Pricing Strategies Can Improve Customer Acceptance

By: Lloyd M. Gordon, President
GEC Consultants, Inc.
Skokie, Illinois

At a time when business conditions are critical for many restaurants, it seems the worst possible strategy to revise prices in order to improve profits. However, good strategy means doing just that. Of course, the net effect of re?pricing your menu must go hand in glove with restructuring your menu to introduce new items and lower cost products, feature items easier to prepare, and introduce topical foods which are highly acceptable for today's clientele.

We have seen how to develop ratios and how to use them in analyzing your operations. Now let's examine some specific methods, using ratios, for actually determining prices in advance of sales, to assure that your cost will fall in parameters beneficial to you.

One of the commonest methods for determining what price to place on a menu item is the FACTOR METHOD. Begin by deciding that you want a certain food cost for the item and then divide 100 by that percentage to get a pricing factor. For example, say you have a veal dish that you want to sell at a 30% food cost, then,

100/30 + 3.333

 The pricing factor is 3.333. To apply this realistically, first determine the actual dollar cost of the menu item and then multiply it by the pricing factor. For example, say that the dollar cost of the veal dish is $1.10. Multiply this amount by 3.333 and your sale price is $3.66 or for practical purposes you would place it on the menu at $3.65.

This can be expressed by the following formula:

ACTUAL $ COST X PRICING FACTOR = MENU SALE PRICE

 The second method of pricing is to use the PRIME COSTS as a factor. Let's assume that you wish to achieve a 55% prime cost on your monthly statements so you wish to price accordingly. For example, you wish to price an item that costs you a dollar. Take the ratio of LABOR COSTS/FOOD COSTS (let's say, in this example 21.66/33.33) taken from your actual last operating statement, or a factor of 65.0. Now substitute into the formula,

FACTOR X (FOOD COST) + ACTUAL FOOD COST = .55 X MENU PRICE

 and you get (.65(1.00) + 1.00)/.55 = menu price = 3.00

The third method is the Texas Restaurant Association or TRA system which requires the following five steps:

1. Determine your actual operating expenses (overhead) (ALL COSTS minus FOOD COSTS AND LABOR COSTS), expressed as percentage.
2. Determine what labor cost budget you want, express it as a percentage.
3. Determine what percentage profit you want per dollar of sales on this particular item. Profit would vary according to the item as shown in this schedule:
   Appetizers 40%
   Popular entrees 10-20%
   Slower entrees 20-25%
   High priced entrees 15%
   Desserts 25-30%
   Beverages 40-50%
4. Add the overhead (see #1 above) to the desired labor cost (see #2 above) to the selected profit wanted (see #3 above) to arrive at the subtotal of costs (not including FOOD COST). This gives the budget percentage without food cost.5. Subtract the budget percentage from 100 and you get the food cost percentage desired. Next determine the actual dollar cost of the item and use this formula:

ACTUAL ITEM COST/DESIRED FOOD COST X 100 = MENU ITEM COST

An example shows how this works,

Assume the overhead is 45% (See No. 1)

Labor budget desired is 20% (See No.2)

Profit desired for entree item is 15% (See No. 3)

Total cost without food is 80% (see Nos. 1+2+3)

Actual dollar cost of item is 1.00

Substitute into the formula and you get:

1.00/20 X 100 = 5.00

 Thus $5.00 is the price for the entree item on the menu.

Now that we have three methods for determining the menu item price, this price must be analyzed in the context of its perceived-price-value from the customer's viewpoint.

Mr. Lloyd M. Gordon, President of GEC Consultants, Inc. has an MBA from the University of Chicago. He has concepted more than 390 restaurants and has been consulting for over 44 years. He helps people enter the restaurant industry, points the way to profitability, and helps keep them successful. To discuss "Pricing Strategies Can Improve Customer Acceptance" he can be reached at 847-674-6310.

To Top

http://www.gecconsultants.com   email: experts /at/ gecconsultants.com
website design: websiterevamp.org