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OH 4-1
Determining Menu Prices
4OH 4-1
OH 4-2
Chapter Learning Objectives
Outline menu planning procedures
Describe external and internal factors that influence menu pricing
List and explain different menu pricing formulas
Describe the menu product mix and menu engineering
Explain the process used to identify food cost percentage problems
Describe the process for determining menu modifications and price adjustments
OH 4-3
Menu Planning Basics
Menus Attract Customers
Menus Impact Financial Success
Menus Impact Daily Operations
OH 4-4
Menu Planning Basics, cont.
OH 4-5
Menu Planning Steps
Process driven
Inclusive
As a menu planner which is more important to you for focus: customers or financials?
OH 4-6
Menu Planning Priorities
External factors Target market
Competition
Consumer trends
Brand
Internal factors Menu mix
Profits
Kitchen facilities
Ingredients
Equipment
Production staff
Service staff
OH 4-7
Menu Classifications Entrees
House Specialties
Appetizers
Soups
Salads
Sandwiches/Wraps
Vegetables/Accompaniments
Desserts
Beverages
OH 4-8
Potential Menu Items
Copies of menus, competitors menus
Standardized recipes
Product inventory and ingredients
Menu evaluation information
Input from managers, employees, customers
OH 4-9
Select Specific Menu Items
Variety
Temperature
Nutrition
Texture
Shape and size
Flavor
Color
Composition and Balance
Possible Selling Price
Test Results
OH 4-10
Menu Prices
If they are too high;
Sales suffer
If they are too low;
Profits suffer
OH 4-11
Menu Prices Should
Be directly related to costs
Help predict profitability
Serve as a cost control tool
Reflect realistic markups (the difference between a menu item’s cost and selling price)
OH 4-12
Pro Forma Income Statement as Budget Standard
OH 4-13
Industry Standards Restaurants typically run in the low to mid 30%
Italian - ~ 28% Multi Unit - ~ 32% American/Regional - ~35% Steak - ~ 40%
Prime Cost = 65% (some industry professionals like to see this nearer to 55%)
OH 4-14
Market Forces Affect Selling Prices
Menu prices can be affected by a variety of external forces, including
Competition
Price-value relationship
Mark-Up Differentiation
OH 4-15
Markups Affect Selling Prices Different menu items
are typically marked up by different amounts.
In general, the lower the menu item cost, the higher the markup (and the lower the food cost percentage).
OH 4-16
Menu Pricing Methods
The Factor Method
Contribution Margin Method (CM)
Ratio Pricing Method
Prime Cost Method
OH 4-17
The Factor Method
Determines menu prices based upon the standard (target) food cost percentage
Involves a two-step process
OH 4-18
The Factor Method continued
Step 1 – Calculate the appropriate factor using the following formula. Divide 100 percent by the Standard food cost percent.
1.00 ÷ Standard food cost percentage = Factor
1.00 ÷ 0.34 = 2.94
OH 4-19
Food cost % and associated factors
What would the factor be if I wanted a
Food Cost % of 33?
How about 42?
OH 4-20
The Factor Method continued
Step 2 – Calculate the menu price using the following formula. Multiply the factor by the menu item cost.
Factor x Menu item cost = Selling price
2.94 x $3.22 = $9.47
OH 4-21
The Factor Method continued
Food cost percentage method- Divide the menu item cost by the food cost percentage in decimal form.
Menu item cost
÷
Food cost percent = Selling price
3.22 ÷ .34 = $9.47
OH 4-22
Food Cost Percentage Method
OH 4-23
Contribution Margin Method
Contribution margin in the amount left over after the food cost is subtracted from the selling priceSelling price – Item cost = Contribution Margin
Contribution is the amount that pays for labor, rent, profit, etc.
A two step process is used for this method
OH 4-24
Contribution Margin Method
Step 1: Calculate the average CM per customer
(Nonfood costs + Profits) ÷ # of customers = Avg CM/cust.
