Menu pricing

Menu Pricing

Thursday, May 26, 2011 BAC-5132 Food and Beverage Management-II-Menu Engineering – Menu Pricing Slide 1 /44

Recap of Semester 4 last session
• Enlisting Standardization methods.
• Monitoring food and beverage operations by
monthly food cost.
y
• Monitoring food and beverage operations by
daily food cost.
• Comparing actual costs by standard cost and
variance analysis.
• Steps taken in beverage sales.
• Establishing sales price of beverages


KCM of the Session
• Memorize the formulas for various pricing
methods.
• Differentiate between Subjective and
objective pricing methods.
• D
Describe various f t
ib i factors th t i fl
that influence
menu planning strategies.
• Calculate base selling prices for various
pricing methods.

Pricing Methods

Pricing Methods

Subjective
S bj ti Objective
Obj ti
Pricing Pricing


Subjective Pricing methods
• Largely based on assumptions.
• Based on results of other establishments.
• Based on personal experience
experience.
• Common in the food service industry.
• Usually done by people who have very little
knowledge of product cost or profit
requirements.
• Unfamiliarity with objective methods.
• Ineffective method of handling p
g pricing.
g

Subjective Pricing methods
1.
1 The reasonable price method
method.

2. The highest i
2 Th hi h t price method.
th d

3. The loss leader price method.

4. The Intuitive price method.


The reasonable price method
• An estimated value/ Price of the dish set
by the manager of the establishment
which he feels is reasonable.
• This price is based on feeling and
sentiment rather than an analysis of the
y
content.
• However in many cases the p
y price is right
g
because it has been thought from the
guests perspective.


The highest price method
• Usually the manager appoints a panel of
colleagues.
• Confers with the panel and includes his
own opinion.
• S t th hi h t price as concluded b all.
Sets the highest i l d d by ll
• A margin of error is also set in so all
contingencies are taken into consideration.


The Loss Leader method
• The price is based on a sales principle of
Promotion of (RIS) Rapid increase of sale.
• An unusually low price is set for an item or
items.
• The manager assumes that the low price
will attract customers and will also buy
other items.
• The method is also interpreted as
schemes.

The Intuitive price method
method.
• The method is based on guesswork and
trail and error rather than an calculated
pp
approach.
• The method is on the basis of a pricing
p
plan and if one does not work the other
plan is tried.
• The method grossly differs from others
g y
because it is based on Hunches and
guess work.


Objective Pricing Methods
• They are based approved operating budgets
budgets.
• Transferring and interpreting budget plans
into selling prices
prices.
• Mainly based on 3 cost procedures
a. C ti updated St d d R i
Creating d t d Standard Recipes.
b. Pre-costing with current costs.
c. Using standard recipes despite changes in
staff and curtail deviation.


Objective Pricing Methods
1.
1 Simple Mark up(Multiplier) pricing methods
Mark-up(Multiplier) methods.
a. Ingredient mark-up method.
b.
b Prime ingredient mark up method
mark-up method.
c. Mark up with accompaniment cost.
2. Contribution Margin pricing method.
3. Ratio Pricing method.
4. Simple prime cost method.
5. Specific p
p prime cost method.

Ingredient mark-up method
mark up
Three steps involved in this method:
1. Determine the ingredients’ costs from all
applicable standard recipes
recipes.
2. Determine the multiplier to use in marking
up th i
the ingredients cost.
di t t
3. Establish a base selling price by
multiplying the ingredients’ cost by the
multiplier.

mark up
• Oysters Rockefeller
• To determine the Base Selling Price.
• To establish the desired food cost
percentage.
• T find th multiplying f t
To fi d the lti l i factor.
• If the Ingredients cost is $ 5.32.
• The desired food cost is 40%
• Then Multiplier = 1/ Desired food cost %age


mark up
• Multiplier = 1/ 0 40
0.40
• Multiplier= 2.5
• B
Base selling price= I
lli i Ingredients cost x
di t t
Multiplier.
• Base selling Price = $ 5.32 x 2.5
• Base selling Price = $ 13.30
g


mark up
• Ingredients Mark-up method:
Mark up
• Multiplier = 1/ Desired(Budgeted) FC %
age.
age
• Example Budgeted Food Cost Percentage
is
• 33% which is 1/ 0.33
• 3.03 is the multiplier


