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Menu Planning, Menu Pricing & Menu Engineering Food & Beverage Management III Yr. Bhavin Parekh 07/11/10 F&B Management - ...
AREAS of FOCUS <ul><li>Menu Planning </li></ul><ul><li>Menu Costing & Pricing </li></ul><ul><ul><li>Different types of Pri...
AREAS of FOCUS <ul><li>Cont’d… </li></ul><ul><ul><li>Evaluating the Menu </li></ul></ul><ul><ul><li>Improving the Menu </l...
MENU AS FOUNDATION FOR CONTROL <ul><li>The Menu is the Foundation for the  Control Process  in a Food & Beverage Operation...
A) The Menu: As a Foundation of Control Points <ul><li>Control Points are basic operating activities that must be performe...
FLOW CHART OF CONTROL POINTS Menu   Planning Purchasing Receiving Storing Issuing Preparing Cooking Holding Serving Guest ...
F&B Operation as Control Points <ul><li>When we view the F&B Operation as a System of Control Points: </li></ul><ul><ul><l...
B) Influence of “THE MENU” <ul><li>The Process of Planning a Menu never ends.  The Final Menu is never achieved. </li></ul...
THE MENU <ul><li>A properly planned menu stimulates  Revenue  and increases the  Guest Check Average. </li></ul><ul><li>Wh...
Influence of “THE MENU” on F&B Operations <ul><li>Product Control Procedures: </li></ul><ul><ul><li>The F&B Products must ...
Influence of “THE MENU” <ul><li>Cost Control Procedures: </li></ul><ul><ul><li>Careful Cost Control Procedures must be fol...
Influence of “THE MENU” <ul><li>Production Requirements: </li></ul><ul><ul><li>Food Items required by the Menu must be Pro...
Influence of “THE MENU” <ul><li>Nutritional Content of Meals: </li></ul><ul><ul><li>Food & Beverage Operations (Commercial...
Influence of “THE MENU” <ul><li>Equipment Needs: </li></ul><ul><ul><li>All Equipment required to produce the Menu must be ...
Influence of “THE MENU” <ul><li>Sanitation Management: </li></ul><ul><ul><li>Since the Menu sets the stage for the remaini...
Influence of “THE MENU” <ul><li>Layout and Space Requirements: </li></ul><ul><ul><li>There must be adequate facilities for...
Influence of “THE MENU” <ul><li>Staffing Needs: </li></ul><ul><ul><li>Employees must be able to produce and serve all the ...
Influence of “THE MENU” <ul><li>Service Requirements: </li></ul><ul><ul><li>F&B Manager must carefully plan how products w...
Influence of “THE MENU” <ul><li>Revenue Control Procedures: </li></ul><ul><ul><li>A simple Fast Food Operation would not h...
C) MENU PALNNING <ul><li>The Menu is not only a  Control Tool . Since it lists F&B Items that your operation has to offer,...
Priority Concerns of the Menu Planner Guest Quality of Item Wants & Needs Concept of Value Item Price Object of Visit Soci...
Marketing Implications of Menu <ul><li>Because a Menu lists the items that a F&B Operation is offering for sale, it in tur...
Marketing Implications of Menu <ul><li>When carrying out it’s Marketing Plans, the F&B Operation must try to meet or Excee...
Theme and Atmosphere <ul><li>The complexity of Menu Planning depends upon the ambience of F&B Operation. </li></ul><ul><li...
Menu Planning Strategies <ul><li>The Past: In the past, the Food Service Operators tried to diversify their menus by addin...
Menu Planning Strategies <ul><li>Present:   The Present – Rationalization Strategy:   </li></ul><ul><ul><li>This strategy ...
Menu Planning Strategies <ul><li>To start with, it is best to base your menu plans on the  Needs and Desires of your Targe...
Building the Menu <ul><li>Entrees are typically selected first in the Menu Planning Process. </li></ul><ul><li>It is not o...
Building the Menu <ul><li>How many Entrees should a F&B Operation have? </li></ul><ul><ul><li>Some F&B Operators feels tha...
Building the Menu <ul><li>In Short:  </li></ul><ul><li>CONTROL BECOMES MORE COMPLEX WITH THE INCREASING COMPLEXITY OF YOUR...
Building the Menu <ul><li>The reverse approach of making available only a limited number of Entrees reduces problems of Co...
Building the Menu <ul><li>A common practice is to plan the Appetizers or Soups followed by High – Starch Items like Potato...
Dining Trends <ul><li>The “Grazing” Trend: It is a common trend observed in the Baby Boomers whose lifestyles reflect thei...
Dining Trends <ul><li>If a F&B Operation’s business is Transient and the clientele changes frequently – Menus may be  Stat...
Menu Design <ul><li>Design of a menu can influence: </li></ul><ul><ul><li>Guests Purchasing Decision </li></ul></ul><ul><u...
Menu Changes <ul><li>External Factors: </li></ul><ul><ul><li>Consumer Demands </li></ul></ul><ul><ul><li>Economic Conditio...
D) Menu Pricing <ul><li>After a menu is planned and costed, each item has to be priced. </li></ul><ul><li>There are variou...
Calculating Menu Selling Prices <ul><li>There are two main types of Pricing Techniques. </li></ul><ul><ul><li>Subjective P...
Subjective Pricing Methods <ul><li>Prices determine to a large extent whether the financial goals of the Operation are met...
Subjective Pricing Methods <ul><li>The Reasonable Price Method:   </li></ul><ul><ul><li>The method uses a price that the  ...
Subjective Pricing Methods <ul><li>Highest Price Method: </li></ul><ul><ul><li>Using this Pricing Method, the  Operator se...
Subjective Pricing Methods <ul><li>Loss Leader Pricing Method: </li></ul><ul><ul><li>In this type of Pricing Method, the M...
Subjective Pricing Methods <ul><li>The Intuitive Price Method: </li></ul><ul><ul><li>Like the name suggests,  Prices are s...
Subjective Pricing Methods <ul><li>Drawbacks: </li></ul><ul><ul><li>Cannot relate to the Profit Requirements of the Operat...
Objective Pricing Methods <ul><li>Simple Mark –Up Pricing Methods </li></ul><ul><ul><li>Ingredient Mark – Up </li></ul></u...
Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods </li></ul><ul><ul><li>It considers a Mark – Up from the...
Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><ul><li>Ingredient Mark – Up Method </li...
Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><li>Ingredient Mark – Up Pricing: </li><...
Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><ul><li>Ingredient Mark – Up Pricing: </...
Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><li>b)  Prime – Ingredient Mark – Up Pri...
Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><li>b) Prime – Ingredient Mark – Up  Pri...
Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><li>b) Prime – Ingredient Mark – Up Pric...
Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><li>c)   Mark – Up with Accompaniment Co...
Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><li>c)  Mark – Up with Accompaniment Cos...
Objective Pricing Methods <ul><li>Determining the Multiplier: </li></ul><ul><ul><li>The Mark – Up Pricing Methods are simp...