($28,000 + $5,500) ÷ 10,000 = $3.35
Step 2: Determine selling price by adding the food cost to the CM $3.22 + $3.35 = $6.57 food cost CM selling price
OH 4-25
Ratio Pricing Method
Managers must know 3 key components to use this method Food costs
Labor costs
Target profit
This method required 3 steps
OH 4-26
Ratio Pricing Method, continued Step 1: Calculate the ratio of food cost to nonfood
cost and profit (nonfood costs + profit) ÷ food costs = ratio
Step 2: Calculate the nonfood and profit requirements amount for the menu item
food cost x ratio = non food costs and profit
Step 3: Add nonfood and profit requirement to menu item’s food cost
food cost + non food cost + profit = selling price
OH 4-27
Prime Cost Method
This method focuses on the direct labor involved in food preparation
Direct labor + Food cost = Prime cost
Managers then determine a targeted prime cost percentage
Calculate selling price using the Prime Cost %
Portion cost ÷ Prime cost % = selling price
OH 4-28
Menu Product Mix Is Important
Restaurants must achieve their standard (targeted) food cost percentage.
If a restaurant exceeds its food cost standard, profits will likely decline.
Menu items sell at a variety of cost percentages.
OH 4-29
Menu Product Mix Is Important continued
The average food cost percentage is determined by menu mix.
Menu mix significantly determines a restaurant’s food cost percentage target.
OH 4-30
Composite Food Cost Percent
Wrong way to determine average food cost percent
Menu Item # Sold Unit Cost
Total Cost Selling Price
Food Cost %
Total Sales
Hamburger 20 $2.00 $40.00 $5.95 34% $119.00
Fries 5 $0.50 $2.50 1.25 40% $6.25
Soda 10 $0.15 $1.50 .79 19% $7.90
Total 35 $44.50 $133.15
34+40+19=
93÷ 3 = 31% FC
OH 4-31
Composite Food Cost Percent continued
Menu Item # Sold Unit Cost
Total Cost Selling Price
Food Cost %
Total Sales
Hamburger 20 $2.00 $40.00 $5.95 34% $119.00
Fries 5 $0.50 $2.50 1.25 40% $6.25
Soda 10 $0.15 $1.50 .79 19% $7.90
Total 35 $44.00 $133.15
$44.00 ÷ $133.15 = 33% FC
Right way to determine is by weighted average food cost
OH 4-32
Menu Product Mix
It is not possible to add unweighted unit costs to determine average unit costs.
It is not possible to add unweighted food cost percentages.
A menu product mix spreadsheet helps determine the total (weighted) food cost percentage.
OH 4-33
Menu Product Mix Spreadsheet
Lists the names of all menu items sold
Lists the number of times each item has sold
Identifies the unit item cost of each item
OH 4-34
Menu Product Mix Spreadsheet continued
Lists each menu item’s selling price
Identifies the total cost of each item (number sold x item cost)
Lists the total sales achieved by each item (number sold x selling price)
OH 4-35
Menu Product Mix Spreadsheet
Menu Product Mix Spreadsheet
ItemNumber
SoldCost
Selling Price
Food Cost Percentage
Total Cost Total Sales
Vegetarian Meat Loaf 354 $1.23 $2.95
Vegetable Fried Rice 487 $0.89 $2.75
Apple Tofu Sausage 525 $0.96 $2.85
Plantain Chips 1001 $0.36 $1.25
Beverages 1156 $0.18 $1.00
Tofu Ice Cream 194 $0.22 $0.85
Total
Solve for Total Cost, Total Sales and Total Food Cost Percentage
Chapter 4 resources\Menu Product Mix Spreadsheet.xlsx
OH 4-36
Menu Product Mix continued
The items that guests select have a significant impact on a restaurant’s weighted food cost percentage.
