Determining Menu Prices

1
Determining Menu Prices
4
OH 4-1
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

3
Menu Planning Basics

• Menus Attract Customers
• Menus Impact Financial Success
• Menus Impact Daily Operations

4
Menu Planning Basics, cont.
5
Menu Planning Steps

• Process driven
• Inclusive
• As a menu planner which is more important to you
  for focus customers or financials?

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

7
Menu Classifications

• Entrees
• House Specialties
• Appetizers
• Soups
• Salads
• Sandwiches/Wraps
• Vegetables/Accompaniments
• Desserts
• Beverages

8
Potential Menu Items

• Copies of menus, competitors menus
• Standardized recipes
• Product inventory and ingredients
• Menu evaluation information
• Input from managers, employees, customers

9
Select Specific Menu Items

• Variety
• Temperature
• Nutrition
• Texture
• Shape and size

• Flavor
• Color
• Composition and Balance
• Possible Selling Price
• Test Results

10
Menu Prices

• If they are too high
• Sales suffer
• If they are too low
• Profits suffer

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 items cost and selling price)

12
Pro Forma Income Statement as Budget Standard
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)

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

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).

16
Menu Pricing Methods

• The Factor Method
• Contribution Margin Method (CM)
• Ratio Pricing Method
• Prime Cost Method

17
The Factor Method

• Determines menu prices based upon the standard
  (target) food cost percentage
• Involves a two-step process

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 1.00 0.34 1.00 0.34 2.94
19
Food cost and associated factors
What would the factor be if I wanted a Food Cost
of 33? How about 42?
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 2.94 x 3.22 2.94 x 3.22 9.47
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 3.22 .34 3.22 .34 9.47
22
Food Cost Percentage Method
23
Contribution Margin Method

• Contribution margin in the amount left over after
  the food cost is subtracted from the selling
  price
• Selling 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

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
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

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 items food cost
• food cost non food cost profit
  selling price

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

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.

29
Menu Product Mix Is Important continued

• The average food cost percentage is determined by
  menu mix.
• Menu mix significantly determines a restaurants
  food cost percentage target.

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
344019 93 3 31 FC
31
Composite Food Cost Percent continued

• Right way to determine is by weighted average
  food cost

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
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.

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

34
Menu Product Mix Spreadsheet continued

• Lists each menu items 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)

35
Menu Product Mix Spreadsheet
Menu Product Mix Spreadsheet Menu Product Mix Spreadsheet Menu Product Mix Spreadsheet Menu Product Mix Spreadsheet Menu Product Mix Spreadsheet Menu Product Mix Spreadsheet Menu Product Mix Spreadsheet
Item Number Sold Cost 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 Solve for Total Cost, Total Sales and Total Food Cost Percentage Solve for Total Cost, Total Sales and Total Food Cost Percentage Solve for Total Cost, Total Sales and Total Food Cost Percentage Solve for Total Cost, Total Sales and Total Food Cost Percentage Solve for Total Cost, Total Sales and Total Food Cost Percentage Solve for Total Cost, Total Sales and Total Food Cost Percentage
Chapter 4 resources\Menu Product Mix
Spreadsheet.xlsx
36
Menu Product Mix continued

• The items that guests select have a significant
  impact on a restaurants weighted food cost
  percentage.
• Menu Mix Popularity is critical information

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
  100
• Total portion sales of
• all menu items

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
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)

40
Menu Engineering
Menu 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?
41
Menu Mix Popularity
42
Menu Engineering
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
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.
43
Menu Engineering
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
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.
44
Menu Engineering
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
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
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
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
47
Menu Analysis
High
H/L
H/H
Popularity
L/L
L/H
High
Low
Contribution Margin
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.)

49
Menu item placement
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

51
Menu Management Decisions

• Must consider more than just sales dollars, item
  popularity, and contribution margins
• Preparation and service costs
• Restaurants image
• Customers expectations

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.

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

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
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
56
Monitoring Menu-Related Concerns continued

• Actual food cost percentage
• Reported on the restaurants income statement

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

58
How Would You Answer the Following Questions?

• A composite food cost percentage is a
  (weighted/unweighted) average.
• A menu product mix spreadsheet is designed to
  identify a restaurants composite food cost
  percentage. (True/False)
• The menu pricing method that considers target
  profit in its computation is the
• Factor method
• Markup on cost method
• Texas Restaurant Association (TRA) method
• Yield percent method
• Product mix has very little impact on the ability
  of a restaurant to achieve its standard food cost
  percentage. (True/False)

59
Next Week

• Quiz (Homework) 3 Chapter 4 Extra Credit
• Read Chapter 5 6
• Sign up for CM Project location

60
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 items 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.
61
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
items contribution margin and its popularity.
Menu matrix The placement of menu items in
different categories based on their popularity
and profitability.
62
Key Terms continued
Menu product mix A detailed analysis that shows
the quantities sold of each menu item, along with
their selling prices and standard portion costs.
Pricevalue 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.
63
Key Terms continued
Value perception A customers opinion of a
products value to him or her.