Foundations of Menu Pricing Notes

Foundations of Menu Pricing Notes

Introduction to Menu Pricing

  • Several methods exist for calculating menu prices.
  • No one method is superior; each has advantages and disadvantages.
  • Prices should maintain a narrow range. If prices vary significantly, consider adjusting recipes.

Method 1: Food Cost Percentage Method

  • Food Cost Percentage (FC%): Represents the portion of sales price that is allocated to food cost. Written as a decimal.

  • Formula:

    • Sales Price = Food Cost / Food Cost % (FC%)

  • Example 1:

  • Food cost = $3.22, FC% = 31%

  • SP = $3.22 / 0.31 = $10.39

  • Example 2:

  • Given FC% = 28.5% and food cost of $3.04, calculate SP.

  • SP = $3.04 / 0.285 = $10.67

  • Beverage Example:

  • Beverage cost of $0.89, FC% = 18.5%

  • SP = $0.89 / 0.185 = $4.81

  • Wine Example:

  • Wine cost = $6.25, beverage cost % = 20%

  • SP = $6.25 / 0.20 = $31.25

  • Challenges:

  • Determining an appropriate FC% can be difficult; typical ranges are 20% to 40%. Consider variations to help identify accurate FC%.

Method 2: Overhead-Contribution Method

  • Definition: Involves analyzing historical data and budgets to determine price.

  • Sales are divided into:

  • Food and beverage costs

  • Overhead costs

  • Profit

  • Contribution Margin % (CM%):

  • Formula: CM% = (Overhead Costs + Profit) / Sales

  • FC% can be calculated as: FC% = 100% - CM%

  • Example Calculation:

  • Overhead = $850,000; Sales = $1,400,000; Profit = $50,000

  • CM%: ($850,000 + $50,000) / $1,400,000 = 0.643

  • FC% = 100% - 64.3% = 35.7%

  • For a dish costing $2.88 per portion: SP = $2.88 / 0.357 = $8.07

Method 3: Base Price Pricing Method

  • Definition: Starts with a set sales price to find the desired food cost. Used particularly in fast food and noncommercial operations.

  • Formula:

  • Food Cost = Sales Price x Food Cost %

  • Cafeteria Example:

  • Must sell entrées for $4.50 with a FC% of 32%

  • Maximum cost = $4.50 x 0.32 = $1.44

  • Dessert Example:

  • A dessert for a $0.99 menu with FC% of 38% has a target food cost of $0.99 x 0.38 = $0.38.

Adjusting Prices

  • Adjustments may be needed based on:
  • Competition (direct and indirect)
  • Price sensitivity of customers
  • Perceived value of the product
  • Product differentiation

Pricing Psychology

  • Use common numbers to keep prices comfortable for consumers.
  • Ending prices in .49 or .99 suggests bargains.
  • Whole dollar amounts suggest luxury.
  • Consider bundling, value pricing, and maintaining pricing below market price ceilings.

Prix Fixe Menu Pricing

  • For new operations, calculate costs for the most expensive choice for each course.

  • Existing operations use average food costs per customer to set prices.

  • Example of Prix Fixe:

  • Monthly food cost = $26,000, guests = 1,230.

  • Average FC per guest = $26,000 / 1,230 = $21.14;

  • SP = $21.14 / 0.27 = $78.30.

  • Buffet Pricing: Lack of portion control can lead to waste.

  • Calculate average FC per guest similarly to other methods.