Menu Mix Popularity % is critical information
OH 4-37
Menu Mix Popularity %
Ratio of portions sold for a given menu item to total portion sales for all menu items
Key element in forecasting sales
Critical in menu evaluation
Popularity Index = Portion sales for item x 100Total portion sales of all menu items
OH 4-38
Menu Item Popularity Index
Menu Item Number Sold MM Popularity %
Strip Steak 145 23.4
Ginger Shrimp 116 18.7
Duck Breast 21 3.3
Lamb Chops 11 1.8
Pork Loin 45 7.3
Vegetarian Burrito 50 8.2
Veal Steak 120 19.4
Steak Diane 111 17.9
Total Covers 619 100%
OH 4-39
Menu Engineering (Contribution Analysis)
Method of menu evaluation or analysis Considers menu product mix
Considers contribution margin (selling price minus menu item food cost)
Considers popularity (number of items sold)
OH 4-40
Menu EngineeringMenu Item
Number Sold
MM Pop %
Food Cost
Selling Price
Item CM
Total Cost
Total Sales
Menu CM
Strip Steak 145 23.4
Ginger Shrimp
116 18.7
Duck Breast
21 3.3
Lamb Chops
11 1.8
Pork Loin 45 7.3
Vegetarian Burrito
50 8.2
Veal Steak 120 19.4
Steak Diane
111 17.9
619 100%
Average 12.5%
Figure the AVERAGE Menu Mix (MM) Popularity % by taking 100% divided by the # of item selections (8) = 12.50%. The authors of this technique actually recommend using 70% of that number but some operators use 100% and for
this exercise we will use 100%.
What would we get using the 70% method?
OH 4-41
Menu Mix Popularity %
OH 4-42
Menu EngineeringMenu Item
Number Sold
MM Pop %
Food Cost
Selling Price
Item CM
Total Cost
Total Sales
Menu CM
Strip Steak 145 23.4 $7.50 $23.65 $16.15
Ginger Shrimp
116 18.7 $5.20 $18.00 $12.80
Duck Breast
21 3.3 $7.30 $21.50 $14.20
Lamb Chops
11 1.8 $6.90 $22.00 $15.10
Pork Loin 45 7.3 $6.30 $20.50 $14.20
Vegetarian Burrito
50 8.2 $3.80 $16.50 $12.70
Veal Steak 120 19.4 $6.35 $20.85 $14.50
Steak Diane
111 17.9 $7.75 $24.75 $17.00
619 100%
Average 12.5%
Next Calculate the Item CM by subtracting the Food
Cost from the Selling Price.
OH 4-43
Menu EngineeringMenu Item
Number Sold
MM Pop %
Food Cost
Selling Price
Item CM
Total Cost
Total Sales
Menu CM
Strip Steak 145 23.4 $7.50 $23.65 $16.15 $1087.50
Ginger Shrimp
116 18.7 $5.20 $18.00 $12.80 $603.20
Duck Breast
21 3.3 $7.30 $21.50 $14.20 $153.30
Lamb Chops
11 1.8 $6.90 $22.00 $15.10 $75.90
Pork Loin 45 7.3 $6.30 $20.50 $14.20 $283.50
Vegetarian Burrito
50 8.2 $3.80 $16.50 $12.70 $190.00
Veal Steak 120 19.4 $6.35 $20.85 $14.50 $762.00
Steak Diane
111 17.9 $7.75 $24.75 $17.00 $860.25
619 100% $4015.65
Average 12.5%
Now calculate Total Cost: Number Sold
x Food Cost.
Then total that column.
