Chapter 8:

Menu Pricing

Class Name
Instructor Name
Date, Semester

THE MENU
DEVELOPMENT, STRATEGY, AND APPLICATION
David Barrish
Relationships Among Menu Prices, Menu Costs, And Profit

• Pricing strategy is likely the most pivotal decision

process you will be involved in.
• Even if you develop a sound menu, a bad pricing
strategy will discourage customers or push purchases to
the wrong items.
• The consequences of pricing are many times more
important than the consequences of cost control.
– You should save pennies (food and beverage costs), but you
must earn dollars (food and beverage revenues).

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Relationships Among Menu Prices, Menu Costs, And Profit

• The contribution margin from a sale is more important than the

food or beverage cost percentage of the sale.
• Menu Price ($) - Direct Variable Costs ($) = Contribution Margin
($)
• Variable costs are any costs that increase or decrease
proportionately as sales volume increases or decreases.

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Relationships Among Menu Prices, Menu Costs, And Profit

Aggregate of labor costs is treated as a variable cost, but is not

assigned to specific menu items.
Contribution Margin ($) = Menu Price ($) - Recipe Costs ($)
The relationship between food cost and food sales is referred to as
food-cost percent
{Food Cost ($)÷ Menu Price ($)} X 100 =Food-Cost Percentage
(%)
Beverage works the same way

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Relationships Among Menu Prices, Menu Costs, And Profit

• Without contribution margin, there is no profit.

• The same can’t be said for food-cost percentage
• Cost percentages are useful management tools for
planning and monitoring operational results, but they
are not the primary objective of the financial plan.

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The Psychology Of Menu Pricing

Your menu pricing approach speaks volumes to your

customers.
Today’s consumers are informed.
There are fewer trade secrets within our industry.
Customers understand the expense of scratch cooking and
the cost of ingredients.
When we establish menu prices, we send messages to our
customers.
Marking up a mesclun salad from $.90 to $8.00 sends a different
message than marking up sweetbreads from $12.00 to $25.00

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The Psychology Of Menu Pricing

• There are two pricing realities

• Prima facie assessment of your published prices
– The price your customers see prior to addition of add-ons, surcharges,
gratuities, and taxes e.g. $48.00

• The second reality is the inclusive price

– With the addition of add-ons, surcharges, gratuities, and
taxes $ 62.00
• The lesson here is to temper (where possible) and
communicate your pricing so that guests are not
surprised by the final bill.

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The Psychology Of Menu Pricing

• When a customer receives value above of what they

anticipated, then they believe they have received a good
deal.
• amuse bouche at the start of the meal
• a mignardise at the end of the meal.
• Both are “gifts” from the kitchen.
• Intangibles in the form of services add value.
• Wine that is decanted vs. poured directly into glasses.

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The Psychology Of Menu Pricing

• For food items, customers expect to pay the highest

increment of their meal for the entrée.
– Consequently, appetizers, soups, salads, and desserts are
typically priced lower than the entrée.
– Mezze, tapas, sushi, and other small plates can add up
quickly.
– You must be careful not to create an expectation of low-price
dining.
– Carryout prices are sometimes lower than prices charged for
dining in the restaurant
– Half-portions are typically not half-priced. Half rack of ribs
$14.00, full rack $22.00
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The Psychology Of Menu Pricing

• Prices ending with “9,” such as $2.99, $15.99, and so on, may
connote value, but not necessarily quality.
• At prices less than $10.00, increments of $1.00 have a
moderate impact on customer decisions.
– E.g. a $6.00 item is viewed as a slightly better value than a $7.00 item.
• Above a certain price, incremental changes do not influence
value decisions.
• You should make dining pleasant and shield customers from
commercial symbolism. As related to menu pricing, it makes
sense not to list dollar signs on your menus.

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Guiding Your Customers’ Purchase Decisions

• As a menu planner it should never be your intent to

deceive your customers.
• You should not hesitate to maximize revenue.
• Your menu should navigate customer decisions in a
strategic manner.
• Customers who are ready to spend freely in your
business should not be inhibited because of your
menu’s conceptual, structural, or design errors.

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Guiding Your Customers’ Purchase Decisions

• Figure 8-3 illustrates a prix fixe dinner menu set at

$29.00 for food only. The menu also lists the à la carte
prices for each course.
– The lesson here is that in many cases, less information is
preferable.
• Figure 8-4 illustrates an extract from a prix fixe
luncheon menu.
– Customers can’t assign incremental value to the various
components of the menu.

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Guiding Your Customers’ Purchase Decisions

• Even with a prix fixe or degustation menu, there are

usually one or two choices, so that likes and dislikes
can be accommodated.
• This also applies to menu pricing. It is typical and
appropriate to provide a range of prices within each
menu category e.g. entrées.
• As a rule, customers scan each category and filter out
items that they dislike or otherwise don’t want.
• What remains are possible selections.

