Menu Pricing Strategy

From VANEEpedia

A constant refrain in the foodservice business is the need for operators to raise their prices. As a general matter, independent operators are lower priced than their multi-unit chain competition. They could raise their prices without losing their value perception among consumers.

But raising prices across the board isn’t the answer. Independent operator menus aren’t underpriced so much as they are mis-priced. Unfortunately the menu pricing formulas used by many operators cause them to leave money on the table. These formulas mistakenly use percentages rather than contribution margin and this often times leaves menus underpriced.

Food cost percentage is an important concept for evaluating the overall financial performance of a restaurant. Many operators, however, use this percentage as a menu pricing guide rather than as the financial measure that it is supposed to be. When an operator thinks that he should have a 30% food cost, he will price everything such that the food cost is always 30% on all menu items. No matter what he sells he’ll always have the right percentage.

The problem with this model is that some items are overpriced and other are underpriced. The operator will sell a lot of the underpriced items and few of the overpriced items. At the end of the day he will not bring in enough dollars per customer to cover his operating expenses. His food cost percentage is right on, but he can not afford to pay his utility bills.

A successful menu pricing strategy requires a different metric: Contribution Margin. Contribution Margin, also called Gross Profit, is expressed in dollars. For example, a bowl of chili that costs $.65 can retail for $3.99. That chili’s contribution margin is $3.34. Using a food cost percentage formula, this item would be priced at $1.95. This leaves over a dollar per serving on the table that could go straight into the operator’s pocket. In a typical restaurant this could be over $10,000 per year.

Vanee sales agents need to help their customers use the proper menu pricing strategy. An advantage our agents have is that they visit many different accounts and have a good feel for the “right” price for different items. That means our sales agents can be a valuable too for the operator by making sure their menus are priced as profitably as possible. Contact Vanee to schedule an appointment with a consultant improve your menu pricing strategy.