OH 4-44
Menu EngineeringMenu Item
Number Sold
MM Pop %
Food Cost
Selling Price
Item CM
Total Cost
Total Sales
Menu CM
Strip Steak 145 23.4 $7.50 $23.65 $16.15 $1087.50 $3429.25
Ginger Shrimp
116 18.7 $5.20 $18.00 $12.80 $603.20 $2088.00
Duck Breast
21 3.3 $7.30 $21.50 $14.20 $153.30 $451.50
Lamb Chops
11 1.8 $6.90 $22.00 $15.10 $75.90 $242.05
Pork Loin 45 7.3 $6.30 $20.50 $14.20 $283.50 $922.50
Vegetarian Burrito
50 8.2 $3.80 $16.50 $12.70 $190.00 $825.00
Veal Steak 120 19.4 $6.35 $20.85 $14.50 $762.00 $2502.00
Steak Diane
111 17.9 $7.75 $24.75 $17.00 $860.25 $2747.25
619 100% $4015.65 $13207.55
Average 12.5% 30.4%
Figure Total
Sales: Number Sold x Selling Price
OH 4-45
1. Calculate the Menu CM by taking the Number Sold x Item CM2. Calculate the Weighted Average CM by dividing the total Menu CM by the Total number of items sold
Menu Item
Number Sold
MM Pop %
Food Cost
Selling Price
Item CM
Total Cost
Total Sales
Menu CM
Strip Steak 145 23.4 $7.50 $23.65 $16.15 $1087.50 $3429.25 $2341.75
Ginger Shrimp
116 18.7 $5.20 $18.00 $12.80 $603.20 $2088.00 $1484.80
Duck Breast
21 3.3 $7.30 $21.50 $14.20 $153.30 $451.50 $298.20
Lamb Chops
11 1.8 $6.90 $22.00 $15.10 $75.90 $242.05 $166.10
Pork Loin 45 7.3 $6.30 $20.50 $14.20 $283.50 $922.50 $639.00
Vegetarian Burrito
50 8.2 $3.80 $16.50 $12.70 $190.00 $825.00 $635.00
Veal Steak 120 19.4 $6.35 $20.85 $14.50 $762.00 $2502.00 $1740.00
Steak Diane
111 17.9 $7.75 $24.75 $17.00 $860.25 $2747.25 $1887.00
619 100% $4015.65 $13207.55 $9191.85
Average 12.5% 30.4% $14.85
OH 4-46
Menu Engineering
Menu Item Pop Category CM Category Menu Item Class
Strip Steak H H Star
Ginger Shrimp H L Plow Horse
Duck Breast L L Dog
Lamb Chops L H Puzzle
Pork Loin L L Dog
Burrito L L Dog
Veal Steak H L Plow Horse
Steak Diane H H Star
OH 4-47
Menu Analysis
Contribution Margin
Pop
ula
rity
High
HighLow
H/L H/H
L/L L/H
OH 4-48
Menu Item Classification
• Stars: High in Popularity, High in CM (Do nothing, keep visibility on the menu, promote more, could carefully look at increasing menu prices)
• Puzzles: Low in Popularity High in CM, (increase popularity – menu location, feature special, suggestive sell, change preparation of item, rename or plate the item to make it more appealing)
• Plow Horses: High in Popularity, Low in CM (increase contribution while keeping popularity – decrease portion size, carefully raise prices, substitute a single expensive ingredient for a less expensive ingredient, move to a less prominent location on menu, combo with other more profitable items on menu)
• Dogs: Low in CM, Low in Popularity, (remove from menu unless it is a loss leader or you can increase it profitability by possibly increasing sales price, reduce the cost of ingredients, replace with an alternative menu item.)
OH 4-49
Menu item placement
OH 4-50
Other Menu Analysis Methods Miller Matrix
Same process but evaluate food cost and popularity Weighted food cost is factor Winners (similar to stars) = low food cost, high popularity Goal to achieve sales mix with 60% of items in low food
cost category
Cost Margin Analysis Combination of Miller Matix and Contribution Analysis Methodology includes evaluation of popularity,
contribution margin and food cost Primes (similar to stars) = low cost, high contribution
OH 4-51
Menu Management Decisions
Must consider more than just sales dollars, item popularity, and contribution margins Preparation and service costs
Restaurant’s image
Customers’ expectations
OH 4-52
The Pareto Principle
A few of the top selling menu items account for a large majority of sales in a category.
Removing the two or three least popular items in a category will not likely reduce the total sales of items in the category.
OH 4-53
Monitoring Menu-Related Concerns
Three factors must be considered and compared when analyzing food cost efficiency. Standard food cost percentage
Composite food cost percentage
Actual food cost percentage
OH 4-54
Monitoring Menu-Related Concerns continued
Standard food cost percentage The expected food cost percentage based upon the
approved operating budget or other benchmark.
