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Cost Control

Cost Control. Chapter 6 Managing Food and Beverage Pricing. Main Ideas. Menu Formats Factors Affecting Menu Pricing Assigning Menu Prices Special Pricing Situations Technology Tools. Menu Formats. Menus – standard, daily or cycle. The standard menu is fixed day after day.

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Cost Control

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  1. Cost Control Chapter 6 Managing Food and Beverage Pricing

  2. Main Ideas • Menu Formats • Factors Affecting Menu Pricing • Assigning Menu Prices • Special Pricing Situations • Technology Tools

  3. Menu Formats • Menus – standard, daily or cycle. • The standard menu is fixed day after day. • The daily menu changes every day. • A cycle menu is a menu in effect for a specific time period. The length of the cycle refers to the length of time the menu is in effect. • Daily or weekly menu specials provide variety, low-cost raw ingredients, carryover utilization, or test-market potential for new menu items.

  4. Factors Affecting Menu Pricing • Total revenue is generated by the following formula: • As price increases, the number of items sold will generally decrease. Price x Number Sold = Total Revenue

  5. Factors Affecting Menu Pricing • Local competition • Service levels • Guest type – price sensitivity • Product quality • Portion size • Ambience • Meal Period • Location • Sales mix

  6. Factors Affecting Menu Pricing • Sales mix refers to the specific menu items selected by guests. • Sales mix will most heavily influence the menu pricing decision • Price blending refers to the process of pricing products, with very different individual cost percentages, in groups with the intent of achieving a favorable overall cost situation. • When you assume that a person will buy a drink with their meal, you lower the meal selling price and raise the drink selling price and create a “blended price structure”

  7. Assigning Menu Prices In general, menu prices are most often assigned on the basis of one of the following two concepts. • Product Cost Percentage/Pricing Factor • Product Contribution Margin

  8. Product Cost Percentage Method • The formula for computing food cost percentage is as follows: • This formula can be worded somewhat differently for a single menu item without changing its accuracy. Cost of Food Sold Food Sales = Food Cost % Costs of a Specific Food Item Sold Food Sales of that Item = Food Cost % of That Item

  9. Product Cost Percentage Method • The principles of algebra allow you to rearrange the formula as follows: • Question #1 – an example of product cost percentage Cost of a Specific Food Item Sold Food Cost % of That Item = Food Sales (Selling Price) of That Item

  10. Product Cost Percentage Method Pricing Factor • A cost factor or multiplier can be assigned to each desired food cost percentage as follows: • The pricing factor when multiplied by any product cost will yield a selling price that is based on the product cost. The formula is as follows: 1.00 Desired Product Cost % = Pricing Factor Pricing Factor x Product Cost = Menu Price

  11. Product Cost Percentage/Pricing Factor • Question #2 – example calculating pricing factors • Question #3 – example which compares these two methods for two identical restaurants.

  12. Contribution Margin • Contribution margin is defined as the amount that remains after the product cost of the menu item is subtracted from the item’s selling price. • It’s the amount of money that “contributes” to paying for your labor and other expenses and providing a profit. • Contribution margin is computed as follows: Selling Price – Product Cost = Contribution Margin

  13. Contribution Margin • When this approach is used, the formula for determining selling price is: • Question #4 – Contribution Margin example Product Cost + Contribution Margin Desired = Selling Price

  14. Assigning Menu Prices • Regardless of the method you choose to follow… • Goal is setting a good price/value relationship in the mind of the customer. • The selling price selected must provide for predetermined operational profit. • The market (your guests needs, wants, and desires) – not you – will determine what your sales will be on any given item.

  15. Special Pricing Situations • Coupons are a popular way to vary menu price. • “Buy one, get one free” or “20% off” • Some form of restriction is placed on the coupon. • Coupons have the effect of reducing sales revenue from each guest in the hope that the total number of guests increases to the point that the total sales revenue increases.

  16. Special Pricing Situations • Value Pricing refers to the practice of reducing all or most prices on the menu in the belief that total guest counts will increase to the point that total sales revenue also increases. • Bundling refers to the practice of selecting specific menu items and pricing them as a group in such a manner that the single menu price of the group is lower than if the items comprising the group were purchased individually. • Value Meals

  17. Special Pricing Situations • The difficulty in establishing a set price for either a salad bar or buffet is that total portion cost can vary greatly from one guest to the next. • The secret to keeping selling price low for a salad bar or buffet is to apply the ABC method. A items should comprise no more than 20% of the total product available; B items, no more than 30%; and C items, 50%.

  18. Special Pricing Situations • Use the following formula to determine buffet product cost per guest: • Question #5 – example of this method Total Buffet Product Cost Guests Served = Buffet Product Cost per Guest

  19. Special Pricing Situations Bottled Wine • How you decide to price the bottled wine offerings on your menu will definitely affect your guest’s perception of the price/value relationship offered by your operation. • The price spread is defined as the range between the lowest and highest priced menu item. • Goal: To reduce the price spread.

  20. Special Pricing Situations Beverages at Receptions and Parties • Pricing beverages for open bar events can be difficult, since each customer group can be expected to behave somewhat differently when attending an open bar or hosted bar function. • Sales histories – can calculate average consumption • Then use the formula: Product Cost + Contribution Margin Desired = Selling Price

  21. Technology Tools • The mathematical computations required to evaluate the effectiveness of individual menu items and to establish their prices can be complex, but there are a wide range of software products available that can help you: • Develop menus and cost recipes. • Design and print menu “specials” for meal periods or happy hours. • Compute and analyze item contribution margin. • Compute and analyze item and overall food cost percentage. • Price banquet menus and bars based on known product costs. • Evaluate the profitability of individual menu items. • Estimate future item demand based on past purchase patterns. • Assign individual menu item prices based on management-supplied parameters.

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