Managing Food and Beverage Pricing

Chapter 6Managing Food and Beverage PricingMain IdeasMenu FormatsMenu SpecialsFactors Affecting Menu PricingAssigning Menu PricesSpecial Pricing SituationsTechnology ToolsMenu FormatsThe standard menu is fixed day after day.The standard menu is most commonly used.Menu tip-ons are smaller menu segments clipped on to more permanent menus to advertise one or more products.The standard menu can be changed seasonallyMenu FormatsThe Daily menu varies each day.This format is especially popular in some upscale restaurants.The daily menu offers some advantages over the standard menu, for example, management can respond very quickly to changes in ingredient or item prices.Carryovers are less of a problem because any product unsold from the previous day has the potential of being incorporated, often as a new dish, into the next day’s menu. Menu FormatsA cycle menu is a menu in effect for a specific time period. The length of the cycle refers to the length of time the menu is in effect.The cycle menu is an effort by management to enjoy the best aspects of the standard (fixed) and daily menus while minimizing their disadvantages.Menu PricesWhen managers use an à la carte menu guests select individual menu items and each menu item is priced separately. With the à la carte menu guests choose individual items they want and are charged only for the items they select. In many parts of the world, including most of Europe, the prix fixe (pronounced “prefix”) menu, is the most common style. With the prix fixe menu guests choose from a pre-determined list of items presented as a multi-course meal. The items included in the meal are then sold at one set price. Menu SpecialsRegardless of the menu format used, managers can incorporate relatively minor menu changes on a regular basis.This is accomplished through the offering of daily or weekly menu specials; which are menu items that appear on the menu as desired and are then removed when the items are sold or the item is discontinued.Daily or weekly specials can provide menu variety, take advantage of low-cost raw ingredients, utilize carryover products, or test-market the selling potential of new menu items.Factors Affecting Menu PricingTotal revenue is generated by the following formula:As price increases, the number of items sold will generally decrease.Price x Number Sold = Total Revenue Factors Affecting Menu PricingGuests seek a good price/value relationship when making a purchase.The price/value relationship reflects guests’ view of how much value they are receiving for the prices they are paying.Increasing prices does not always mean increased revenue.Factors Affecting Menu PricingEconomic conditionsLocal competitionService levelsGuest type – price sensitivityProduct qualityFactors Affecting Menu Pricing (cont.)Portion sizeAmbience Meal PeriodLocationSales mixSales MixSales mix refers to the specific menu items selected by guests. Sales mix will most heavily influence the menu pricing decision.Price blending refers to the process of pricing products, with very different individual cost percentages, into groups with the intent of achieving a favorable overall cost situation. Assigning Menu PricesThe methods used to assign menu prices in food service operations are often as varied as the managers who utilize the methods. In general, menu prices in food and beverage operations have historically been determined on the basis of one of the following two concepts: 1. Product cost percentage2. Product contribution marginAssigning Menu PricesThe formula for computing food cost percentage is:This formula can be worded somewhat differently for a single menu item without changing its accuracy. Consider that:Cost of Food SoldFood SalesFood Cost % Costs of a Specific Food Item SoldFood Sales of that ItemFood Cost % of That Item Assigning Menu PricesProduct Cost PercentageThe principles of algebra allow managers to rearrange the formula as follows: Cost of a Specific Food Item SoldFood Cost % of That ItemFood Sales (Selling Price) of That ItemAssigning Menu PricesPricing FactorA cost factor or multiplier can be assigned to each desired food cost percentage as follows:The pricing factor when multiplied by any product cost will yield a selling price that is based on the product cost. The formula used is: 1.00 Desired Product Cost % = Pricing FactorPricing Factor x Product Cost = Menu PriceAssigning Menu PricesIn many settings, such as “all-you-can-eat” buffets and banquet-style meals, foodservice managers cannot determine a single portion cost, but rather must calculate their selling prices based upon their plate costs.A plate cost is simply the sum of all product costs included in a single meal (or “plate”) served to a guest for one fixed price.Assigning Menu PricesContribution MarginContribution margin is defined as the amount that remains after the product cost of a menu item is subtracted from the item’s selling price. Contribution margin is computed as:Selling Price – Product Cost = Contribution MarginAssigning Menu PricesWhen the contribution margin approach is used, the formula for determining selling price is:The selling price selected must provide for a predetermined operational profit.Product Cost + Contribution Margin Desired = Selling PriceAssigning Menu PricesRegardless of whether the pricing method used is based on product cost percentage, contribution margin or even a completely different approach, the selling prices selected must provide for a predetermined operational profit.Menu items cannot be priced so low that no profit is possible nor so high that the operation will not be able to sell a sufficient number of items to make a profit. Special Pricing SituationsSpecial pricing situations include:CouponsValue pricingBundlingSalad bars and buffetsBottled wineBeverages at receptions and partiesSpecial Pricing SituationsCoupons are a popular way to vary menu price.Buy one, get one free, (BOGO)Typically some form of restriction is placed on the use of the coupon.Coupons have the effect of reducing sales revenue from each guest in the hope that the total number of guests served increases to the point that total revenue increases.Special Pricing SituationsValue Pricing refers to the practice of reducing prices on selected menu items in the belief that total guest counts will increase to the point that total sales revenue also increases.Bundling refers to the practice of selecting specific menu items and pricing them as a group in such a manner that the single menu price of the group is lower than if the items in the group were purchased individually.Special Pricing SituationsTotal food costs on a buffet line or salad bar are a function of two things:How much is eaten?What is eaten?Special Pricing SituationsThe difficulty in establishing a set price for either a salad bar or buffet is that total portion cost can vary greatly from one guest to the next.The secret to keeping selling prices low for a salad bar or buffet is to apply the ABC method. A items should comprise no more than 20% of the total product available; B items, no more than 30%; and C items, 50%.Special Pricing SituationsManagers use the following formula to determine buffet product cost per guest:Total Buffet Product CostGuests ServedBuffet Product Cost per GuestBottled WinesHow bottled wines are priced on a menu or wine list directly affects guests’ perceptions of the price/value relationship offered by an operation.Price spread is the range between the lowest and the highest priced menu items.Price spreads on any menu or wine list should not be excessively large.Bottled WinesPricing beverages for open bar events can be difficult, since each customer group can be expected to behave somewhat differently when attending an open bar or hosted bar function.Sales histories can be used to calculate average consumption rates.Special Pricing SituationsBeverages at Receptions and PartiesWhen product usage histories are available managers can use the following formula to calculate their selling prices:Product Cost + Contribution Margin Desired = Selling PriceTechnology ToolsThe mathematical computations required to evaluate the effectiveness of individual menu items and to establish their prices can be complex, but there are a wide range of software products available that can help managers:Develop menus and cost recipes.Design and print menu “specials” for meal periods or happy hours.Compute and analyze item and overall food cost percentage. Technology ToolsCompute and analyze item contribution margin. Price banquet menus and bars based on known product costs.Evaluate the profitability of individual menu items.Estimate future item demand based on past guest purchase patterns.Assign individual menu item prices based on management-supplied parameters.