Objective Pricing Methods <ul><li>Contribution Margin Pricing Method: </li></ul><ul><ul><li>Contribution Margin  </li></ul...
Objective Pricing Methods <ul><li>Contribution Margin Pricing Method: </li></ul><ul><ul><li>Example:  Consider the given d...
Objective Pricing Methods <ul><li>Contribution Margin Pricing Method: </li></ul><ul><ul><li>Step A)  </li></ul></ul><ul><u...
Objective Pricing Methods <ul><li>Ratio Pricing Method: </li></ul><ul><li>Data: </li></ul><ul><li>Food Costs = $ 435,000 <...
Objective Pricing Methods <ul><li>Ratio Pricing Method: </li></ul><ul><ul><li>Ratio = ($ 790000 + $ 95000) / $ 435000 </li...
Objective Pricing Methods <ul><li>Ratio Pricing Method: </li></ul><ul><li>Step C) Determining the Base Selling Price for M...
Objective Pricing Methods <ul><li>Simple Prime Costs Method: </li></ul><ul><li>The term  Prime Costs  refers to the most s...
Objective Pricing Methods <ul><li>Simple Prime Costs Method: </li></ul><ul><ul><li>Data:  </li></ul></ul><ul><li>Menu Item...
Objective Pricing Methods <ul><li>Simple Prime Costs Method: </li></ul><ul><ul><li>Step A)  Labor Costs per Guest =   </li...
Objective Pricing Methods <ul><li>Simple Prime Costs Method: </li></ul><ul><ul><li>Step C)  Computing Base Selling Price: ...
Objective Pricing Methods <ul><li>Specific Prime Costs Method: </li></ul><ul><ul><li>In this type of Menu Pricing the F&B ...
 
Objective Pricing Methods <ul><li>Specific Prime Costs Method: </li></ul><ul><ul><li>Disadvantages: </li></ul></ul><ul><ul...
Pricing Considerations <ul><li>The Base Selling Price is the  Starting Point for deciding the S.P.  of a Menu Item. The B....
Pricing Considerations <ul><li>Factors upon which the S.P. is decided: </li></ul><ul><ul><li>Volume Concerns – Higher the ...
Evaluating the Menu <ul><li>The menu is the most important tool influencing the success or failure or a Food & Beverage Op...
Evaluating the Menu <ul><li>Based upon the criteria of  Popularity and Profitability , the Menu item can be classified int...
MENU MIX  POPULARITY CONTRIBUTION  MARGIN THE MENU ENGINEERING GRID PUZZLES PLOWHORSE STARS DOGS PUZZLES
Evaluating the Menu <ul><li>In order to classify the Menu Item into these 4 categories, we must device a standard measure ...
Evaluating the Menu <ul><li>Defining Profitability: </li></ul><ul><ul><li>The basis of measuring the degree of Profitabili...
Evaluating the Menu <ul><li>Defining Popularity: </li></ul><ul><ul><li>The basis of measuring the degree of Popularity of ...
Evaluating the Menu <ul><li>Therefore, ideally the Popularity of each menu item is computed as 100% (Total No. of Units So...
Evaluating the Menu <ul><li>Menu Engineering  assumes  that an item is Popular if it’s unit sales equal or exceed  70%   o...
 
IMPROVING THE MENU   <ul><li>Carrying out the Menu Engineering Exercise is only useful if the information obtained from it...
IMPROVING THE MENU <ul><li>Managing the Plow Horses: </li></ul><ul><ul><li>(High Popularity / Low Profitability): </li></u...
IMPROVING THE MENU <ul><li>Relocate the item to a lower profile of the menu. Since, it is popular, some guests will search...
IMPROVING THE MENU <ul><li>Assess the Direct Labor Cost involved. </li></ul><ul><li>Consider Portion Reduction. By reducin...
IMPROVING THE MENU <ul><li>Managing Puzzles: </li></ul><ul><ul><li>(High Profitability and Low Popularity Items)   </li></...
IMPROVING THE MENU <ul><li>Add Value to the Item: </li></ul><ul><li>Offering a larger Portion size, more accompaniments, b...
IMPROVING THE MENU <ul><li>Managing Stars:   </li></ul><ul><ul><li>(High Profitability and High Popularity) </li></ul></ul...
IMPROVING THE MENU <ul><li>Managing Dogs: </li></ul><ul><ul><li>(Low Profitability and Low Popularity). </li></ul></ul><ul...
COMPUTER BASED MENU MANAGEMENT <ul><li>Data can be entered into a Program’s Database Manually.  </li></ul><ul><li>This can...
COMPUTER BASED MENU MANAGEMENT <ul><li>Reports generated by the Computer Based Menu Management Software are: </li></ul><ul...
COMPUTER BASED MENU MANAGEMENT – Sample Menu Item Analysis Report
COMPUTER BASED MENU MANAGEMENT – Sample Menu Mix Analysis Report
COMPUTER BASED MENU MANAGEMENT –
COMPUTER BASED MENU MANAGEMENT – Four Box Analysis ************************************************************ STARS DOGS...
Menu Engineering Graph
Additional Information  (For the Smart Guys Only) 07/11/10 F&B Management - III Yr. - Bhavin Parekh
Additional Info and Review <ul><li>MARKUPS:   A markup is the difference between the cost of the item and selling price. S...
Additional Info and Review <ul><li>VALUE PERCEPTION:  What the consumers think of the desirability of the product as compa...
Additional Info and Review <ul><li>PRICING PSYCHOLOGY :  According to studies made by various planners on pricing and how ...
Additional Info and Review <ul><li>SUPPLY AND DEMAND PRICING:   </li></ul><ul><li>Many operators are either not aware or d...
Additional Info and Review <ul><li>Advertising can also create demand. A bar may decide to have a two for one promotion, w...
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Menu Planning, Costing, Engineering

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Menu Planning, Menu Costing and Engineering.

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  • it was very helpfull. is there any additonal consideration for pricing hotel's restaurants?please contact me on this email address: strh.ebrhm@gmail.com
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  • Thanks for posting. VERY helpful!
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  • Thanks for sharing. VERY helpful!
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  • As per the Control Point Chart we can define the following: Serving: It is defined as the Flow of Products from the Kitchen into the hands of the Servers / Waiting Staff. Service: On the other hand Service can be defined as the Flow of Products from the Servers / Waiting Staff to the Guests. Inferences from the Flow Chart: Preparing / Cooking / Holding Control Points are grouped under the broad category of Production Activities as they take pace in the kitchen. Beginning with Menu Planning, each Control Point plays a crucial role in determining the success or failure of the Food &amp; Beverage Operation. Each Control Point is a Miniature System with its own Structure and Functions. Each Control Point (Basic Operating Activity) has it’s own Specific Objectives, Guidelines, Standards and Internal Processes that contribute to the success of the Operation and the Ultimate Goal: GUEST SATISFACTION.
  • The Menu has an impact on all aspects of Food &amp; Beverage Operation: It creates an image of your operation in the minds of the Guests. It satisfies his needs. It influences his purchasing decisions. It merchandizes your products.
