Lecture Managerial Accounting for the hospitality industry: Chapter 7 - Dopson, Hayes

Chapter 7 - Food and beverage pricing. In this chapter, you will learn about the important relationship between the costs of the products you will sell and the prices you must charge your guests. If your prices are too low, your profits may be too low also.

Chapter 7

Food and Beverage

Pricing

 Factors Affecting Menu Pricing

Chapter Outline

Learning Outcomes

menu pricing strategy

margin methods of menu pricing

evaluate menu pricing strategies

Factors Affecting Menu Pricing

understood than the area of pricing food and beverage products

prices include one or more of the following

his or her product can be useful information in helping

you arrive at your own selling price

increases, costs increase and thus prices must also be increased

Factors Affecting Menu Pricing

are and what they value most is critical to the success

of any restaurant's pricing strategy

best represents your guests’ anticipated desires as well

as your own operational goals, and then price your

products accordingly

significant It will be your job to establish and maintain

strict control over portion size

Factors Affecting Menu Pricing

of products and ambiance also support the price

structure

for an item served in the evening than for that same

item served at a lunch period

for business If it is good, menu prices may reflect that fact If a location is indeed bad, menu prices may need

to be lower

manager’s menu pricing decisions Sales mix refers to

the frequency with which specific menu items are

selected by guests

Assigning Menu Prices

a restaurant’s profits and its menu prices

not synonymous terms

price refers to the amount charged to one guest

formula:

Price x Number Sold = Total Revenue

Assigning Menu Prices

most products purchased by consumers, as the price of

an item increases, the number of those items sold will

generally decrease

number of those items sold will generally increase

based on their impact on total revenue and not on price alone

Assigning Menu Prices

in higher prices but, frequently, lower revenues because

of reduced guest counts

making a purchase

much value they are receiving for the price they are

paying

Marketing Approaches to Pricing

variety of concepts

Orleans steakhouse restaurant group, sets the price for

a steak on its menu, it seeks to tell its customers,

“Come here for quality!”

seeks to tell customers “Come here for value!”

Marketing Approaches to Pricing

maximize volume (number of covers sold)

total operational revenues

limited, the products sold are easily produced, and the

cost of providing the product can reliably and

consistently be controlled

Marketing Approaches to Pricing

the marketing philosophy of maintaining your current

competitive position relative to the other restaurants in

your market that target the same customers as you

are primarily price conscious and will not pay “more” for the menu items at their restaurants than they would pay

at competitive restaurants

Cost Approaches to Pricing

way to examine menu pricing, is to view it primarily from

a cost approach to pricing

consider an operation’s costs and profit goals when

determining menu prices

those that are based upon:

Food Cost Percentage

percentage for a restaurant is as follows:

Cost of Food Sold =Food Cost % Food Sales

  This formula can be worded somewhat differently for a single menu item without changing its accuracy Consider that:

Item Food Cost Selling Price = Item Food Cost %

The principles of algebra allow you to rearrange the formula as follows:

Item Food Cost % = Selling Price

  This method of pricing is based on the idea that food cost should be a predetermined percentage of selling price

If you have a menu item that costs $1.50 to produce, and your desired food cost percentage for that item is 40%, the following formula is used to determine what the item’s menu price should be:

Item Food Cost Item Food Cost % = Selling price

or

$1.50 40 = $3.75

Thus, in this example, the recommended selling price, given a $1.50 item food cost, is $3.75

If the item is sold for $3.75, then a 40% food cost should be achieved for that item A check on your work can also be done using the item food cost percentage formula:

Item Food Cost Selling Price = Item Food Cost %

Food Cost Percentage

can be assigned to each desired food cost percentage

( g o fig ure! continued)       

Experienced foodservice managers know that a second formula for arriving at appropriate selling prices based on predetermined food cost % goals can be employed This method uses a cost factor or multiplier that can be assigned to each desired food cost percentage

For example, if you were attempting to price a product and achieve a food cost of 40%, the factor would be calculated using the following formula:

1.00 Desired Item Food Cost % = Pricing Factor

or 1.00 0.40 = 2.5

Figure 7.2 Pricing-Factor Table Desired Food Cost % Factor

Pricing Factor x Item Food Cost = Selling Price

or

2.5 x 1.50 = $3.75

Item Contribution Margin

that is focused on an item contribution margin, defined

as the amount that remains after the food cost of a

menu item is subtracted from that item’s selling price

“contributes” to paying for labor and other expenses and providing a profit

item gross profit margin (selling price minus item food

cost)

same calculation as gross profit margin on the income

statement (food sales minus food cost)

