Determining Menu Prices
4
OH 4-1
4-1
Learning Objectives
After completing this chapter, you should be able to:
• 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.
Menu Prices
 If they are too high;
Sales suffer
 If they are too low;
Profits suffer
OH 4-3
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 4-4
Pro Forma Income Statement
as Budget Standard
OH 4-5
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 4-6
Internal & External Factors Affect Pricing
OH 4-7
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 4-8
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 4-9
Menu Pricing Methods
 The Factor Method
 Contribution Margin Method (CM)
 Ratio Pricing Method
 Prime Cost Method
OH 4-10
The Factor Method
 Determines menu prices based upon the
standard (target) food cost percentage
 Involves a two-step process
OH 4-11
The Factor Method continued
Step 1 – Calculate the appropriate factor using the
following formula. Divide 100 percent by
the Standard food cost percent.
OH 4-12
1.00
÷
1.00
÷
Standard food cost
percentage
0.34
=
Factor
=
2.94
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 4-13
x Menu item cost
= Selling price
x
=
$3.22
$9.47
Food cost % and associated factors
OH 4-14
Contribution Margin Method
 Contribution margin in the amount left over after
the food cost is subtracted from the selling price
 Contribution is the amount that pays for labor,
rent, profit, etc.
 A two step process is used for this method
OH 4-15
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 4-16
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 4-17
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 4-18
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
 Portion cost ÷ Prime cost % = selling price
OH 4-19
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 4-20
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 4-21
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=
÷
93
OH 4-22
3
=
31% FC
Composite Food Cost Percent continued
 Right way to determine is by weighted average
food cost
Menu Item
Hamburger
# 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
$44.50
OH 4-23
35
÷
$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 4-24
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 4-25
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 4-26
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 4-27
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 4-28
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 4-29
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 4-30
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%
77.38
12.5%
Average
OH 4-31
Total
Cost
Total
Sales
Menu
CM
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%
77.38
12.5%
Average
OH 4-32
$4015.65
Total
Sales
Menu
CM
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
77.38
12.5%
Average
OH 4-33
30.4%
Menu
CM
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
$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
77.38
12.5%
30.4%
$14.85
Average
OH 4-34
Menu Engineering
Menu Item Pop Category CM Category
OH 4-35
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 4-36
H/L
H/H
L/L
L/H
Contribution Margin
High
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 4-37
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 4-38
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 4-39
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 4-40
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 4-41
÷
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 4-42
Monitoring Menu-Related Concerns continued
 Actual food cost percentage
 Reported on the restaurant’s income statement
OH 4-43
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 4-44
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 4-45
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)
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.