  • Example: There may be a Grill Station in the Kitchen as per the requirements of the Menu. If most of the Menu Items have Grilling as their method of Cooking, then the Grill Station would be highly pressurized during the Peak Operation hours, while the other station, for example the Hot Range / Oven would be under – utilized.
  • Note: Let us consider an Operation with a single Product to offer, say a Burger. It becomes fairly simple to control the Revenue in such an Operation. If each Burger costs INR. 50.00, then a Sale of 100 Units in through the day should see a Revenue of INR. 5000.00. Also, Product Inventory Procedures become very simple. If there are 100 Burger Buns consumed through the day, it is logical that 100 Burger Patties would also be consumed and that the sale for the day would be 100 Units. If the per unit cost is INR. 50.00, then the Revenue would be INR. 5000.00. However, in the case of a Specialty Restaurant, this would not be a simple process. Such a Restaurant may have a long list of Beverages and Food Items. Each of these items have a different Selling Price on the Menu. It becomes more complex to ascertain the Revenue from the Sale of each Menu Item and hence the Total Revenue of the Operation. Inversely, the Product Control Procedures (Inventory) is also complex as one ingredient may be a component of several different Menu Items. It is hard to determine the Menu Mix of Items based upon mere Inventory. There are greater chances of Theft by the Staff, wherein the Item is Produced and Served to the guest, but the Revenue is pocketed.
  • Notice that the most important concerns for a Menu Planner are for Guests and the Quality of the Items.
  • Today, most Food Service operators are searching for new menu item alternatives. The increasing number of Convenience Foods available have made it possible for such Operators to offer additional Menu Items / Increase Menu Variety without having to buy additional Equipment for Production or increasing their Labor Costs, as such foods have built – in labor. However, Convenience Foods have a Higher AP Price than Raw Ingredients from which they are made.
  • Modular Cuisine: Menus designed with interchangeable Courses.
  • F&amp;B Outlets situated in Transient Hotels (Airports / Railway Station / Ports). The clientele changes frequently hence having a Static Menu (Not Changing for a Pre – Determined Period of time) would be suitable. Daily Specials can be added to a Menu of a F&amp;B Operation where the Clientele is repetitive. This adds more choice for the Customers and at the same time the F&amp;B Operator can make use of the Freshly available Seasonal Local Ingredients to prepare dishes. This reduces his AP Price of Raw Ingredients and contributes to a greater extent to his Profit Margin, as such Specials have a higher Contribution Margin (Low Costs and can be priced at a Premium)
  • External Factors: Consumer Demands: They are the most important factor in deciding whether a Menu Change must be effected or not. A F&amp;B Operation may change the menu based upon the Clientele that it intends to target. After changing the menu, it must be evaluated in light of the Positive or Negative effects it may have on the existing Customer Base. Economic Conditions: These will ultimately decide the Price of your Raw Materials and hence their Contribution Margin and Profitability of your Operation. c) Competition: Competition will also play a role in deciding what items you will place in your menus. Example: You might want to add to your menu some Popular (Fast Moving) items that your Competitor is selling in order to retain your existing clientele and attract more customers. Also, if your competitor is an Oriental Food Restaurant serving the Best Food in town, you might not want to add Oriental Cuisine to your menu. Instead offer something different like Italian / Continental. d) Supply Levels: Supply Level relate the price to the Quality and Quantity. Supply Levels are varied for some seasonal raw ingredients. Hence, adapting the menu to these changes is highly advisable for maintaining a Profitable Operation and keeping the Consistency of Value for Money from the Guests Point of View. e) Industry Trends: Provide general information about the Dining Trends and “Value for Money” from the Customer’s point of view. Trends currently point to a sophisticated Consumer looking for a higher “Price – Value” relationship. Internal Factors: Facility’s Meal Pattern: A typical meal pattern is Breakfast / Lunch / Dinner. Management must decide if the existing Meal Patterns should be continued or not. Based upon the “Load” during each serving period. Target Market’s expectations have a direct influence on this decision. Concept / Theme: Any change must fit the Operation’s Theme. Example: The Steak House in the city might do more harm than good by adding an extensive variety of Fish and Shell Fish to it’s menu. An establishment’s image may rule out certain menu items. Example: An ethnic Italian Restaurant also adding Chinese Cuisine to it’s menu due to popularity. It just does not fit into the projected image of the restaurant. Menus are also modified by the establishment’s Operational System. For example: a new menu may demand extensive purchasing of costly equipment. This process may prove too costly for the operation. One also has to look into the Skills of the Labor (Production and Service)
  • Base Selling Price is necessarily the Final Selling Price of the Product. Rather the Base Selling Price or B.S.P. is the starting point to which other Operational Costs must be accurately assessed and added to reach upon the Final Selling Price. Note: The Ingredient Costs (In this case the Standard Recepie Cost / portion) can be determined from the Standardized Recepie Costing. In order to determine the Multiplier we need the Desired Food Cost . Now Food Costs can be obtained from In – House Analysis of your Menu Item Sales over a period of time. On this we arrive at the Standard Food Cost of the Operation. This can be computed on a daily basis.
  • Base Selling Price as mentioned before is not necessarily the Selling Price of the Item. This Price is further subjected to Increases based upon your Non – Food Costs (Labor / Utility) in order to cover them. The Costs are then compared to the Market Rates (Competition). If found to be at par, then the B.S.P. becomes the Selling Price of the Item. Else it has to undergo further adjustments.
  • Plate Cost: The Plate Cost is defined as the Average Cost of All Non - Entrée Items or other relatively inexpensive items with compliment the Entrée / Main Course. This might include Salads / Vegetables / Potato Dish / Bread and Butter / Juices etc.
  • The advantage of this method is it’s simplicity. We can save a lot of time as only the Food Costs / Portion of the Entrees have to be calculated and the other Costs of relatively inexpensive Non – Entree items accompanying the Main Course are simply added up into a Plate Cost. This Pricing method is very good for F&amp;B Operations offering a choice of Entrees with a variety of Accompaniments like Potato / Vegetables / Salads / Juices etc. The Only Disadvantages of this type of Pricing method is that the Plate Costs are not truly representative of the Costs associated with Non – Entree Items.
  • Determining Desired Food Cost %: Desired Food Cost % is the most important step in the Mark – Up Pricing methods. In order determine the Food Cost % Managers takes the following approaches: For some Managers, Determining the Desired Food Cost % is based upon experience. At times it is the “ Rule of Thumb ”, such as the Traditional 40%. Some Manager’s use the Food Cost % of last year. Some use Industry averages published by journals. Another source to obtain the desired Food Cost % is from the Operating Budget of the Operation. However, the impact of Sales Mix cannot be overlooked i.e. if your operation sells more High Cost Menu Items than the low Cost Menu Items, the Food Cost % is bound to go up. However, if your Multiplier is determined by the Desired Food Cost % from the Operating Budget, then it will yield undesirable financial results.