Prime Ingredient Mark-Up method
Mark Up
• Based on the basic cost of the main
ingredient.
• The multiplier should be greater than the
previous method.
• Th multiplier i established on th b i
The lti li is t bli h d the basis
of assumption.
• If the ingredients cost of the dish is $ 5.32
• The prime Ingredient cost is $ 2.65.
p g

Mark Up
• The multiplier is assumed to be 5 02
5.02.
• Base selling Price = Prime ingredient cost
x Multiplier
Multiplier.
• BSP = $ 2.65 x 5.02 = $ 13.30
• If the cost of prime increases from $ 2.65
to $ 2.75: then
• BSP = $ 2.75 x 5.02 = $ 13.81


Mark Up
• Multiplier = Total Food Revenue
Total Entrée costs
• Example:
E l
• Total Food Costs = $ 1,000,000.00
• Total Entrée costs = $ 350,000.00
• Total Revenue = $ 175 7000 00
175,7000.00
• Multiplier = 1757000/350000= 5.02


Mark –up with accompaniment
cost M h d
Method
• The accompaniment cost is also known as
plate cost.
• The Plate cost comprises of cost of
condiments, salads, potatoes, vegetables,
bread and butter and non alcoholic
non-alcoholic
beverages.
• Th plate cost i added t th main entrée
The l t t is dd d to the i té
cost before its multiplied by the factor.


cost M h d
Method
• Entrée cost $ 3.15
3 15
+
• Plate
Pl t cost t $ 1.25
1 25
• Estimated Food Cost $ 4.40
• Multiplier x 3.3
• Base selling price $ 14.52
14 52


cost M h d
Method
• Step A:
• Calculate per meal accompaniment cost
• A
Assume:
Total Food Costs = $ 1,000,000.00
Total Entrée costs = $ 350,000.00
Total accompaniments Cost = $ 650 000 00
650,000.00
Number of Guests = $ 125,000.00


cost M h d
Method
= $ 650,000(accompaniments cost)
, ( p )
125000(Guests)
Accompaniments cost = $ 5.20 Per meal
p
• Step B:
• Entrée Costs $ 2.80
• Accompaniments Cost $ 5.20
• Total Costs $ 8.00 per meal as food cost
• If the desired food cost is 33% then 1/33=3.03
• Base selling Price = $ 8.00x3.03= $ 24.24


Contribution Pricing method
• Contribution margin is the amount left after
food cost is subtracted from Sales
• Sales – Main Variable costs = Contribution
Margin.
• Also means the amount of that the sale of
the menu item” contributes” to pay all non
food costs allocated to the food service
operations to help with the profit
requirements.


• To set the Base Selling price by this method
method.
1. Determine the average contribution margin
required per guest by dividing all non-food
costs + required profit by the expected
number of guests.
2. Determine the base selling price for the
menu item by adding the average
contribution margin required per guest to the
items standard food cost.

• All Non food costs = $ 695,000.00
• Required Profit set as = $ 74,000.00
• Guests Expected = 135 000
135,000
• 1: To calculate average contribution Margin
required p g
q per guest.
• Non food costs + Required Profit
Number of expected Guests
• $ 695,000 + $ 74000 = $ 5.70
135000

• 2 Determine the Base selling Price for a
2.
menu item.
• BSP= Standard Food Cost + Average
Contribution Margin
• BSP = $ 4 60 + $ 5 70 = $ 10 30
4.60 5.70 10.30


Ratio Pricing method
• This method determines the relationship
between fixed costs and all non food costs
plus profit requirements
requirements.
• Usually done in three steps:
1. Determine th ratio of f d costs to all
1 D t i the ti f food t t ll
non food costs plus required profit by
dividing ll
di idi all non f d costs plus profit b
food t l fit by
food costs.


2.
2 Calculate the amount of non food costs
plus profit required for a menu item by
multiplying the standard food costs of the
menu item by the ratio calculated in step
1.
3. Determine the base selling price of a
menu item by adding the result of step 2 to
the standard food cost of the menu item.