If an item sells for $3.75 and the food cost for this item is $1.50, the item contribution margin would be computed as follows:

Selling Price – Item Food Cost = Item Contribution Margin

or

$3.75 - $1.50 = $2.25

The principles of algebra allow you to rearrange the formula to determine selling

price For example, when the item food cost is $1.50 and the desired item

contribution margin is $2.25, the selling price is calculated as follows:

Item Food Cost + Desired Item Contribution Margin = Selling Price

or

$1.50 + $2.25 = $3.75

Food Cost Percentage vs Item

Contribution Margin

the use of food cost percentage, item contribution

margin, or a combination of both will enable him or her

to arrive at appropriate pricing decisions

relationship in the mind of your guest while achieving

profits for your operation

possible or so high that you will not be able to sell a

sufficient number of items to make a profit

Menu Analysis

menu item contribute to the overall success of my

operation?”

psychology, and many times, the manager’s emotions

but rather to menu design, the description of the menu

item, the placement of items on the menu, their price,

and their current popularity

Menu Analysis

used each seek to perform the analysis using one or

more of the following important operational variables:

Menu Analysis

the three major philosophical approaches to menu

Menu Analysis

selling price, contribution margin, and popularity are

compiled in a Menu Analysis Worksheet (refer to Figure 7.4)

analysis of food cost percentage and contribution

margin, and goal value analysis

Date: 1/1 - 1/7

Menu Item # Sold Selling Price

Total Sales

Item Food Cost

Total Food Cost

Item Contribution Margin

Total Contribution Margin Cost % Food

Strip Steak 73 $17.95 $1,310.35 $8.08 $ 589.84 $9.87 $720.51 45 Coconut Shrimp 121 16.95 2,050.95 5.09 615.89 11.86 1,435.06 30 Grilled Tuna 105 17.95 1,884.75 7.18 753.90 10.77 1,130.85 40 Chicken Breast 140 13.95 1,953.00 3.07 429.80 10.88 1,523.20 22 Lobster Stir-Fry 51 21.95 1,119.45 11.19 570.69 10.76 548.76 51 Scallops & Pasta 85 14.95 1,270.75 3.59 305.15 11.36 965.60 24 Beef Medallions 125 15.95 1,993.75 5.90 737.50 10.05 1,256.25 37

Matrix Analysis

make comparisons among menu items

based on their unique characteristics such as food cost

%, popularity, and contribution margin

Food Cost Percentage

the oldest and most traditional method used

method, you are seeking menu items that have the

effect of minimizing your overall food cost percentage,

since a lowered food cost percentage leaves more of

the sales dollar to be spent for other operational

expenses

Food Cost Percentage

items that have a higher food cost percentage may be

removed from the menu in favor of items that have a

lower food cost percentage but may also contribute

fewer dollars to overall profit

method, menu items must be segregated based on the following two variables:

Food Cost Percentage

following examples

item per week, any item which sold more than 100

times would be considered high in popularity, while any item selling less than 100 times would be considered

low in popularity

menu item with a food cost percentage above 35%

would be considered high in food cost percentage, while any menu item with a food cost below 35% would be

considered low

Food Cost Percentage

Food Cost %

35%

Food Cost Percentage

only one, square

cost percentage, items in the fourth square are highly

desirable

of the four matrix squares are unique and, thus, should

be managed differently

squares requires a special marketing strategy,

depending on their square location

Figure 7.5 Analysis of Food Cost Matrix Results Square Characteristics Problem Marketing Strategy

1 High food cost %, low popularity Marginal due to both high food

cost and lack of sales

a Remove item from the menu

b Consider current food trends to determine if the item itself is unpopular, or if its method of preparation is unpopular

c Survey guests to determine current wants regarding this item

d If this is a high contribution margin item, consider reducing price and/or portion size

2 High food cost %, high popularity Marginal due to high food cost a Increase price b Reduce prominence on the

menu

c Reduce portion size

d Combine the sale of this item with one that has a lower cost and thus provides lower overall food cost %

