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ControllingFoodservice Costs

Determining Menu Prices

Chapter 4

Learning ObjectivesAfter completing this chapter, you should be able to:

• 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 modificationsand price adjustments.

Chapter 4 Determining Menu Prices

WHY MENU PRICES MATTER


FACTORS AFFECTING MENU PRICES


External FactorsPrice–Value Relationship

Markup Differentiation


Internal FactorsCosts

Portion Size


ESTABLISHING FOOD AND BEVERAGE PRICES


Factor Method


Contribution Margin (CM) Method

Ratio Pricing Method

Prime Cost Method


Q Factor


ANALYZING THE MENU MIXDetermining Item Popularity


Determining Item Contribution Margin



Assessing Individual Item Performance



Menu Modifications and Price AdjustmentsIs the Menu the Problem?

Is the Problem Operational?


IMPLEMENTING REVISED PRICESRevenue Forecast Adjustments

Menu Revisions

Chapter 4 Determining Menu Prices - Summary

1. Describe external and internal factors that influence menu pricing.• The selling price on the menu is not always the same price that is

derived from one of the formulas.

• Other factors must also be taken into account when pricing a menu, including the market, location, economic climate, competition, and the perceived value by the customer.

• One of the most important ways managers use a menu as a cost control device is to determine if the menu items are priced appropriately.

• Food costs change, so it is very important that recipe cost cards are updated regularly.

• If the cost goes up and the selling price is not adjusted accordingly, the standard food cost percentage will not be met and the profit of the operation will be reduced.

• Portion size must also be controlled or it will impact food cost and profit.


2. List and explain different menu pricing formulas.

• Establishments use a variety of methods to calculate markup and determine selling prices.

• The factor method, also known as the food cost percentage method, is a popular formula used to determine menu prices based simply on the standard food cost percentage.

• The contribution margin (CM) method calculates what is left over after the product cost of a menu item is subtracted from the menu selling price.

• That amount is what each item “contributes” to paying for labor and other expenses and providing a profit.

• The ratio pricing method considers the relationship between all expenses and profit, whereas the prime cost method calculates labor costs involved in food preparation, as well as food cost.


3. Describe the menu product mix and menu engineering.

• The menu product mix is a detailed analysis that shows the quantities sold of each menu item, their selling prices, and their standard portion costs.

• It is used to determine the composite (potential) food cost percentage for all items sold.

• It is this average, not each individual item, that must meet the operation’s standard food cost percentage.

• Menu engineering identifies the buying habits of customers, and how their choices affect profitability.

• Menu engineering places each of the menu items into one of four categories based on their sales volume and contribution to profits: stars, plow horses, puzzles, and dogs.

• This process helps determine which items to feature more prominently on the menu, which items need repackaging, and which items may need to be removed from the menu.


4. Explain the process used to identify food cost percentage problems.

• Managers can identify concerns directly related to food cost percentages.

• There are three factors that should be examined and compared: standard food cost percentage for the operation, composite (potential) food cost percentage based on the menu product mix, and actual food cost percentage calculated from the income statement.

• If they do not match, this indicates problems that need to be investigated.

• The manner in which these factors do not match will give managers insight into where the problem lies, and whether it is related to the menu or to the actual activities within the operation.


5. Describe the process for determining menu modifications and price adjustments.

• Managers should be cautious and methodical in making price adjustments.

• They need to listen to the customers and service staff, track sales mix and profitability, as well as employ common sense.

• By adjusting specific variables, such as cost, pricing, menu placement, and presentation, an operation can maximize the profitability of each menu item.


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.


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.



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.



Value perception A customer’s opinion of a product’s value to him or her.


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Marketing

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