Menu pricing

Menu PricingMenu Pricing

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

Recap of Semester 4 last sessionRecap of Semester 4 last session

• Enlisting Standardization methods.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 SessionKCM of the Session

• Memorize the formulas for various pricingMemorize the formulas for various pricing methods.

• Differentiate between Subjective and• Differentiate between Subjective and objective pricing methods.D ib i f t th t i fl• Describe various factors that influence menu planning strategies.

• Calculate base selling prices for various pricing methods.


Pricing MethodsPricing Methods

Pricing Methods

S bj ti Obj tiSubjective Pricing

Objective Pricing


Subjective Pricing methodsSubjective Pricing methods• Largely based on assumptions.Largely based on assumptions.• Based on results of other establishments.• Based on personal experienceBased on personal experience.• Common in the food service industry.• Usually done by people who have very littleUsually done by people who have very little

knowledge of product cost or profit requirements.

• Unfamiliarity with objective methods.• Ineffective method of handling pricing.g p g


Subjective Pricing methodsSubjective Pricing methods

1 The reasonable price method1. The reasonable price method.

2 Th hi h t i th d2. The highest price method.

3. The loss leader price method.

4. The Intuitive price method.


The reasonable price methodThe reasonable price method

• An estimated value/ Price of the dish setAn 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 ycontent.

• However in many cases the price is right y p gbecause it has been thought from the guests perspective.


The highest price methodThe highest price method

• Usually the manager appoints a panel ofUsually the manager appoints a panel of colleagues.

• Confers with the panel and includes his• Confers with the panel and includes his own opinion.S t th hi h t i l d d b ll• Sets the highest price as concluded by all.

• A margin of error is also set in so all contingencies are taken into consideration.


The Loss Leader methodThe Loss Leader method

• The price is based on a sales principle ofThe price is based on a sales principle of Promotion of (RIS) Rapid increase of sale.

• An unusually low price is set for an item orAn unusually low price is set for an item or items.

• The manager assumes that the low priceThe 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 methodThe Intuitive price method.

• The method is based on guesswork andThe method is based on guesswork and trail and error rather than an calculated approach.pp

• The method is on the basis of a pricing plan and if one does not work the other pplan is tried.

• The method grossly differs from others g ybecause it is based on Hunches and guess work.


Objective Pricing MethodsObjective Pricing Methods

• They are based approved operating budgetsThey are based approved operating budgets.• Transferring and interpreting budget plans

into selling pricesinto selling prices.• Mainly based on 3 cost procedures

C ti d t d St d d R ia. Creating updated Standard Recipes.b. Pre-costing with current costs.c. Using standard recipes despite changes in

staff and curtail deviation.


Objective Pricing MethodsObjective Pricing Methods

1 Simple Mark-up(Multiplier) pricing methods1. Simple Mark up(Multiplier) pricing methods.a. Ingredient mark-up method.b Prime ingredient mark up methodb. Prime ingredient 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 prime cost method.p p


Ingredient mark-up methodIngredient mark up method

Three steps involved in this method:Three steps involved in this method:1. Determine the ingredients’ costs from all

applicable standard recipesapplicable standard recipes.2. Determine the multiplier to use in marking

th i di t tup the ingredients cost.3. Establish a base selling price by

multiplying the ingredients’ cost by the multiplier.



• Oysters RockefellerOysters Rockefeller• To determine the Base Selling Price.• To establish the desired food cost• To establish the desired food cost

percentage.T fi d th lti l i f t• To find the multiplying factor.

• If the Ingredients cost is $ 5.32.• The desired food cost is 40%• Then Multiplier = 1/ Desired food cost %age



• Multiplier = 1/ 0 40Multiplier = 1/ 0.40• Multiplier= 2.5

B lli i I di t t• Base selling price= Ingredients cost x Multiplier.

• Base selling Price = $ 5.32 x 2.5• Base selling Price = $ 13.30g $



• Ingredients Mark-up method:Ingredients Mark up method:• Multiplier = 1/ Desired(Budgeted) FC %

ageage.• Example Budgeted Food Cost Percentage

iis • 33% which is 1/ 0.33• 3.03 is the multiplier


Prime Ingredient Mark-Up methodPrime Ingredient Mark Up method

• Based on the basic cost of the mainBased on the basic cost of the main ingredient.