  • Advantages of the Contribution Pricing Method are that: It is fairly simple to calculate the Base Selling Price and that the information on which the calculations are based is accurate as this is derived from the Operating Budget. It is practical to use this method, when the costs of serving the Guest are the same. This could be the case with a Fast Food Joint like McDonalds. However, in a fine dining we are not being fair to our clientele as we are evenly dividing the Non Food Costs (Labor / Utilities) and the Profit Requirements among all the guests irrespective of what they order. Example of : Guest A Ordering for Sweet Corn Chicken Soup . Cost per Portion $ 1.5 Guest B Ordering for Peking Duck. Cost per Portion $ 5.5 Using the Contribution Pricing method with all other data remaining the same, the Base Selling Price for the above mentioned items would be: Sweet Corn Chicken Soup = $ 6.152 + $ 1.5 = $ 7.652 Peking Duck = $ 6.152 + $ 5.5 = $ 11.652 We observe that the Cost of N.F.C. and Profit Requirements is shared by both Guests Equally. But this is not being fair to our clientele. N.F.C. related to the Preparation of Sweet Corn Chicken Soup are far less than those associated with the Preparation of the Peking Duck (We are basically referring to Labor Cost and the Cost of Utilities). Hence, a fair share would be to associate a larger portion of the N.F.C. to the Peking Duck then the Sweet Corn Chicken Soup.
  • Ratio Pricing Method is simple to use and the Raw Data is accurate as this is derived from the Operating Budget of the Food and Beverage Operation. Disadvantages: Each Meal equally shares the Non – Food Costs and Profit Requirements. The Ratio Pricing Method does not compensate for the Higher Labor Costs that are involved in the preparation of certain Menu Items. Taking the same example as previously of the Sweet Corn Chicken Soup and the Peking Duck. Determining the Base Selling Price of these items using the Ratio Pricing Method: Ratio is 2.03. Standard Food Cost of the Menu Items: Sweet Corn Chicken Soup = $ 1.5 Peking Duck = $ 5.5 B.S.P. of Sweet Corn Chicken Soup Amount of N.F.C. + Profit Requirements = $ 1.5 x 2.03 = $ 3.045 B.S.P. = $ 3.045 + $ 1.5 = $ 4.55 B.S.P. of Peking Duck Amount of N.F.C. + Profit Requirements = $ 5.5 x 2.03 = $ 11.165 B.S.P. = $ 11.165 + $ 5.5 = $ 16.665 In this case, we find that the Customer pays for N.F.C and Profit Requirements according to the Menu Items that he orders. If the Guest orders for a menu items which is easier to prepare and is less labor intensive he pays only $ 3.045 but in the case of the Peking Duck is the amount he pays is $ 11.165 The disadvantage is that Labor Costs are equally shared among the dishes offered.
  • This method is very similar to the Ingredients Mark – Up Method in that instead of considering the Ingredients Costs only, we consider the Prime Cost which includes the Ingredients Cost + Labor Cost. The Multiplier here is determined on the basis of the Desired Prime Cost % instead of the Desired Food Cost %. Hence, this method takes into account Labor Costs associated with the F&amp;B Operation.
  • Hiking Up the Prices of Menu Items or Decreasing the Pricing: When we hike the Prices of the Menu Items, fewer Menu Items would have to be sold in order to Meet Profit Requirements. However, Hiking up the Price of the Menu Items is worthwhile only if the Revenue generated from the Price Hike is sufficient to counter the Loss due to fall in demand for your Menu Item. In some cases it may be worthwhile to Drop the Prices of the Menu Items. This would Increase demand (Volume) and hence compensate for Profit Requirements by increasing total revenue. Economic Concept of “Elasticity of Demand” comes into the picture here.
  • Computation of Average Contribution Margin: Contribution Margin = Selling Price – Food Cost. Hence, Contribution Margin is the amount of money left with the Operator to meet Non – Food Costs and Profit Requirements. The Contribution Margin of every dish is hence known. In order to Compute the A.C.M. we would require the Total Revenue Generated through selling of Menu Items and the Total Food Cost. Hence, Total Contribution Margin = Total Revenue Generated – Total Food Cost Therefore, Average Contribution Margin = Total Contribution Margin / Total No. of Items Sold
  • Increase in the Prices: If the Price of a certain Menu Item is to increased, then it should be done in several stages rather than doing it one time. Test the demand for the Menu Item at every stage of the Price Increase. It might also help to Re-Package the Product .
  • Menu Engineering can be used to Objectively to evaluate Menu Revision. Let us suppose that in the Old Menu, the Average Contribution Margin was $ 2.50 and with the revised menu the C.M. is $ 2.75. Then, we can consider the New Menu to be better than the old menu as long as there no decrease in the Guest Count. With the new menu in place, the Guest leaves $ 0.25 more towards the Contribution Margin of the F&amp;B Operation.
  • Transcript of "Menu Planning, Costing, Engineering"

    1. 1. Menu Planning, Menu Pricing & Menu Engineering Food & Beverage Management III Yr. Bhavin Parekh 07/11/10 F&B Management - III Yr. - Bhavin Parekh
    2. 2. AREAS of FOCUS <ul><li>Menu Planning </li></ul><ul><li>Menu Costing & Pricing </li></ul><ul><ul><li>Different types of Pricing </li></ul></ul><ul><ul><li>Why are they used </li></ul></ul><ul><ul><li>Pricing Types with their examples </li></ul></ul><ul><li>Menu Evaluation </li></ul><ul><ul><li>Defining Popularity </li></ul></ul><ul><ul><li>Defining Profitability </li></ul></ul>07/11/10 F&B Management - III Yr. - Bhavin Parekh
    3. 3. AREAS of FOCUS <ul><li>Cont’d… </li></ul><ul><ul><li>Evaluating the Menu </li></ul></ul><ul><ul><li>Improving the Menu </li></ul></ul><ul><li>Menu Engineering and Analysis using Computer Based Systems </li></ul><ul><ul><li>MEA </li></ul></ul><ul><ul><li>Menu Item Analysis </li></ul></ul><ul><ul><li>Menu Mix Analysis </li></ul></ul><ul><ul><li>Four Box Analysis </li></ul></ul><ul><ul><li>Menu Engineering Graph </li></ul></ul>07/11/10 F&B Management - III Yr. - Bhavin Parekh
    4. 4. MENU AS FOUNDATION FOR CONTROL <ul><li>The Menu is the Foundation for the Control Process in a Food & Beverage Operation. </li></ul><ul><li>As the foundation, Menu Planning Control Point beings the Control Process . </li></ul>
