Menu Pricing

Menu Pricing

Menu pricing is a careful calculation of what it costs to prepare a dish, along with other expenses, to arrive at a final price that allows for those costs to be covered and a profit to be made. The pricing of a menu is “art of pricing”. The successful management analyses the food cost and other overheads, the guest’s ability to pay for the menu, and competitors’ menu pricing before fixing the menu and its prices. Usually, the menus are priced by the General Manager, Chef, Food and Beverage Manager, Sales Manager, Purchase Manager. Every factor-like food cost, raw material price, competitor’s menu price, guest ability to pay, etc. are considered while fixing the price.

Factors to be considered while fixing the selling price-

Some factors involved in menu pricing include

• The elasticity of Demand- It means that demand can fluctuate in response to other factors, such as a change in pricing, food quality or environment
• Perception of value- It is what the customer believes the meal worth. You may offer the item at a low cost but have a relatively high selling price. Different geographical areas or classes of society can have a different perception of value. Value is sometimes expressed as quality per price and makes it possible to impose higher prices for prestige and price- sale appeal.
• Competition- One should constantly aware of what prices are offered by your competitors for the same services.
• Relationship between Menu, Prices, and Volume- Two schools of thought are there you are trying to make a small profit per item by selling many items or high profit per item by selling fewer items.
• Profit in Rupee, not Percentage- Many operation stress percentages in their menu pricing. A menu item may very profitable on a percentage basis but because of lower sales, it might bring little profit.
• Total Cost Consideration- In setting their menu price, many operations concentrate primarily on the raw food price involved. Nowadays other cost is significant and should be considered
• Contribution to profit- Selling price must provide an adequate share of fixed cost and other overheads and a good margin of profit.
• Long term implication for pricing- If an operation has a reputation of high or low menu price, it can be difficult to change in the short run of business. Some commercial operation creates financial difficulty for themselves when they try to raise their prices since they have low price reputation or vice- verse.

Pricing Methods

The menu price fixed should be acceptable to the hotel/restaurant and guest. By reducing the price hotel tries to attract more guests and hence try to increase the sale. The large sale reduces the fixed cost per guest and hence the hotel makes the profit despite having a low price. Some hotels may prefer to keep high prices and look for high-income guests only who can sell more per cover, despite having low sale hotel may still make a profit. It is very difficult to fix the menu/dish price.

The following are the common pricing methods:

• The Factor System- This is also known as a multiplier or mark up a system. The raw food cost (RFC) is multiplied by the pricing factor(Pf) to provide a menu selling price( MSP). The pricing factor is determined by dividing the desired food cost percentage into 100. If a 40% food cost is desired, dividing 0.40 into 100 will give a pricing factor of 2.5.
• The Prime Cost Factor- The prime cost system considers not only raw food costs but also direct labor costs. Direct labor cost includes those cost involved in preparation. It does not include service, sanitation or administrative labor cost then it is multiplied by pricing factorPrime Cost ( PC) = Raw Food Cost ( RFC) + Direct Labour Cost ( DLC)

  Prime Cost ( PC) x Pricing Factor ( PF) = Menu selling Price (MSP)

• The Actual Pricing Method- This method includes all the costs plus the desired profit to determine the menu selling price.
• Demand Oriented Perceived Value Pricing- This method is based on the perception of guest and that means what the guest feels after seeing the dish. The price of food matching is the perception of value for money. Eg The guest in a silver service restaurant is ready to pay than in a self-service cafeteria.
• Price based on Competitor’s Price- This is the simplest method of pricing. Here the caterer does not work on cost, profit, etc, and on the contrary, caterer takes pricing of competitor’s price as a guideline and fixes his price may be slightly higher or lower.
• Marginal Pricing- The cost can be divided into two categories fixed and variable cost. Usually caterer first aim at getting Break-Even Sale. After the BEP any cost which occurs is known as marginal cost and covers the marginal cost and profit is marginal pricing.
• Gross Profit Method- This method involves finding gross profit per person and adding the price of an extra item to the main meal cost and arriving at the selling price of each menu item.Selling Price = Cost main item + Accompanying dish + other items cost + GP
• Food Cost Method – In India, it is the most common method of fixing price. The hotel decides to maintain a certain food cost. Before fixing the price, the portion size and the food cost of the dish are calculated. After knowing the food cost then the selling price is decided.