MENU DESIGN AND ENGINEERING

HTF552
Chapter 4
Pricing the Menu

1
LECTURE OUTLINE
Introduction

Understanding the Income Statement

Markup Methods

Similarities and Differences

Selecting a Method

Psychological Pricing

Price-Value Relationship

Product Mix

Menu Precost
2
INTRODUCTION
Once cost has been figured, the next step
is to determine selling price

PROFIT STARTS WITH THE MENU!!

Managers should develop a profit mentality(profit oriented)

Sales must exceed costs before profit can be realized

Controls are important, otherwise waste

and theft can cut down profit

3
UNDERSTANDING THE INCOME
STATEMENT
Refer to page 77, fig. 4-1

Sale Total of all selling price multiply by no. of units sold

Cost of Opening inventory plus

food sold purchases minus closing inventory

Food cost Food cost in RM/$ and divide it by sales.

percentage (percentage gives a more meaningful discussion of costs)

4
UNDERSTANDING THE INCOME
STATEMENT

Gross profit Sales subtract cost of food sold

Labor
Total payroll
expense

Other
Other costs controlled by
Controllable
management, e.g. Paper goods, detergent
Expenses

Non-
Other costs management has no
controllable
control over, e.g. Utilities, rent, insurance, property taxes
Expenses
5
UNDERSTANDING THE INCOME
STATEMENT

Total Add all expense lines (labor, controllable and uncontrollable)

Expenses except Food Cost, then subtract this figure from Gross Profit

Pre-tax
Gross profit less total expenses
Profit

Fig 4-2 shows expenses and costs as a whole

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MARKUP METHODS
1 2
The No-Method Method The Factor Method

Charging what the competitor Take the desired food cost

charges percentage and divide it into
100%, to get the factor.
Multiply the factor by the item
It is popularly used cost (from the cost card)

Refer to Fig. 4-3

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MARKUP METHODS
3 4
The Markup on Cost Method
Take the food cost of the item
and divide it by the desired
food cost percentage.
Refer to Fig. 4-4
The Gross Markup Method
This method takes into account
all expenses, profit as well as
food cost to determine selling
price
i) Divide gross profit by the no.
of customers served. (to get
cost per customer)
ii) Add the cost per customer to
the cost of item to get the
selling price
Refer to fig. 4-5
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MARKUP METHODS – The Gross Mark Up Method

In this method all costs (except food) are accounted for, as well as
profit. Secondly, all other expenses and profit have been divided
equally among all customers

This method is also known as the quasi-communistic approach

to the restaurant business

This method is appropriate for operations with a tight item-cost

range, for example when one price is charged for all entrees, as
well as for all-you-can-eat buffets or salad bars

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MARKUP METHODS
5 6
The Ratio Method
•This method also takes into
account all expenses and profit
•In this method, add labor cost,
other controllable costs, non-
controllable costs and profit (these
equal gross profit).
•Divide these costs by the cost of
food sold (the result is the ratio)
•To the ratio, add 1.00 (sales as a
percentage) then, multiply this
figure by the item cost to get
selling price.
Refer to fig.4-6
The TRA Method
•Developed by the Texas
Restaurant Association
•Takes into account all expenses
and profit
•To figure selling price, add labor
cost percentage, controllable
expense percentage, non-
controllable expense percentage,
and profit percentage. The result is
cost percentage without food.
•Subtract it from 1.00 (sales). This
is food cost percentage.
•Divide the cost of item by the
food cost percentage to get selling
price.
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MARKUP METHODS

The advantage of this method is that it is easy to adapt to any changes. If

several expenses increases, for example increase in utilities, insurance, or
if you want to increase profit all you have to do is adjust the formula

Refer to fig. 4-7

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SIMILARITIES AND DIFFERENCES

From all these methods (except for the No- Method method and the
Gross Markup method ) the selling prices calculated are the same!!

The reason for this is that, in order to get a selling price that achieves
a profit, an appropriate amount must be charged that covers the cost
of the item and allows enough money left over to offset other costs
and profit

In the Factor, Markup on Cost, Ratio, and TRA methods show that
costs and profit are divided in the direct relation to the selling price

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SIMILARITIES AND DIFFERENCES

In the Gross Markup method, however, labor, overhead, and profit are
divided equally among all customers, not in a direct relationship
between cost and selling price

In this method, once all customers ordering from the full menu are
served, all expenses and profit are covered

13
SELECTING A METHOD
Which method?

Many operators prefer the TRA method, because it forces

them to look at the complete financial figure

Sometimes corporate policy dictates by telling its

management team to multiply the item food cost by a
certain factor or divide the item food cost by a certain
percentage

Many foodservice managers still cling to the 40% food cost theory

Charging what the competitor charges is not a rational method,

however it is also important. It must also cover all costs and profit
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PSYCHOLOGICAL PRICING
Psychological pricing theories take into account the customer and how
she reacts to certain pricing structures

Odd-cents price, charging RM1.45 or RM1.49 instead of RM1.50… the

customer perceives this as a better price-value relationship as the
restaurant is charging the exact amount rather than rounding up to the
nearest amount, it also gives the illusion of a discount

Quick-service restaurants that depend on high volume and low prices use
this method

For prices of RM7 to RM10 best ending figure is 5

For over RM10 ending figure is 0, as this price is confined to finer

restaurants
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PSYCHOLOGICAL PRICING
Another factor is the left most digit, for example 69 and 71 is perceived as
of greater distance than 67 and 69(this is important when contemplating
price increase)

Most quick-service and family-style restaurants use psychological pricing

as they are very competitive, and want the image of high value and low
cost

Some theme and ethnic restaurants use, while some don’t depending on
their demographic markets

Fine-dining restaurants do not use, as they are trying to create an image

of quality and luxury and no discounts

However, Psychological pricing can change the selling price that was
determined by the markup formulas
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PRICE-VALUE RELATIONSHIP

A menu listing must have a value associated with it

Price point or the dollar point is a point after which a customer will no
longer buy that item, ie. the point of resistance

Price point and price-value relationships are evident in the industry

The selling price must be in keeping with the value received

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PRODUCT MIX
Different categories on the menu have different
food costs assigned to them

Not every item on the menu is marked up to give

that desired percentage food cost

The percentage food cost comes from an aggregate of all items

sold at their various costs, this is known as product mix

It is the product mix, the actual no. of items sold at their various
markups, that makes up the cost of food sold on the income statement

Refer to Tables 4-4, 4-5, and 4-6

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MENU PRECOST
• Menu precost is the step in determining new menu
selling price. It tells what is likely to occur to the food
cost in the future

• Refer to Table 4-6 and page 90.

• It is very important for the management to keep good

records of guest checks, printout of point-of-sale
register, up-to-date cost cards of each item to
determine product mix or menu precost

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CONCLUSION

Obviously, determining the correct selling prices on

the menu is time consuming

To accomplish this, accurate cost cards and income

statements are needed

Profits starts with the menu!!

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