    5. 5. A) The Menu: As a Foundation of Control Points <ul><li>Control Points are basic operating activities that must be performed in any Food & Beverage Operation. </li></ul><ul><li>There are 9 Main Control Points. </li></ul><ul><li>The Flow Chart of Basic Operation Activities uses Boxes to denote each Control Point. </li></ul><ul><li>Arrows between the boxes are used to indicate the flow of Products / Materials . </li></ul>
    6. 6. FLOW CHART OF CONTROL POINTS Menu Planning Purchasing Receiving Storing Issuing Preparing Cooking Holding Serving Guest Satisfaction Production Activities
    7. 7. F&B Operation as Control Points <ul><li>When we view the F&B Operation as a System of Control Points: </li></ul><ul><ul><li>Control Activities associated with each function are easier to identify and carry out. </li></ul></ul><ul><ul><li>Accountability for Control Activities improves. </li></ul></ul><ul><ul><li>It becomes possible to make Short Term and Long Term Planning for Control to keep “CRISIS” situations at bay. </li></ul></ul>
    8. 8. B) Influence of “THE MENU” <ul><li>The Process of Planning a Menu never ends. The Final Menu is never achieved. </li></ul><ul><li>Menu Planning is: </li></ul><ul><ul><li>Ongoing Process </li></ul></ul><ul><ul><li>Dynamic Process </li></ul></ul><ul><ul><li>Expectations of the Guests (Present / Potential). </li></ul></ul>
    9. 9. THE MENU <ul><li>A properly planned menu stimulates Revenue and increases the Guest Check Average. </li></ul><ul><li>Whenever the Menu is Presented to a Guest a SALES TRANSACTION begins. </li></ul>
    10. 10. Influence of “THE MENU” on F&B Operations <ul><li>Product Control Procedures: </li></ul><ul><ul><li>The F&B Products must be controlled. If the Operation needs Shrimp to produce a Menu Item, Shrimp will have to be Purchased / Received / Stored / Issued / Prepared / Cooked and finally Served. </li></ul></ul>
    11. 11. Influence of “THE MENU” <ul><li>Cost Control Procedures: </li></ul><ul><ul><li>Careful Cost Control Procedures must be followed as more expensive products are served. This is upon Guest Demand of an operation, providing a “ Dining Experience ” and not just a “ Meal ”. </li></ul></ul>
    12. 12. Influence of “THE MENU” <ul><li>Production Requirements: </li></ul><ul><ul><li>Food Items required by the Menu must be Produced “ Consistently ”. </li></ul></ul><ul><ul><li>The following parameters are all dictated by the Menu: </li></ul></ul><ul><ul><ul><li>Product Quality </li></ul></ul></ul><ul><ul><ul><li>Staff Productivity </li></ul></ul></ul><ul><ul><ul><li>Skills </li></ul></ul></ul><ul><ul><ul><li>Timing and Scheduling </li></ul></ul></ul>
    13. 13. Influence of “THE MENU” <ul><li>Nutritional Content of Meals: </li></ul><ul><ul><li>Food & Beverage Operations (Commercial / Non – Commercial) are increasing concerned about the Nutritional Content of the Food served to the Guests / Clients. Menu can have an impact on the health and well being of those to whom it is served. </li></ul></ul>
    14. 14. Influence of “THE MENU” <ul><li>Equipment Needs: </li></ul><ul><ul><li>All Equipment required to produce the Menu must be available. The Menu must be balanced such that no one station in the Kitchen is Pressurized or under – utilized. </li></ul></ul>
    15. 15. Influence of “THE MENU” <ul><li>Sanitation Management: </li></ul><ul><ul><li>Since the Menu sets the stage for the remaining control points, the Management must consider the Menu Items in light of possible Sanitation Hazards. Once potential Hazards are identified, risks can be reduced. </li></ul></ul>
    16. 16. Influence of “THE MENU” <ul><li>Layout and Space Requirements: </li></ul><ul><ul><li>There must be adequate facilities for the Staff and Equipment required to produce items listed on the menu. The layout and design facilities establish physical space within which Food Production and Service take place. Physical facilities must be adequate for Purchasing / Receiving / Storage / Issuing / Production and Serving of Menu Items. </li></ul></ul>
    17. 17. Influence of “THE MENU” <ul><li>Staffing Needs: </li></ul><ul><ul><li>Employees must be able to produce and serve all the items required by the menu. The more complex the menu, the greater the demands placed on the Production and Service Staff. Staffing needs are influenced to a great extent by the use of “Convenience Foods” by the operation. </li></ul></ul>
    18. 18. Influence of “THE MENU” <ul><li>Service Requirements: </li></ul><ul><ul><li>F&B Manager must carefully plan how products will be served to the guest. The Menu influences your choice of Service Style. It influences the Skill Levels required by the Waiting Staff along with Equipment & Inventory. </li></ul></ul>
    19. 19. Influence of “THE MENU” <ul><li>Revenue Control Procedures: </li></ul><ul><ul><li>A simple Fast Food Operation would not have as much problems in Revenue Control as a Specialty Restaurant. </li></ul></ul><ul><ul><li>In a Fast Food Operation, there would be fewer Menu Items (comparatively lesser Product Range), hence controlling Revenue from the sale of these would be far easier than controlling Revenue in a Specialty Restaurant wherein the Product Range is extensive, involving a large Beverage List as well as a wide choice of Food items. </li></ul></ul>
    20. 20. C) MENU PALNNING <ul><li>The Menu is not only a Control Tool . Since it lists F&B Items that your operation has to offer, it also doubles up as a Marketing tool . </li></ul><ul><li>In this manner the Menu doubles up as a Control and Marketing Tool and blends them into a workable system . </li></ul>
    21. 21. Priority Concerns of the Menu Planner Guest Quality of Item Wants & Needs Concept of Value Item Price Object of Visit Socio - Economic Demographic Concerns Ethnic / Religious Concerns Cost Availability Peak Volume Production / Op. Concerns Sanitation Layout Equipment Flavor Visual Appeal Temperature Texture/Shape Aroma Consistency Nutrition
    22. 22. Marketing Implications of Menu <ul><li>Because a Menu lists the items that a F&B Operation is offering for sale, it in turn becomes a Marketing Tool. </li></ul><ul><li>When developing it’s Marketing Plans, the operation needs to assess its’ Products and Services, the ambience / décor and the perceived value that its’ Target Markets expect. </li></ul>
    23. 23. Marketing Implications of Menu <ul><li>When carrying out it’s Marketing Plans, the F&B Operation must try to meet or Exceed Customer Expectation. </li></ul><ul><li>In addition Menu Planners must study the competition in the area. This helps to decide what the Operation can do to get the “EGDE” over the competition, especially when the same Market Segment is Targeted . </li></ul>
