Pmmp- Module 3

Introduction to Pricing Strategies

  • The customer payments define business success.

  • Reference to Schuler's Barbecue's challenges related to food cost percentage (FCP).

    • Initial FCP was too high (40-42%), indicating prices were too low.

    • Profitability margins were narrow, limiting growth opportunities.

Importance of Pricing and Cost Management

  • Lowering food costs and increasing prices can enhance profitability.

  • Effective price management requires structured processes.

  • Confidence comes from understanding and controlling pricing processes.

Connection of Sales Price to Costs

  • Sales price must cover:

    • Food costs

    • Other non-food costs (fixed and variable)

    • Profitability

  • Understanding contribution margin is key.

    • Contribution margin: remaining revenue after variable costs are covered, linked to overhead and profit.

Pricing Calculation Methods

Food Cost Percentage Method

  • Standard industry FCP ranges from 20% to 40%, ideally around 30-35%.

  • To calculate sales price:

    1. Determine portion cost (cost of ingredients).

    2. Divide portion cost by food cost percentage.

  • Example calculation:

    • For a dish costing $5.71 with an FCP of 30.2%:

      • Sales Price = 5.71 / 0.302 = $18.91

Overhead Contribution Method

  • Considers overhead and desired profit to determine an appropriate food cost percentage.

  • Calculate contribution margin using:

    1. Overhead + Profit / Sales.

    2. To find FCP, subtract contribution margin percentage from 100%.

  • Example calculation:

    • Overhead = $710,000, Profit = $47,000, Forecasted Sales = $1,000,000

      • Contribution Margin = ($710,000 + $47,000) / $1,000,000 = 75.7%

      • FCP = 100% - 75.7% = 24.3%

Prime Cost Method

  • Integrates food cost and labor cost to determine price using a price factor.

  • Prime Cost = Food Cost + Labor Cost.

  • Sales Price = Prime Cost x Price Factor.

  • Example calculation:

    • Portion cost: $1.92, Labor cost: $1.65, Price factor: 3.1

      • Sales Price = (1.92 + 1.65) x 3.1 = $11.07

Actual Pricing Method

  • Utilizes historical budget percentages to determine pricing.

  • Price Divisor = Variable Cost % + Fixed Cost % + Desired Profit %.

  • Sales price = Prime Cost / Price Divisor.

Gross Profit Pricing Method

  • Measures gross profit per customer and divides it by total sales over a period.

  • Useful for low-cost items.

  • Sales Price = Cost of Dish + Gross Profit per Customer.

Base Price Method

  • Sets prices aligned with competitor pricing or category expectations.

  • Adjustments may be needed to ensure costs are covered while competing effectively.

Factors Influencing Final Pricing

  • Competition: Identify prices of similar offerings in the market.

  • Price Sensitivity: Fluctuating ingredient costs due to supply and demand issues.

  • Perceived Value: Customer perception affects willingness to pay.

  • Product Differentiation: Unique offerings can justify price variations.

  • Psychological Pricing: Strategies to price items at psychologically favorable points (e.g., $9.99 vs. $10.00).

Managing Food Costs and Sales

  • Track food cost as a percentage of sales for oversight.

  • Monitor variances between standard and actual costs to mitigate losses.

    • Consider impacts of employee meals, promotions, spoilage, theft, and vendor price increases.

Conclusion

  • Understanding and applying various pricing methods is crucial for maintaining profitability and competitiveness.

  • Continual analysis and adaptation based on market conditions and business performance are necessary for success.