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  • FINANCIAL MANAGEMENT: Making menu pricing easier and more profitable

A 25-year veteran of the restaurant industry, Jim is the owner and operator of RestaurantOwner.com, and a sought-after industry speaker.

Of all the business decisions operators make, determining menu prices is among the trickiest and most perplexing. Deciding when and to what extent to increase prices is a dicey, even agonizing task for both new and experienced restaurateurs.

Price too low and the difference between your actual prices and what you could be charging comes right off your bottom line. Price too high and you may lose customers wanting a better deal.

Historically, the

Jim Laube

most common way to determine menu prices was to do a rough calculation of the food cost for an item and multiply that by three or four to arrive at an approximate starting point before rounding up or down to a "logical" price point.

For example, let's say the ingredients for a new barbecue chicken pizza cost $2.75. If the goal is a 25 percent food cost, you multiply the $2.75 by four to get a sales price of $11, and then round down to $10.95 as the final sales price.

The approach is simplistic, but is it a good approach to pricing menus today?

Probably not.

One problem with relying on cost to price the menu is that customers ultimately will determine your prices. Plus, the fact is, they don't care about your cost. They care about value. So if customers perceive value in a pizza with an 18 percent food cost (which in some markets they do), then why not set your prices accordingly?

One of the challenges to setting prices according to your customers' perceived value is determining what that amount is. It's not an exact science and pricing decisions will always contain some degree of subjectivity. But in the meantime, here are a few ideas that should make pricing decisions a little easier and a lot more profitable.

Know your market

Be aware of what your competition is charging for similar menu items. Are your prices aligned fairly close to other restaurants in your market area? Keep in mind that this is an industry filled with amateurs, so don't base your pricing decisions solely on your competition. Regardless, you need to know what they're charging.

After you know that, consider factors that might allow you to charge more or require you to accept less than the prevailing market prices. These factors include your food quality, portion sizes, product presentation, style of service, location, ease of access, atmosphere and décor.

For example, if your restaurant enjoys a good reputation and is well-known for its quality pizza you should be able to charge and get a higher price than the average pizza establishment. Being in a prime or exceptionally convenient location may also allow you to command a higher price.

Ask your staff

Yes, you read that right. Ask your staff. Think for a minute about the people working in your restaurant who are closest to the customer. Chances are they aren't you or your managers, they're your servers and order takers. Think of the hundreds and even thousands of interactions these people have with your customers while the ordering decisions are made. Since your employees also are restaurant customers themselves, they have a very good sense of customer buying habits, price points and price resistance. (But in most restaurants, who are usually the last people to find out about price changes or new menu items? Right, it's usually servers and people who take the orders.)

Some operators make a point of including service personnel in the pricing process. In these restaurants, when new menu items are evaluated the staff is shown the final plate presentation, they sample the product and then indicate on a comment card what they feel could be charged for each item. The operators who do this tell me they get a much better sense of what price to charge, often higher than what they originally thought.

Including your service personnel in the pricing process can be a real double-win because you're now including them in the process. They feel involved in your restaurant, and when you ask for their opinions it shows their experience matters. It can be a genuine morale booster.

Examine your sales

Next you need to determine the following: In each section of your menu, are you selling more higher-priced items or more lower-priced ones? Do you sell more pizzas loaded with extras or more with just cheese?

Knowing this can give you a good sense of how price sensitive your typical customer is. When a large part of your sales comes from higher-priced items, it's a good sign that factors besides price are influencing your customers' buying decisions. The good news here is you may have an opportunity to charge even more for certain menu items. By finding out what your customers want to spend, you're also able to develop menu items you can sell profitably at prices customers will pay.

This practice, which I learned from a national chain operator, is referred to as "price-point targeting." Through focus groups and surveys, the operator determined what price points customers wanted to pay for items at different meal periods. Then the company developed menu items that could be offered at or around those price points.

This might not be appropriate for every restaurant, but if you're competing in a market segment where price is the key factor, this approach might provide an incentive to attract people who are motivated to buy primarily on the basis of price.

Although pricing will always be one of every operator's most difficult decisions, there are ways to get additional information that can make the pricing less stressful and more profitable.

Additional articles by Jim Laube:

* FINANCIAL MANAGEMENT: How much money should your restaurant be making?
* FINANCIAL MANAGEMENT: Educate your staff about the cost of your business
FINANCIAL MANAGEMENT: Know your numbers
*FINANCIAL MANAGEMENT: Preparing a monthly P&L won't give you the best numbers

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