    24. 24. Theme and Atmosphere <ul><li>The complexity of Menu Planning depends upon the ambience of F&B Operation. </li></ul><ul><li>Many F&B Operations have a specific theme and atmosphere. French / Italian / Chinese are examples of Operations with Ethnic Themes. Menu Planning greatly depends upon this as the Menu must be compatible with the Theme / Atmosphere of the place. </li></ul>
    25. 25. Menu Planning Strategies <ul><li>The Past: In the past, the Food Service Operators tried to diversify their menus by adding new menu items. This increased the number and variety of raw ingredients. </li></ul><ul><li>This would in turn lead to problems in Storage </li></ul><ul><li>And increased Inventory Costs (Cost of Ingredients + Carrying Cost + Storage Costs + Opportunity Costs) </li></ul>
    26. 26. Menu Planning Strategies <ul><li>Present: The Present – Rationalization Strategy: </li></ul><ul><ul><li>This strategy limits the menu of the Operation to only those items that best enhance the Operation’s Image. </li></ul></ul><ul><li>The objective is simplification for the purpose of Operational efficiency. </li></ul><ul><li>Alternatively, an Operator can offer several menu items using the same Raw Ingredients. </li></ul>
    27. 27. Menu Planning Strategies <ul><li>To start with, it is best to base your menu plans on the Needs and Desires of your Targeted Market Segment . (You identify a Need in the Market and then try to fulfill the same with your Menus.) </li></ul><ul><li>However, other factors to look at when designing a Menu are: </li></ul><ul><ul><li>Storage Conditions – (Time & Temperature) </li></ul></ul><ul><ul><li>Personnel Skill Levels </li></ul></ul><ul><ul><li>Product’s Availability / Seasonality </li></ul></ul><ul><ul><li>Quality and Price Levels </li></ul></ul><ul><ul><li>Ability to produce the Menu Item in Sanitary / Cost Effective Way. </li></ul></ul>
    28. 28. Building the Menu <ul><li>Entrees are typically selected first in the Menu Planning Process. </li></ul><ul><li>It is not only important to look at the types of Entrees but also their Costs, Preparation Methods and Compatibility with the Theme & Atmosphere. </li></ul>
    29. 29. Building the Menu <ul><li>How many Entrees should a F&B Operation have? </li></ul><ul><ul><li>Some F&B Operators feels that a wide variety of Entrees should be provided. This in turn causes a number of problems which need careful planning to resolve. </li></ul></ul><ul><ul><li>Example: A number of Ingredients would be required with differing SPS, if the Outlet is offering a wide variety of Entrees. Along with this you would have a need for a wide variety of Production Equipment and Highly Skilled Labor. </li></ul></ul>
    30. 30. Building the Menu <ul><li>In Short: </li></ul><ul><li>CONTROL BECOMES MORE COMPLEX WITH THE INCREASING COMPLEXITY OF YOUR MENU </li></ul>
    31. 31. Building the Menu <ul><li>The reverse approach of making available only a limited number of Entrees reduces problems of Control to a great extent and increases Operational Efficiency (Production and Service). </li></ul><ul><li>After selecting Entrees, Menu Planners must choose Items to complement the Entrees. </li></ul>
    32. 32. Building the Menu <ul><li>A common practice is to plan the Appetizers or Soups followed by High – Starch Items like Potato or Vegetables if already not part of the Entrée. </li></ul><ul><li>This is followed by the accompanying Breads, Salads, followed by Desserts and Beverages. </li></ul>
    33. 33. Dining Trends <ul><li>The “Grazing” Trend: It is a common trend observed in the Baby Boomers whose lifestyles reflect their desire for variety. </li></ul><ul><li>Grazers are unlikely to select a full meal, but rather choose appetizers, salads and desserts to complete their menu selection. They like to build their own menus. </li></ul><ul><li>Grazers are more likely to choose smaller portions of a number of menu items rather than a large portion of an entrée. Hence, Modular Cuisine suits them best. </li></ul>
    34. 34. Dining Trends <ul><li>If a F&B Operation’s business is Transient and the clientele changes frequently – Menus may be Static . </li></ul><ul><li>When Business is highly repetitive and involves regular guests, there is a need for a Dynamic Menu – Changing Frequently (Weekly Basis). Daily Specials can be added to make the menu more varied offering a greater choice to customers. </li></ul>
    35. 35. Menu Design <ul><li>Design of a menu can influence: </li></ul><ul><ul><li>Guests Purchasing Decision </li></ul></ul><ul><ul><li>Stimulate Sales of Additional / Preferable Menu Items </li></ul></ul><ul><ul><li>Increase the Guest Check Average </li></ul></ul><ul><li>Readability / Artwork / Type Styles / Physical Design and layout play an important role in merchandizing. </li></ul>
    36. 36. Menu Changes <ul><li>External Factors: </li></ul><ul><ul><li>Consumer Demands </li></ul></ul><ul><ul><li>Economic Conditions </li></ul></ul><ul><ul><li>Competition </li></ul></ul><ul><ul><li>Supply Levels </li></ul></ul><ul><ul><li>Industry Trends </li></ul></ul><ul><li>Internal Factors: </li></ul><ul><ul><li>Facility’s Meal Pattern </li></ul></ul><ul><ul><li>Concept / Theme </li></ul></ul><ul><ul><li>Operational System </li></ul></ul><ul><ul><li>Menu Mix </li></ul></ul>
    37. 37. D) Menu Pricing <ul><li>After a menu is planned and costed, each item has to be priced. </li></ul><ul><li>There are various factors to take into consideration such as the: </li></ul><ul><ul><li>Type of Operation </li></ul></ul><ul><ul><li>The Market </li></ul></ul><ul><ul><li>Costs </li></ul></ul><ul><li>The market is a major factor in the type of pricing. </li></ul><ul><ul><li>Certainly most customers want only low prices; others seek moderate ones; some will be willing to pay higher prices. </li></ul></ul><ul><ul><li>The Key is to establish a fine balance between the Price and Quality of Food offered by the Operation all other parameters being the same. </li></ul></ul>
    38. 38. Calculating Menu Selling Prices <ul><li>There are two main types of Pricing Techniques. </li></ul><ul><ul><li>Subjective Pricing Method </li></ul></ul><ul><ul><li>Objective Pricing Method </li></ul></ul>
    39. 39. Subjective Pricing Methods <ul><li>Prices determine to a large extent whether the financial goals of the Operation are met, many managers use very Subjective Pricing Methods. </li></ul><ul><li>Subjective Pricing Methods establish Prices, however, fail to relate them to Profit Requirements and even Costs. </li></ul><ul><li>This Pricing method is based merely on assumptions. </li></ul>