• The multiplier should be greater than the• The multiplier should be greater than the previous method.Th lti li i t bli h d th b i• The multiplier is established on the basis of assumption.

• If the ingredients cost of the dish is $ 5.32• The prime Ingredient cost is $ 2.65.p g $



• The multiplier is assumed to be 5 02The multiplier is assumed to be 5.02.• Base selling Price = Prime ingredient cost

x Multiplierx 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



• Multiplier = Total Food RevenueMultiplier = Total Food RevenueTotal Entrée costs

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


Mark –up with accompaniment M h dcost Method

• The accompaniment cost is also known asThe accompaniment cost is also known as plate cost.

• The Plate cost comprises of cost of• The Plate cost comprises of cost of condiments, salads, potatoes, vegetables, bread and butter and non alcoholicbread and butter and non-alcoholic beverages.Th l t t i dd d t th i t é• The plate cost is added to the main entrée cost before its multiplied by the factor.



• Entrée cost $ 3 15Entrée cost $ 3.15+

Pl t t $ 1 25• Plate cost $ 1.25• Estimated Food Cost $ 4.40• Multiplier x 3.3• Base selling price $ 14 52Base selling price $ 14.52



• Step A:Step A:• Calculate per meal accompaniment cost

A• Assume: Total Food Costs = $ 1,000,000.00Total Entrée costs = $ 350,000.00Total accompaniments Cost = $ 650 000 00Total accompaniments Cost $ 650,000.00Number of Guests = $ 125,000.00



= $ 650,000(accompaniments cost)$ , ( p )125000(Guests)

Accompaniments cost = $ 5.20 Per mealp• 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 methodContribution Pricing method

• Contribution margin is the amount left afterContribution margin is the amount left after food cost is subtracted from Sales

• Sales – Main Variable costs = ContributionSales Main Variable costs Contribution Margin.

• Also means the amount of that the sale ofAlso 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 methodTo set the Base Selling price by this method.1. Determine the average contribution margin

required per guest by dividing all non-foodrequired per guest by dividing all non-food costs + required profit by the expected number of guests.number of guests.

2. Determine the base selling price for the menu item by adding the averagemenu item by adding the average contribution margin required per guest to the items standard food cost.


Contribution Pricing methodContribution Pricing method• All Non food costs = $ 695,000.00All Non food costs $ 695,000.00• Required Profit set as = $ 74,000.00• Guests Expected = 135 000Guests Expected 135,000• 1: To calculate average contribution Margin

required per guest.q p g• Non food costs + Required Profit

Number of expected GuestsNumber of expected Guests• $ 695,000 + $ 74000 = $ 5.70

135000135000Thursday, May 26, 2011 BAC-5132 Food and Beverage Management-II-Menu Engineering – Menu Pricing Slide 26 /44


• 2 Determine the Base selling Price for a2. Determine the Base selling Price for a menu item.

• BSP= Standard Food Cost + Average• BSP= Standard Food Cost + Average Contribution MarginBSP $ 4 60 $ 5 70 $ 10 30• BSP = $ 4.60 + $ 5.70 = $ 10.30


Ratio Pricing methodRatio Pricing method

• This method determines the relationshipThis method determines the relationship between fixed costs and all non food costs plus profit requirementsplus profit requirements.

• Usually done in three steps:1 D t i th ti f f d t t ll1. Determine the ratio of food costs to all

non food costs plus required profit by di idi ll f d t l fit bdividing all non food costs plus profit by food costs.



2 Calculate the amount of non food costs2. Calculate the amount of non food costs plus profit required for a menu item by multiplying the standard food costs of themultiplying the standard food costs of the menu item by the ratio calculated in step 11.

3. Determine the base selling price of a menu item by adding the result of step 2 tomenu item by adding the result of step 2 to the standard food cost of the menu item.



• Problem: Anudeep family style restaurantProblem: Anudeep family style restaurant has the following approved budget shows the following figuresthe following figures.

1. Food Costs: $ 435,000.002 NFC’ $ 790 000 002. NFC’s: $ 790,000.003. Required Profit: $ 95,000.004. Menu Item standard FC = $ 4.75



• Step 1: Determine the ratio of food costsStep 1: Determine the ratio of food costs to all other costs plus profit requirements:

• All Non Food Costs + Required Profit = Ratio• All Non Food Costs + Required Profit = RatioFood Cost

• $ 790,000.00+ $ 95000 = $ 2.03$ 435,000.00



• Step 2: Calculate the amount of non foodStep 2: Calculate the amount of non food costs and profit required for a menu item.