3 Low food cost %, low popularity Marginal due to lack of sales a Relocate item on the menu for greater visibility

b Take off the regular menu and run as specials

c Reduce menu price

d Eliminate other unpopular menu items in order to increase demand for this one

4 Low food cost %, high popularity None a Promote well b Increase visibility on the menu

Contribution Margin

approach (also widely known as menu engineering), the operator seeks to produce a menu that maximizes the

menu’s overall contribution margin

defined as the amount that remains after the food cost

of the item is subtracted from the item’s selling price

available to pay for your labor and other expenses and

to keep for your profit

Contribution Margin

is that it tends to favor high-priced menu items over priced ones, since higher priced menu items tend to

low-have the highest contribution margins

and menu placement decisions that tend to put in the

guest’s mind a higher check average than the operation may warrant or desire

method, use the following two variables:

Contribution Margin

following examples

item per week, any item which sold more than 100

times would be considered high in popularity, while any item selling less than 100 times would be considered

low in popularity

margin of $10.83, any menu item with a contribution

margin above $10.83 would be considered high, while

any menu item with a contribution margin below $10.83 would be considered low (High is better.)

Low Strip Steak Square 3

Lobster Stir-Fry

Square 4

Grilled Tuna Beef Medallions  

Contribution Margin

$10.83

Contribution Margin

matrix square

it is desirable to have as many of the menu items as

possible to fall within square 2, reflecting high

contribution margin and high popularity

requires a special marketing strategy, depending on its location

Figure 7.6 Analysis of Contribution Margin Matrix Results Square Characteristics Problem Marketing Strategy

1 High contribution margin,

Low popularity

Marginal due to lack of sales

a Relocate on menu for greater visibility

b Consider reducing selling price

2 High contribution margin,

High popularity None a Promote well b Increase prominence on

the menu

3 Low contribution margin,

Low popularity Marginal due to both low

contribution margin and lack

of sales

a Remove from menu

b Consider offering as a special occasionally, but

at a higher menu price

4 Low contribution margin,

High popularity

Marginal due to low contribution margin

a Increase price

b Reduce prominence on the menu

c Consider reducing portion size

Contribution Margin

matrix food cost nor the matrix contribution margin

approach is tremendously effective in analyzing menus

average food cost percentage, contribution margin, or

sales level (popularity), some menu items will always

fall into the less desirable categories

undesirable categories

price, sales volume, and overall profit margin is to avoid the overly simplistic matrix analysis and employ a more effective method of menu analysis called Goal Value

Analysis

Goal Value Analysis

system that compares goals of the foodservice

operation to performance of individual menu items

sophisticated menu averaging techniques

use, accuracy, and the ability to simultaneously

consider more variables than is possible with

two-dimensional matrix analysis

Goal Value Analysis

based upon food costs or contribution margin alone,

and that ignores labor costs?

cost percentage, contribution margin, popularity, and,

unlike the two previous analysis methods introduced,

includes the analysis of the menu item’s nonfood

variable (primarily labor) and fixed costs as well as its

selling price

(1.00 – Food Cost %) x (Number Sold) x (Selling Price)

x [1.00 – (Variable Cost % + Food Cost %)]

Goal Value Analysis

food cost % of 35%

average of $16.55

assigned to each menu item

to assign nonfood variable costs to individual menu

items based on the overall restaurant’s nonfood variable costs

g o fig ure!       

Using 30% for variable cost % and the average/ weighted average numbers from Figure 7.4 for #

sold (100), selling price ($16.55), and food cost % (35%), Isabella calculates the formula to

compute the goal value of her total menu as follows:

or

According to this formula, any menu item whose goal value equals or exceeds 376.5 will achieve

profitability that equals or exceeds that of Isabella’s overall menu

Goal Value Analysis

a specific goal value for the entire menu, and the same formula can also be used to compute the goal value of

each individual menu item

the overall menu goal value will contribute greater than average profit percentages

profitability

Goal Value Analysis

in this way, assuming that the average food cost %,

average number of items sold per menu item, average

selling price (check average), and average variable cost

% all meet the overall profitability goals of the

restaurant

dollar figure because it is really a numerical target or

score

analysis

Rank Item Food

Cost %

Number Sold

Selling Price

Variable Cost %

Goal Value

Goal Value Analysis

goal value score be replaced?

with the current target food cost percentage, profit

margin, check average, and guest count

profitable than others

leaders