    40. 40. Subjective Pricing Methods <ul><li>The Reasonable Price Method: </li></ul><ul><ul><li>The method uses a price that the Operator thinks will represent value to the guest . </li></ul></ul><ul><ul><li>In other words, the Operator puts himself in the guest’s shoes and asks “ How much am I willing to pay for this Item, considering the type of setting? ” </li></ul></ul><ul><ul><li>The answer to this is the Reasonable Pricing Method. </li></ul></ul>
    41. 41. Subjective Pricing Methods <ul><li>Highest Price Method: </li></ul><ul><ul><li>Using this Pricing Method, the Operator sets the Highest Price for an Item that he thinks the Guest is willing to pay . </li></ul></ul><ul><ul><li>This is pushing the concept of Value to the Maximum. A High Price is set then “Backed Of” in order to provide for an Error Margin in the estimate. </li></ul></ul>
    42. 42. Subjective Pricing Methods <ul><li>Loss Leader Pricing Method: </li></ul><ul><ul><li>In this type of Pricing Method, the Menu Items are Priced very low. </li></ul></ul><ul><ul><li>The philosophy for this Pricing method is that the Guests will be attracted to the Operation due to Low Prices and will then buy other items while they are there (Spin Off Business) . </li></ul></ul><ul><ul><li>In this case, it is very important to sell other items to make Profit. This Pricing method is used as an Early Bird Promotion to attract specific market segments. </li></ul></ul>
    43. 43. Subjective Pricing Methods <ul><li>The Intuitive Price Method: </li></ul><ul><ul><li>Like the name suggests, Prices are set by Intuition of the Operator alone. The Operator takes a little more than a “Wild Guess” about the Selling Price. </li></ul></ul><ul><ul><li>It differs from the Reasonable Price Method in that it takes a little less effort to determine the price as one does not consider what would represent Value to the Customer. </li></ul></ul>
    44. 44. Subjective Pricing Methods <ul><li>Drawbacks: </li></ul><ul><ul><li>Cannot relate to the Profit Requirements of the Operation. </li></ul></ul><ul><ul><li>Cannot relate to the Cost of a Menu Item. </li></ul></ul><ul><ul><li>Solely based on Assumptions, Guess Work and Hunches. </li></ul></ul><ul><ul><li>Seldom works in an era where Consumers are looking for “Value for Money” and AP Prices of Ingredients are sky rocketing. </li></ul></ul>
    45. 45. Objective Pricing Methods <ul><li>Simple Mark –Up Pricing Methods </li></ul><ul><ul><li>Ingredient Mark – Up </li></ul></ul><ul><ul><li>Prime Ingredient Mark – Up </li></ul></ul><ul><ul><li>Mark – Up with Accompaniments Costs </li></ul></ul><ul><li>Contribution Margin Pricing Method </li></ul><ul><li>Ratio Pricing Method </li></ul><ul><li>Simple Prime Costs Method </li></ul><ul><li>Specific Prime Costs Method </li></ul>
    46. 46. Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods </li></ul><ul><ul><li>It considers a Mark – Up from the Cost of Good Sold (In the case of a Menu Item, that would be the Standard Food Cost). </li></ul></ul><ul><ul><li>The Mark – Up is designed in such a way that it covers all Costs to Yield the Desired Profit Levels. </li></ul></ul>
    47. 47. Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><ul><li>Ingredient Mark – Up Method </li></ul></ul><ul><ul><ul><li>This Pricing method attempts to account for all Product Costs (Food Cost in case of Food and Beverage cost in case of Beverage). </li></ul></ul></ul><ul><ul><ul><li>Steps: </li></ul></ul></ul><ul><ul><ul><ul><li>Determine Ingredient Costs </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Determine Multiplier to Mark – Up Ingredient Costs </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Determine the Base Selling Price. </li></ul></ul></ul></ul>
    48. 48. Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><li>Ingredient Mark – Up Pricing: </li></ul><ul><ul><li>Multiplier = 1 </li></ul></ul><ul><ul><li>Desired Food Cost Percentage </li></ul></ul><ul><ul><li>Example: </li></ul></ul><ul><ul><ul><li>If you want to keep your Food Cost as 40% then: </li></ul></ul></ul><ul><ul><ul><li>Multiplier = 1 / 40% </li></ul></ul></ul><ul><ul><ul><li> = 1 / .40 </li></ul></ul></ul><ul><ul><ul><li> = 2.5 </li></ul></ul></ul>
    49. 49. Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><ul><li>Ingredient Mark – Up Pricing: </li></ul></ul><ul><ul><ul><li>Assume that a Seafood Platter has a Standard Food Cost / Portion of a Seafood Platter is $ 5.32 </li></ul></ul></ul><ul><ul><ul><li>If a Food Cost % of 40% is desired: </li></ul></ul></ul><ul><ul><ul><li>Base Selling Price (B.S.P.) = $ 5.32 x 2.5 </li></ul></ul></ul><ul><li> = $ 13.30 </li></ul>
    50. 50. Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><li>b) Prime – Ingredient Mark – Up Pricing </li></ul><ul><ul><ul><li>This method differs from the Ingredient Mark – Up Pricing in that it concerns itself with only the Prime Ingredient of the Menu Item. </li></ul></ul></ul><ul><ul><ul><li>Only the Cost of the Prime Ingredient is Marked Up. The Multiplier is usually higher in Order to account for the Cost of the ancillary ingredients in the recepie. </li></ul></ul></ul>
    51. 51. Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><li>b) Prime – Ingredient Mark – Up Pricing (Example) </li></ul><ul><ul><li>Using the same example as above, Consider the Cost of Prime Ingredient in a Seafood Platter as $ 2.65 (Prime Ingredient being Lobster) </li></ul></ul><ul><ul><li>The Multiplier = 5 (Higher than the regular M to account for other ingredients) </li></ul></ul><ul><ul><li>Hence, B.S.P. </li></ul></ul><ul><ul><li>= $ 2.65 x 5 </li></ul></ul><ul><ul><li>= $ 13.25 </li></ul></ul>
    52. 52. Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><li>b) Prime – Ingredient Mark – Up Pricing </li></ul><ul><ul><li>If the Cost of the Prime Ingredient increases to $ 2.75 per Dinner Portion, then the new B.S.P. </li></ul></ul><ul><li> = $ 2.75 x 5 </li></ul><ul><li> = $ 13.75 </li></ul><ul><ul><li>The Pricing method approach assumes that the Cost of other Recipe Ingredients increases in Proportion to the Cost of the Prime Ingredient. </li></ul></ul>
    53. 53. Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><li>c) Mark – Up with Accompaniment Costs: </li></ul><ul><ul><li>In this pricing method, the Operator determines the ingredient costs based only upon the Entrée items and then a Standard Accompaniment cost / Plate Cost is added before Multiplying by a Mark – Up. </li></ul></ul>
