cost + (Total nonfood cost + target profit/# of customers) = menu price $4.93 + ($125,000 + $15,000/17,500) = Menu price $4.93 + 8.00 = $12.93 mathematical Actual Menu Price: $12.95 or $12.99 or $13

18. 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

19. 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: _______

20. 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

21. Prime Cost Pricing 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

22. 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)

23. 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 Cost30%$4.41  Operating Cost25%$3.68  Total83%$12.21  Profit17%$ 2.50  Total100%$14.71 or $14.75

24. Menu Pricing Pricing Employee Meals  Employee meals are considered a benefit as well as an operating expense.  When the cost of food for employee meals is included in the cost of food used, it must be deducted.  The value for deducting an employee meal can be based on:  1. The actual cost of the meal – discounts from standard prices.  2. Experience.  3. An arbitrary amount.

25. Changing Menu Prices  If food prices are rising rapidly customers may recognize the need of the operation to raise prices.  In periods of stable prices where other factors may dictate increases customers may not be as willing to accept price increases.  Sometimes menu items are removed and then brought back in anew manner with a higher price.  It’s not wise to raise all prices at once.  Market Price.  Daily inserts for items that have costs that fluctuate.

26. 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.

27. Menu Analysis 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.