Menu Pricing Note
Menu pricing is determining the price to charge your guests for the items you sell. Menu
pricing is both an art and a science. The science is calculating the selling price based on
what it costs to produce the item. The art is setting the price at the appropriate level to
provide your guests with good value and the operation with good revenue and net
Approaches to Menu Pricing
There are several approaches to menu pricing. First, you can use subjective methods
where the manager selects the price but has little or no basis on which to justify that
price. Second, you can copy the competition’s price. However, if you use this approach,
you need to be aware of how your operation is similar or different from the competitors.
Finally, you can use costs as the basis for setting the menu price.
Subjective Methods of Pricing
Reasonable cost method - the manager assumes they know what a guest is willing to
pay and sets the price accordingly.
Highest price method - the manager sets the price at the highest price they think the
guest is willing to pay. You could also call this method “what the market will bear”.
Loss leader method - the manager sets the price very low in the hope of attracting guests
who then purchase normally priced or high-priced items to their guests. They make
money by selling these higher priced items.
Guessing - involves setting the price without any basis for determining the price. Some
managers can be successful using these methods because they know and understand their
business very well. However, it is more good luck than good management. As well, this
also makes the operation very dependent on that manager. If something happens to the
manager, the employees will not know what to do. As well, a new manager would be
unlikely to be as successful.
Cost Based Menu Pricing Methods
Cost based menu pricing techniques use the cost of a serving of the item to determine the
price. Depending on the method, you consider the food cost percent or the food cost
percent and other costs.
a. Mark-up or Factor Method
- The manager determines a base selling price that is
the calculated selling price based on the cost of the food ingredients in the
meal. After the base selling price is determined, the manager has to set the
price that will be on the menu. The mark-up or factor method is generally
based on the desired food or beverage cost percent. However, determining the
desired food cost percent may be the difficult. You may use historical food
cost percent, industry averages or some other food cost percent. The
assumption with this method is that the money left after paying the ingredient cost is sufficient to pay for all other operating costs and to provide an
b.Contribution Margin Pricing Method
With this method, you determine the
average contribution margin per cover or guest and add it to the ingredient cost
of the meal. Some managers use it because they believe it allows them to offer
a wider range of menu items without creating selling prices that are so high his
guests won’t buy them. The method will create selling prices that provide
reasonable value to your guests when the cost of each menu item is similar.
However, as you will see when you do this question in the Menu Pricing
Exercise, you obtain some uneven and perhaps unusual food cost percents
when the cost of each menu item is quite different. If you use this method, you
CANNOT use food cost percent to assess how well you are controlling
your food cost. Instead, you need to use ideal food cost in dollars. As well, it
only works when you are pricing whole meals that include the appetizer,
dessert and tea or coffee. If you want to price these items separately, adding
the whole contribution margin to these items is not appropriate. Therefore, you
need another method to price individual menu items.
c. Base Price Method
It starts with the selling price and from that, you determine
how much in dollars you can spend on food. It is useful for institutions and
resorts where the room selling price includes the selling price of the meals that
are included with the ro