• NFC’ & Profit required = SFC x Ratio• NFC & Profit required = SFC x Ratio• = $ 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 methodSimple Prime costs method

• Prime costs are defined as direct materialPrime costs are defined as direct material + direct labor+ direct expenses

• In hospitality it is Cost of Food and• In hospitality it is Cost of Food and Beverage + Cost of Labor.Th f ll i b hi d i 3 t• The following can be achieved in 3 steps:

1. Determine the labor cost per guest by dividing total of all labor costs by the number of expected guests.


Simple Prime costs methodSimple Prime costs method

2 Determine the prime costs per guest by2. Determine the prime costs per guest by adding labor cost per guest to the menu items food costitems food cost.

3. Determine the menu items base selling price by dividing the prime costs per guestprice by dividing the prime costs per guest by the desired prime costs percentage ( Food cost + labor cost percentage)Food cost + labor cost percentage)


Demonstrative exampleDemonstrative 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 P i t t2. Prime cost per guest3. Base selling Price.


Demonstrative exampleDemonstrative example1. Labor Cost per guest = Labor Costs1. Labor Cost per guest Labor Costs

Number of expected Guests• $ 210000/75000 = $ 2 80$ 210000/75000 $ 2.802. Prime cost per guest = Menu Item FC +

Labor cost per guest.p g• $ 3.75 + $ 2.80 = $ 6.553. BSP = Prime Cost per guest/ Desired Prime3. BSP Prime Cost per guest/ Desired Prime

cost % age• $ 6.55/ 0.62= $ 10.56


Specific Prime Costs methodSpecific Prime Costs method

C t (A) C t (B)

Budget Item Operating Budget

Percentage

Category (A) Extensive

Preparation Items

Category(B) Non-extensive

Preparation Items1 2 3 41 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%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%Total 100% 67% 33%

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


Specific Prime Costs methodSpecific Prime Costs method

• Using the multipliers in the Specific PrimeUsing the multipliers in the Specific Prime costs method.

• If the Food cost of a menu item whichIf the Food cost of a menu item which involves extensive preparation is $ 4.75 simply multiply it by the multiplier 3.2 = $ p y p y y p15.20.

• 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 CalculationNumerical Calculation• Siddhant’s Beefy Town grill does not serve y g

alcoholic beverages. Its operating budget reveals the following:

• Revenue $ 1375000 00• Revenue $ 1375000.00• Food Cost $ 585,000.00• Non Food Costs $ 710 000 00• Non Food Costs $ 710,000.00• Profits $ 80,000.00• Number of guests $ 161580Number of guests $ 161580• Guest Check average $ 8.51• Contribution Margin: $ 790,000.00g $ ,


Numerical CalculationNumerical Calculation

• Using the information calculate the baseUsing the information calculate the base selling price of a menu item with a total ingredient cost of $ 4 85 using:ingredient cost of $ 4.85 using:

a. The contribution margin pricing method.b Th ti i i th db. The ratio pricing method.c. The simple prime cost method( the non

food costs include $ 426250.00 in labor costs)


BSP by Contribution Pricing M h dMethod

• ACM= NFC + RPACM= NFC + RPEx # Guests

710000 80000• 710000+80000 = 161580

$ 4.889

• BSP = SFC + ACM• = $ 4 85 + $ 4 889= $ 9 75 $ 4.85 + $ 4.889 $ 9.75


BSP by Ratio Pricing methodBSP by Ratio Pricing method

Step 1: Ratio of Fc’s to other costsStep 1: Ratio of Fc s to other costs• All NFC’s + RP = 710000+80000 =

F d C t 5850001.350

Food Cost 585000Step 2: Calculate the amount of AFC’s & P reqd• Which is = $ 4.85 x 1.350=Step3: Determine BSP

$ 6.545

BSP = Step 2 + SFCWhich is $ 6.545 + $ 4.85 = $ 11.395Which is $ 6.545 $ 4.85


BSP by Simple Prime costsBSP by Simple Prime costs

• Step 1: Labor cost per guestStep 1: Labor cost per guest • = Total Labor costs/ # of Expected guests.

426250/161580• = 426250/161580


Q tiQuestions

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