oh 4-1 determining menu prices 4 oh 4-1. oh 4-2 chapter learning objectives outline menu planning...

OH 4-1

Determining Menu Prices

4OH 4-1

OH 4-2

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 modifications and price adjustments

OH 4-3

Menu Planning Basics

Menus Attract Customers

Menus Impact Financial Success

Menus Impact Daily Operations

OH 4-4

Menu Planning Basics, cont.

OH 4-5

Menu Planning Steps

Process driven

Inclusive

As a menu planner which is more important to you for focus: customers or financials?

OH 4-6

Menu Planning Priorities

External factors Target market

Competition

Consumer trends

Brand

Internal factors Menu mix

Profits

Kitchen facilities

Ingredients

Equipment

Production staff

Service staff

OH 4-7

Menu Classifications Entrees

House Specialties

Appetizers

Soups

Salads

Sandwiches/Wraps

Vegetables/Accompaniments

Desserts

Beverages

OH 4-8

Potential Menu Items

Copies of menus, competitors menus

Standardized recipes

Product inventory and ingredients

Menu evaluation information

Input from managers, employees, customers

OH 4-9

Select Specific Menu Items

Variety

Temperature

Nutrition

Texture

Shape and size

Flavor

Color

Composition and Balance

Possible Selling Price

Test Results

OH 4-10

Menu Prices

If they are too high;

Sales suffer

If they are too low;

Profits suffer

OH 4-11

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 4-12

Pro Forma Income Statement as Budget Standard

OH 4-13

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 4-14

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 4-15

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 4-16

Menu Pricing Methods

The Factor Method

Contribution Margin Method (CM)

Ratio Pricing Method

Prime Cost Method

OH 4-17

The Factor Method

Determines menu prices based upon the standard (target) food cost percentage

Involves a two-step process

OH 4-18

The Factor Method continued

Step 1 – Calculate the appropriate factor using the following formula. Divide 100 percent by the Standard food cost percent.

1.00 ÷ Standard food cost percentage = Factor

1.00 ÷ 0.34 = 2.94

OH 4-19

Food cost % and associated factors

What would the factor be if I wanted a

Food Cost % of 33?

How about 42?

OH 4-20


Step 2 – Calculate the menu price using the following formula. Multiply the factor by the menu item cost.

Factor x Menu item cost = Selling price

2.94 x $3.22 = $9.47

OH 4-21


Food cost percentage method- Divide the menu item cost by the food cost percentage in decimal form.

Menu item cost

÷

Food cost percent = Selling price

3.22 ÷ .34 = $9.47

OH 4-22

Food Cost Percentage Method

OH 4-23

Contribution Margin Method

Contribution margin in the amount left over after the food cost is subtracted from the selling priceSelling 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 4-24

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 4-25

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 4-26

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 4-27

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 4-28

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 4-29

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 4-30

Composite Food Cost Percent

Wrong way to determine average food cost percent

Menu Item # Sold Unit Cost

Total Cost Selling Price

Food Cost %

Total Sales

Hamburger 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 $44.50 $133.15

34+40+19=

93÷ 3 = 31% FC

OH 4-31

Composite Food Cost Percent continued

Menu Item # Sold Unit Cost

Total Cost Selling Price

Food Cost %

Total Sales

Hamburger 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 $133.15

$44.00 ÷ $133.15 = 33% FC

Right way to determine is by weighted average food cost

OH 4-32

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 4-33

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 4-34

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 4-35



ItemNumber

SoldCost

Selling Price

Food Cost Percentage

Total Cost Total Sales

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

Total

Solve for Total Cost, Total Sales and Total Food Cost Percentage

Chapter 4 resources\Menu Product Mix Spreadsheet.xlsx

OH 4-36

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 4-37

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 100Total portion sales of all menu items

OH 4-38

Menu Item Popularity Index

Menu Item Number Sold 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

Total Covers 619 100%

OH 4-39

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 4-40

Menu EngineeringMenu Item

Number Sold

MM Pop %

Food Cost

Selling Price

Item CM

Total Cost

Total Sales

Menu CM

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 12.5%

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?

OH 4-41

Menu Mix Popularity %

OH 4-42


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

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 12.5%

Next Calculate the Item CM by subtracting the Food

Cost from the Selling Price.

OH 4-43


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

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% $4015.65

Average 12.5%

Now calculate Total Cost: Number Sold

x Food Cost.

Then total that column.

OH 4-44


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

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 12.5% 30.4%

Figure Total

Sales: Number Sold x Selling Price

OH 4-45

1. Calculate the Menu CM by taking the Number Sold x Item CM2. 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

Average 12.5% 30.4% $14.85

OH 4-46

Menu Engineering

Menu Item 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

OH 4-47

Menu Analysis

Contribution Margin

Pop

ula

rity

High

HighLow

H/L H/H

L/L L/H

OH 4-48

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 4-49

Menu item placement

OH 4-50

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 4-51

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 4-52

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 4-53

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 4-54

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

÷

Total target food sales = Standard food

cost percent

OH 4-55


Composite (weighted) food cost percentage The percentage that results from the actual

food sales

Calculation

Actual food cost for menu items sold

÷Actual sales from menu items sold

= Composite food cost percent

OH 4-56


Actual food cost percentage Reported on the restaurant’s income statement

OH 4-57

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 4-58

How Would You Answer the Following Questions?

1. A composite food cost percentage is a (weighted/unweighted) average.

2. A menu product mix spreadsheet is designed to identify a restaurant’s composite food cost percentage. (True/False)

3. The menu pricing method that considers target profit in its computation is the

A. Factor methodB. Markup on cost methodC. Texas Restaurant Association (TRA) methodD. Yield percent method

4. Product mix has very little impact on the ability of a restaurant to achieve its standard food cost percentage. (True/False)

OH 4-59

Next Week

Quiz (Homework) 3 – Chapter 4 + Extra Credit

Read Chapter 5 & 6

Sign up for CM Project location

Chapter 4 Determining Menu PricesChapter 4 Determining Menu PricesChapter 4 Determining Menu PricesChapter 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.


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.



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.

Menu product mix A detailed analysis that shows the quantities sold of each menu item, along with their selling prices and standard portion costs.



Value perception A customer’s opinion of a product’s value to him or her.

oh 4-1 determining menu prices 4 oh 4-1. oh 4-2 chapter learning objectives outline menu planning...

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