Determining Menu Prices 4 OH 4-1 4-1 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 OH 4-2 modifications and price adjustments Menu Planning Basics Menus Attract Customers Menus Impact Financial Success Menus Impact Daily Operations OH 4-3 Menu Planning Basics, cont. OH 4-4 Menu Planning Steps Process driven Inclusive As a menu planner which is more important to you for focus: customers or financials? OH 4-5 Menu Planning Priorities External factors Internal factors Target market Menu mix Competition Profits Consumer trends Kitchen facilities Brand Ingredients Equipment Production staff Service staff OH 4-6 Menu Classifications Entrees House Specialties Appetizers Soups Salads Sandwiches/Wraps Vegetables/Accompaniments Desserts Beverages OH 4-7 Potential Menu Items Copies of menus, competitors menus Standardized recipes Product inventory and ingredients Menu evaluation information Input from managers, employees, customers OH 4-8 Select Specific Menu Items Variety Flavor Temperature Color Nutrition Composition and Texture Shape and size Balance Possible Selling Price Test Results OH 4-9 Menu Prices If they are too high; Sales suffer If they are too low; Profits suffer OH 4-10 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 item’s cost and selling price) OH 4-11 Pro Forma Income Statement as Budget Standard OH 4-12 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%) OH 4-13 Market Forces Affect Selling Prices Menu prices can be affected by a variety of external forces, including Competition Price-value relationship Mark-Up Differentiation OH 4-14 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). OH 4-15 Menu Pricing Methods The Factor Method Contribution Margin Method (CM) Ratio Pricing Method Prime Cost Method OH 4-16 The Factor Method Determines menu prices based upon the standard (target) food cost percentage Involves a two-step process OH 4-17 The Factor Method continued Step 1 – Calculate the appropriate factor using the following formula. Divide 100 percent by the Standard food cost percent. OH 4-18 1.00 ÷ 1.00 ÷ Standard food cost percentage 0.34 = Factor = 2.94 Food cost % and associated factors What would the factor be if I wanted a Food Cost % of 33? How about 42? OH 4-19 The Factor Method continued Step 2 – Calculate the menu price using the following formula. Multiply the factor by the menu item cost. Factor 2.94 OH 4-20 x Menu item cost = Selling price x = $3.22 $9.47 The Factor Method continued Food cost percentage method- Divide the menu item cost by the food cost percentage in decimal form. Menu item cost 3.22 OH 4-21 ÷ ÷ Food cost percent .34 = Selling price = $9.47 Food Cost Percentage Method OH 4-22 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 OH 4-23 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 OH 4-24 Ratio Pricing Method Managers must know 3 key components to use this method Food costs Labor costs Target profit This method required 3 steps OH 4-25 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 item’s food cost food cost + non food cost + profit = selling price OH 4-26 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 OH 4-27 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. OH 4-28 Menu Product Mix Is Important continued The average food cost percentage is determined by menu mix. Menu mix significantly determines a restaurant’s food cost percentage target. OH 4-29 Composite Food Cost Percent Wrong way to determine average food cost percent Menu Item # Sold Unit Total Cost Selling Food Total Cost Price Cost % Sales 20 $2.00 $40.00 $5.95 34% $119.00 Hamburger 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 34+40+19= ÷ 3 93 OH 4-30 = 31% FC Composite Food Cost Percent continued Right way to determine is by weighted average food cost Menu Item Hamburger OH 4-31 # Sold Unit Total Cost Selling Food Total Cost Price Cost % Sales 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 ÷ $44.00 $133.15 = $133.15 33% FC 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. OH 4-32 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 OH 4-33 Menu Product Mix Spreadsheet continued Lists each menu item’s 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) OH 4-34 Menu Product Mix Spreadsheet Menu Product Mix Spreadsheet Number Sold Cost Selling Price 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 Item Food Cost Percentage Total Solve for Total Cost, Total Sales and Total Food Cost Percentage Chapter 4 resources\Menu Product Mix Spreadsheet.xlsx OH 4-35 Total Cost Total Sales Menu Product Mix continued The items that guests select have a significant impact on a restaurant’s weighted food cost percentage. Menu Mix Popularity % is critical information OH 4-36 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 OH 4-37 Menu Item Popularity Index Menu Item 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 17.9 619 100% Total Covers OH 4-38 Number Sold 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) OH 4-39 Menu Engineering Menu Item Number Sold MM Pop % 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 OH 4-40 12.5% Food Cost Selling Price Item CM Total Cost Total Sales Menu CM 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? Menu Mix Popularity % OH 4-41 Menu Engineering Menu Item Number Sold MM Pop % Food Cost Selling Price Item 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 OH 4-42 12.5% Total Cost Total Sales Menu CM Next Calculate the Item CM by subtracting the Food Cost from the Selling Price. Menu Engineering Menu Item Number Sold MM Pop % Food Cost Selling Price Item CM Total Cost 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% Average OH 4-43 12.5% $4015.65 Total Sales Menu CM Now calculate Total Cost: Number Sold x Food Cost. Then total that column. Menu Engineering Menu Item Number Sold MM Pop % Food Cost Selling Price Item CM Total Cost Total Sales 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 OH 4-44 12.5% 30.4% Menu CM Figure Total Sales: Number Sold x Selling Price 1. Calculate the Menu CM by taking the Number Sold x Item CM 2. 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 30.4% $14.85 Average OH 4-45 12.5% Menu Engineering Menu Item OH 4-46 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 Menu Analysis Popularity High Low OH 4-47 H/L H/H L/L L/H Contribution Margin High 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.) OH 4-48 Menu item placement OH 4-49 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 OH 4-50 Menu Management Decisions Must consider more than just sales dollars, item popularity, and contribution margins Preparation and service costs Restaurant’s image Customers’ expectations OH 4-51 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. OH 4-52 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 OH 4-53 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 OH 4-54 ÷ Total target food sales = Standard food cost percent Monitoring Menu-Related Concerns continued Composite (weighted) food cost percentage The percentage that results from the actual food sales Calculation Actual food Actual sales Composite cost for menu ÷ from menu items = food cost items sold sold percent OH 4-55 Monitoring Menu-Related Concerns continued Actual food cost percentage Reported on the restaurant’s income statement OH 4-56 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 % OH 4-57 How Would You Answer the Following Questions? 1. 2. 3. A composite food cost percentage is a (weighted/unweighted) average. A menu product mix spreadsheet is designed to identify a restaurant’s composite food cost percentage. (True/False) The menu pricing method that considers target profit in its computation is the A. B. C. D. 4. OH 4-58 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) Next Week Quiz (Homework) 3 – Chapter 4 + Extra Credit Read Chapter 5 & 6 Sign up for CM Project location OH 4-59 Chapter 4 Determining Menu Prices 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. Chapter 4 Determining Menu Prices 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. Chapter 4 Determining Menu Prices 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. 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. Chapter 4 Determining Menu Prices Key Terms continued: Value perception A customer’s opinion of a product’s value to him or her.