Calculation
Total target food cost
÷
Total target food sales = Standard food
cost percent
OH 4-55
Monitoring Menu-Related Concerns continued
Composite (weighted) food cost percentage The percentage that results from the actual
food sales
Calculation
Actual food cost for menu items sold
÷Actual sales from menu items sold
= Composite food cost percent
OH 4-56
Monitoring Menu-Related Concerns continued
Actual food cost percentage Reported on the restaurant’s income statement
OH 4-57
Monitoring Menu Related Concerns continued
If the composite percentage exceeds the standard percentage, take steps to manage sales activity.
Composite % ≥ Standard %
If the actual food cost percentage exceeds the composite percentage, take steps to improve food controls.
Actual % ≥ Composite %
OH 4-58
How Would You Answer the Following Questions?
1. A composite food cost percentage is a (weighted/unweighted) average.
2. A menu product mix spreadsheet is designed to identify a restaurant’s composite food cost percentage. (True/False)
3. The menu pricing method that considers target profit in its computation is the
A. Factor methodB. Markup on cost methodC. Texas Restaurant Association (TRA) methodD. Yield percent method
4. Product mix has very little impact on the ability of a restaurant to achieve its standard food cost percentage. (True/False)
OH 4-59
Next Week
Quiz (Homework) 3 – Chapter 4 + Extra Credit
Read Chapter 5 & 6
Sign up for CM Project location
Chapter 4 Determining Menu PricesChapter 4 Determining Menu PricesChapter 4 Determining Menu PricesChapter 4 Determining Menu Prices
Key Terms:Composite (potential) food cost percentage The weighted average food cost percentage for all items sold, weighted by the quantity of each item sold.
Contribution margin (CM) The amount left over after the food cost of a menu item is subtracted from the menu selling price.
Contribution margin method (pricing) Adding the contribution margin (CM) figure to the cost of a menu item to determine that item’s price.Demand-driven pricing The theory that an operation can set pricing based on demand for the product or service.
Factor method (pricing) A popular formula used to determine menu prices based on the standard food cost percentage, also called simple markup or food cost percentage method.
Food cost percentage method (pricing) A popular formula used to determine menu prices based on the standard food cost percentage. This method is also called simple markup or factor method.
Chapter 4 Determining Menu PricesChapter 4 Determining Menu PricesChapter 4 Determining Menu PricesChapter 4 Determining Menu Prices
Key Terms continued:
Market-driven pricing Pricing that is determined by the market, which is usually regional.
Market price A menu pricing strategy in which the price of a menu item changes based on the current market.
Markup The difference between the actual cost of producing an item and the price listed on the menu.
Markup differentiation Giving different markups to different categories of food, according to a range of expectations in the market.Menu engineering The process of analyzing the menu product mix, along with consideration of an item’s contribution margin and its popularity.
Menu matrix The placement of menu items in different categories based on their popularity and profitability.
Chapter 4 Determining Menu PricesChapter 4 Determining Menu PricesChapter 4 Determining Menu PricesChapter 4 Determining Menu Prices
Key Terms continued:
Price–value relationship The connection between the selling price of an item and its worth to the customer.
Prime cost method (pricing) A method that requires managers to determine the amount of direct labor spent in preparing an item; this number is added to the food cost to arrive at the prime cost.
Q factor The quotient or cost of all other food items served with an entrée; the cost includes side dishes and garnishes as well as all complimentary items such as condiments, seasonings, coffee creamer, and sweetener.
Ratio pricing method A ratio derived by taking the sum of all nonfood costs (including labor costs, other controllable costs, and noncontrollable costs), adding it to the target profit, and dividing the resulting number by the cost of food sold in dollars.
Menu product mix A detailed analysis that shows the quantities sold of each menu item, along with their selling prices and standard portion costs.
Chapter 4 Determining Menu PricesChapter 4 Determining Menu PricesChapter 4 Determining Menu PricesChapter 4 Determining Menu Prices
Key Terms continued:
Value perception A customer’s opinion of a product’s value to him or her.
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