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Guiding Your Customers’ Purchase Decisions

Customers usually move toward central prices unless you provide

compelling alternatives.
Some operators use a pricing practice of questionable value by
including an artificially high-price item at the top of the range.
Compare the following examples:
Menu A Menu B
Low price $16.00 $16.00
High price $28.00 $ 42.00
Mean price $22.00 $ 29.00
Range $12.00 $ 26.00

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Guiding Your Customers’ Purchase Decisions

• The Average price on menu A equals $22.00

– Customers will likely make purchase decisions clustered around this
point.

• The Average price on menu B equals $29.00

– As long as customers do not see the high price ($42.00) as out of place,
then the strategy may be effective and purchases may cluster around the
$29.00 price point.

• Prices within a menu category should not be listed in

ascending order.
• Pricing patterns should not be obvious and should be
avoided.

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Add-ons And Surcharges

• If customers want something extra, then they should

pay for it. Those who don’t want extra should not have
to pay for something they don’t order.
• The use of add-ons and surcharges may not be the
wisest tactic. They are perceived as “nuisance fees”.
• An alternative to surcharges involves building the
additional food cost of add-ons into the overall menu
structure and raising the prices across the board.

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 8.
6
Omelet
Menu with
Add-ons
Insert Figure 8-6

Placeholder image

The Menu Life Cycle

8.1

Insert Table 8-1

8.2

Insert Table 8-2

Placeholder image

The Menu Life Cycle

Beverage Value Decisions

• National brands (Pepsi, Coca-Cola, etc.) can be marked

up only to a certain point. House-made beverages have
great mark-up possibilities.
• The value you add directly influences the level of
markups your customers will tolerate.
– Brewed iced tea requires tea leaves and hot water, and involves
a bit more work for your staff.
– Alternatively, when you use creative ingredients, skilled
preparations, boutique ice cubes, or unique service
presentations, you can justify higher prices and command
attractive contribution to net income.

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Beverage Value Decisions

• You want thoughtfully paired beverages to transform

good food into a delicious dining experience.
• Your wine program involves the scope and character of
your wines, the pricing scheme you develop, the
glassware you use, and the protocol your staff uses to
serve their customers.

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Beverage Value Decisions

• Some wine programs are simple and do not justify high

markups.
– E.g. a few wines by the glass and perhaps a half-dozen bottled
wines.
– $10.00 cost per bottle is appropriate
• The majority of wine programs typically range
between 28% and 35% of the cost of sales
• Many authorities believe that to entice customer
purchases, the lowest priced bottle of wine should not
exceed the price of the lowest entrée.

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Beverage Value Decisions

• When it comes to wine by the glass, many operators

price the glass to cover the wholesale price of the wine.
– Cost of the bottle = $15
– Price of the glass = $15
• The downside: if the customer knows the wine and its
price, could be seen as gouging (it is a 5x markup).

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Beverage Value Decisions

• More than half of the states in the United States allow some form
of corkage fee in restaurants
• Corkage: a fee charged by the restaurant when a customer brings
their own bottle of wine.
• Corkage fees range between $10.00 and $30.00 per bottle Some
exclusive operations charge as much as $75.00 per bottle.
• Replaces the contribution margin of the lost sale and subsidize
the fixed cost associated with wine service

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Beverage Value Decisions

• Some restaurants offer corkage-free days when

customers may bring in their own wines and enjoy them
at no additional cost when purchasing meals.
• Large parties (food sales offsetting lost wine sales)
• Drives demand during slow periods

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How Customers Measure Value

• Determination of value is as varied as the spectrum of

your customers .
• Price elasticity of demand .
– If the price for a pint of beer increases and the demand for it
decreases, then beer can be said to have an elastic demand .
– Conversely , some products have a relatively inelastic demand.
Coffee served at breakfast can be sold over a wide range of
prices with little effect on demand.
– 7-11 vs. Starbucks

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How Customers Measure Value

• The market-clearing price (equilibrium price) is the menu

price at which quantity demanded is equal to quantity
supplied.
• The concept of equilibrium assumes that over time, forces
tend to create supply, demand, and prices that have
incrementally moved to a point of balance and sustainable
competition.
• Local market tends to move toward competitive pricing,
whereby the capacity to serve meals (supply) is utilized if
customers are satisfied with the overall value they receive.

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Marginal Analysis Pricing

• The following example illustrates a marginal analysis

pricing model for menu items, and shows the impact on
sales (demand) and marginal profit (the difference
between total sales and total costs) as price varies.
• As the graph illustrates, the demand (number sold)
decreases as the price is increased.