• Problem: Anudeep family style restaurant
has the following approved budget shows
the following figures
figures.
1. Food Costs: $ 435,000.00
2. NFC’s:
2 NFC’ $ 790 000 00
790,000.00
3. Required Profit: $ 95,000.00
4. Menu Item standard FC = $ 4.75


• Step 1: Determine the ratio of food costs
to all other costs plus profit requirements:
• All Non Food Costs + Required Profit = Ratio
Food Cost
• $ 790,000.00+ $ 95000 = $ 2.03
$ 435,000.00


• Step 2: Calculate the amount of non food
costs and profit required for a menu item.
• NFC’ & Profit required = SFC x Ratio
NFC
• = $ 4.75 x 2.03 = $ 9.64
• Step 3: Determine the base selling price
for the menu item
• Step 2 result + SFC
• $ 9.64 + $ 4.75 = $ 14 39
9 64 4 75 14.39

Simple Prime costs method
• Prime costs are defined as direct material
+ direct labor+ direct expenses
• In hospitality it is Cost of Food and
Beverage + Cost of Labor.
• Th following can b achieved i 3 steps:
The f ll i be hi d in t
1. Determine the labor cost per guest by
dividing total of all labor costs by the
number of expected guests.

Simple Prime costs method
2.
2 Determine the prime costs per guest by
adding labor cost per guest to the menu
items food cost.
cost
3. Determine the menu items base selling
price by dividing the prime costs per guest
by the desired prime costs percentage (
Food cost + labor cost percentage)


Demonstrative example
• Given:
• Menu Item Food Cost $ 3.75
• Labor Costs $ 210,000.00
• Number of expected guests 75000
• Desired Prime costs % age 62%
• To be derived:
1. Labor cost per guest.
2. Prime cost per guest
2 Pi t t
3. Base selling Price.


Demonstrative example
1. Labor Cost per guest = Labor Costs
Number of expected Guests
• $ 210000/75000 = $ 2 80
2.80
2. Prime cost per guest = Menu Item FC +
Labor cost per g
p guest.
• $ 3.75 + $ 2.80 = $ 6.55
3. BSP = Prime Cost per guest/ Desired Prime
cost % age
• $ 6.55/ 0.62= $ 10.56

Specific Prime Costs method
Category (A)
C t Category(B)
C t (B)
Operating Budget Extensive Non-extensive
Budget Item Percentage Preparation Items Preparation Items
1 2 3 4
Food Cost 35% 60% of 35 % = 21% 40% of 35% =14 %
Labor Cost 30% 55% of 30% =17 % 40% of 13% = 5 %
60% of 13% = 8%
All other Costs 20% 60% of 20% =12% 40% of 20 % = 8%
Profit 15% 60% of 15% = 9% 40% of 15% = 6%
Total 100% 67% 33%

Multiplier 100%/33%= 2.9 67%/21%=3.2 33%/14% = 2.4


Specific Prime Costs method
• Using the multipliers in the Specific Prime
costs method.
• If the Food cost of a menu item which
involves extensive preparation is $ 4.75
simply multiply it by the multiplier 3.2 = $
py py y p
15.20.
• If the food cost of the menu item that does
not require extensive preparation is $ 4.75
multiply it by the multiplier 2.4 = $ 11.40


Numerical Calculation
• Siddhant’s Beefy Town g does not serve
y grill
alcoholic beverages. Its operating budget
reveals the following:
• Revenue $ 1375000 00
1375000.00
• Food Cost $ 585,000.00
• Non Food Costs $ 710 000 00
710,000.00
• Profits $ 80,000.00
• Number of guests $ 161580
• Guest Check average $ 8.51
g
• Contribution Margin: $ 790,000.00
,

Numerical Calculation
• Using the information calculate the base
selling price of a menu item with a total
ingredient cost of $ 4 85 using:
4.85
a. The contribution margin pricing method.
b. The ti
b Th ratio pricing method.
i i th d
c. The simple prime cost method( the non
food costs include $ 426250.00 in labor
costs)

BSP by Contribution Pricing
Method
M h d
• ACM= NFC + RP
Ex # Guests
• 710000 80000 = $ 4.889
710000+80000
161580
• BSP = SFC + ACM
• = $ 4.85 + $ 4 889=
4 85 4.889 $ 9.75
9 75


BSP by Ratio Pricing method
Step 1: Ratio of Fc’s to other costs
Fc s
• All NFC’s + RP = 710000+80000 = 1.350
Food Cost
F dC t 585000
Step 2: Calculate the amount of AFC’s & P reqd
• Which is = $ 4.85 x 1.350= $ 6.545
Step3: Determine BSP
BSP = Step 2 + SFC
Which is $ 6.545 + $ 4.85 = $ 11.395

BSP by Simple Prime costs
• Step 1: Labor cost per guest
• = Total Labor costs/ # of Expected guests.
• = 426250/161580


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