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 Relationship of Beer Pricing and Number of Units Sold
8.8
Marginal Analysis Pricing

• What combination of menu price and sales volume is

best?
• You must know two additional pieces of data:
– The variable cost of the product
– Fixed cost of serving the product

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 Relationship among Pricing, Fixed Costs, Variable
Costs, Number of Units Sold, and Marginal Profit
8.9

Insert Figure 8-9

Placeholder image

The Menu Life Cycle

Marginal Analysis Pricing

• Sales levels below $4.25 rely on a price point that is too

low to generate sufficient revenue.
• Prices above that point begin to drive away demand,
resulting in insufficient sales.
• The intrinsic problem with this model involves
knowing just how much demand will change as you
vary prices.
• There are some opportunities to test different prices.
– E.g. you can test demand at different prices during various dayparts (happy
hour, regular meal periods, late night.

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Techniques For Increasing Perceived Value

• Restaurateurs often equate value with quantity (as do

some customers) and provide oversize portions.
• Lately, there has been a fundamental shift that focuses
on quality rather than quantity…
– List and describe origin of ingredients
– Finish dishes and drinks with creative edible garnishes
– Train and develop knowledgeable service staff
– Artistic plate presentation
– Use creative plates and service ware
– And many others…

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Mechanics Of Menu Pricing

• There are many approaches to pricing, each with

proponents and detractors.
• Compares two methods that range from simple to
highly structured.
• Factored markup pricing method is a simple pricing
method
• LOGICPATH™ PRICING

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Factored Markup Pricing Method

Markup Factor for X % Food or Beverage Cost = 100÷X

(where X equals the Desired Cost %)
Markup Factor for 30% Food Cost = 100÷30 = 3.33
Entrée Food Cost Markup Factor Menu Price
Crab cakes $8.53 X3.33 = $28.40

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8.3

Insert Table 8-3

Placeholder image
Factored Markup Pricing Method

• There are two significant shortcomings to this pricing method:

1. Table 8-4 indicates several entrees that are priced lower than
what the market will bear. The calculation of the markups is
mathematical, but not necessarily functional.
2. The method accurately relates menu prices to the target food
cost percentage, it fails to consider the contribution margins.

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LOGICPATH™ PRICING

1. Begins with calculation of required sales to produce

desired profit (DP) before income taxes.
2. Once the estimated target sales figure is calculated
average markups (AMU) are identified and used to
suggest menu prices.
3. The final step refines these suggestions into usable
selling prices.

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LOGICPATH™ PRICING

• Cost-volume-profit (CVP) analysis recognizes the

relationships among sales, variable and fixed cost
behaviors, and varying levels of profit.
• Assumptions when applying CVP to LogicPath™:
– Does not address discounts or economies of scale in production.
– Units sold equal units produced; there is no surplus production
returned to inventory.

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LOGICPATH™ PRICING

• Variable Rate (VR) is the percent of a dollar that is dedicated to

paying variable costs such as food & beverages and variable
labor costs.
• Contribution Rate (CR) is the percent of a dollar that is left once
variables costs have been paid and are used to pay fixed costs
(rent etc.) and profit.
• Variable Rate + Contribution Rate always equal 1
– 1- VR = CR
– 1- CR = VR

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LOGICPATH™ PRICING

• Target sales = {Fixed Costs (FC) + Desired Profit (DP)} ÷

Contribution Rate (CR)
• Step 1: Specify desired profit (in dollars).
– does not include the cost of income taxes
• Step 2: Set initial assumptions for check averages.
– average amount you would like each customer to spend on food and
beverages.
• Step 3: Forecast guest traffic levels.

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LOGICPATH™ PRICING

• Step 4: Calculate variable rate.

– The variable rate is dependent on the sum of variable costs.
– Variable costs typically include:
– Cost of food and beverages
– Hourly wages
– Benefits and payroll taxes on hourly wages
– Certain direct operating expenses,
– A portion of general and administrative expenses
– Utility costs related to guest traffic

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LOGICPATH™ PRICING

• Step 5: Calculate contribution rate.

1- variable rate = contribution rate
• Step 6: Total all fixed costs.
• Fixed costs typically include certain direct operating expenses:
– Rent
– Music and licensing fees
– Corporate overhead, marketing expenses, the major fraction of utility costs,
and repairs
– Maintenance, depreciation, a portion of general and administrative expenses
– Interest on loans

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LOGICPATH™ PRICING

• Step 7: Calculate annual sales required to produce

desired profit.
• Step 8: Reconcile initial assumptions and requirements,
and revise plans if the variance is excessive.

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LOGICPATH™ PRICING

• Review CASE STUDY 8-1A

• Review CASE STUDY 8-1B

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OTHER PRICING APPROACHES

• Many operators set their prices in relation to their

competitors.
• Certainly, there is logic to knowing the prices your
competitors charge; however, their expense structure
and business objectives may allow them to set prices
lower than you.

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Acceptable Tactics For Changing Prices Over Time

• When your costs of ingredients, labor, operations,

occupancy, and taxes increase, you must decide if
raising prices is appropriate.
• If you do raise prices then you must decide how to
present it to your customers.
• Perhaps the best approach to raising prices involves
framing the changes within the context of a new menu
deployment.
– Daily menus, weekly menus, and seasonal menus all provide the
vehicle for price changes without raising too many eyebrows.

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