    54. 54. Objective Pricing Methods <ul><li>Simple Mark – Up Pricing Methods: </li></ul><ul><li>c) Mark – Up with Accompaniment Costs: </li></ul><ul><li>Example: </li></ul><ul><ul><li>Entrée / Primary Costs = $ 3.15 </li></ul></ul><ul><li>Plate Cost = $ 1.25 </li></ul><ul><li>Estimated Food Cost = $ 4.40 </li></ul><ul><li> Mark – Up Multiplier = $ 3.30 </li></ul><ul><li> Base Selling Price = 14.52 </li></ul>
    55. 55. Objective Pricing Methods <ul><li>Determining the Multiplier: </li></ul><ul><ul><li>The Mark – Up Pricing Methods are simple to use and hence are commonly used in the Hospitality Industry. </li></ul></ul><ul><ul><li>A significant disadvantage involves determining the Desired Food Cost %. </li></ul></ul><ul><ul><li>Pricing method does not reflect higher / lower Labor Costs / Utility Costs associated with the Menu Item. </li></ul></ul>
    56. 56. Objective Pricing Methods <ul><li>Contribution Margin Pricing Method: </li></ul><ul><ul><li>Contribution Margin </li></ul></ul><ul><li>= Selling Price – Food Cost </li></ul><ul><ul><li>We can define Contribution Margin as the Amount left after deducting the Food Cost from the Selling Price of the Menu Item. This is amount left behind to meet all Non Food Expenditure and Profit Requirements. </li></ul></ul>
    57. 57. Objective Pricing Methods <ul><li>Contribution Margin Pricing Method: </li></ul><ul><ul><li>Example: Consider the given data obtained from the Operating Budget of the Restaurant: </li></ul></ul><ul><ul><ul><li>Non – Food Costs = $695,000 </li></ul></ul></ul><ul><ul><ul><li>Profit Required = $ 74,000 </li></ul></ul></ul><ul><ul><ul><li>No. of Guests Expected to be served = 125,000 </li></ul></ul></ul><ul><ul><ul><li>With the above information, compute the B.S.P. of a Menu Item with a Food Cost per portion of $4.60. </li></ul></ul></ul>
    58. 58. Objective Pricing Methods <ul><li>Contribution Margin Pricing Method: </li></ul><ul><ul><li>Step A) </li></ul></ul><ul><ul><li>Determine the Avg. C.M. per Guest: </li></ul></ul><ul><li>Avg. C.M. / Guest = (Non F.C. + Profit Req.) </li></ul><ul><li> Total No. of Guest Served </li></ul><ul><li> = ($ 695000 + $ 74000) / 125000 </li></ul><ul><li> = $ 6.152 </li></ul><ul><ul><li>Step B) </li></ul></ul><ul><ul><li>Determine the B.S.P: </li></ul></ul><ul><li>B.S.P. = $ 4.60 + $ 6.152 = $ 10.8 </li></ul>
    59. 59. Objective Pricing Methods <ul><li>Ratio Pricing Method: </li></ul><ul><li>Data: </li></ul><ul><li>Food Costs = $ 435,000 </li></ul><ul><li>Non – Food Costs = $ 790,000 </li></ul><ul><li>Profit Requirement = $ 95,000 </li></ul><ul><li>Standard Food Cost of Menu Item = $ 4.75 </li></ul><ul><li>Step A) Determine the Ratio of Food Costs to N.F.C and Profits: </li></ul><ul><li>(All N.F.C. + Profit) / Food Costs = Ratio (R) </li></ul>
    60. 60. Objective Pricing Methods <ul><li>Ratio Pricing Method: </li></ul><ul><ul><li>Ratio = ($ 790000 + $ 95000) / $ 435000 </li></ul></ul><ul><ul><li>Ratio = 2.03 </li></ul></ul><ul><li>This Ratio implies that for every $ 1 earned to cover Food Cost we have to earn $ 2.03 to cover N.F.C. and Profit Requirements </li></ul><ul><li>Step B) Amount of N.F.C. and Profit Required: </li></ul><ul><ul><li>The Cost of the Menu Item is $ 4.75 </li></ul></ul><ul><ul><li>Amount required to cover all Non F.C. and Profit Requirements </li></ul></ul><ul><ul><ul><ul><ul><li>= $ 4.75 x 2.03 = $ 9.64 </li></ul></ul></ul></ul></ul>
    61. 61. Objective Pricing Methods <ul><li>Ratio Pricing Method: </li></ul><ul><li>Step C) Determining the Base Selling Price for Menu Item: </li></ul><ul><li>B.S.P. = $ 4.75 + $ 9.64 = $ 14.39 </li></ul>
    62. 62. Objective Pricing Methods <ul><li>Simple Prime Costs Method: </li></ul><ul><li>The term Prime Costs refers to the most significant Costs in a Food & Beverage Service Operation. Prime Costs for any F&B Operation would be: </li></ul><ul><ul><li>Labor Costs </li></ul></ul><ul><ul><li>Food Costs </li></ul></ul><ul><li>This method involves assessing Labor Costs and Food Costs for the operation and then factoring these into the Pricing Equation. </li></ul>
    63. 63. Objective Pricing Methods <ul><li>Simple Prime Costs Method: </li></ul><ul><ul><li>Data: </li></ul></ul><ul><li>Menu Item Food Cost = $ 3.75 </li></ul><ul><li>Labor Cost = $ 210,000 </li></ul><ul><li>Number of Exp. Guest = 75,000 </li></ul><ul><li>Desired Prime Cost % = 62% </li></ul>
    64. 64. Objective Pricing Methods <ul><li>Simple Prime Costs Method: </li></ul><ul><ul><li>Step A) Labor Costs per Guest = </li></ul></ul><ul><li>$ 210,000 / 75,000 </li></ul><ul><li> =$ 2.8 </li></ul><ul><ul><li>Step B) Determine the Prime Cost per Guest </li></ul></ul><ul><li>= $ 3.75 + $ 2.8 </li></ul><ul><li>= $ 6.55 </li></ul>
    65. 65. Objective Pricing Methods <ul><li>Simple Prime Costs Method: </li></ul><ul><ul><li>Step C) Computing Base Selling Price: </li></ul></ul><ul><li> B.S.P. = Prime Costs per Guests </li></ul><ul><li> Desired P.C.% </li></ul><ul><li>B.S.P. = $ 6.55 / 62 % </li></ul><ul><li> = $ 10.56 </li></ul><ul><li>An obvious disadvantage of this Pricing method is to assign an equal share of Labor Costs to all Menu Items. This is not true as the Labor Cost of each item may greatly differ. </li></ul>
    66. 66. Objective Pricing Methods <ul><li>Specific Prime Costs Method: </li></ul><ul><ul><li>In this type of Menu Pricing the F&B Operator develops mark –ups for Menu Items which takes into account their Food Costs and also their Fair Share of Labor Costs. </li></ul></ul><ul><ul><li>This method tries to overcome the limitations of the Simple Prime Costs Method . </li></ul></ul><ul><ul><li>In this method, Menu Items requiring more labor intensive preparation would have a higher mark – up and those involving less labor during preparation would have a lower mark – up. </li></ul></ul>
    67. 68. Objective Pricing Methods <ul><li>Specific Prime Costs Method: </li></ul><ul><ul><li>Disadvantages: </li></ul></ul><ul><ul><ul><li>Very Time Consuming as All Menu Items have to be Classified and then the % Costs have to be allocated to each Cat. </li></ul></ul></ul><ul><ul><ul><li>Assumption that all other Costs vary in relationship to the Food Cost Associated with the Menu Item. </li></ul></ul></ul>
    68. 69. Pricing Considerations <ul><li>The Base Selling Price is the Starting Point for deciding the S.P. of a Menu Item. The B.S.P. is further subjected to further assessment based on several factors. </li></ul><ul><li>Factors upon which the S.P. is decided: </li></ul><ul><ul><ul><li>Concept of Value </li></ul></ul></ul><ul><ul><ul><li>Law of Supply and Demand </li></ul></ul></ul>
    69. 70. Pricing Considerations <ul><li>Factors upon which the S.P. is decided: </li></ul><ul><ul><li>Volume Concerns – Higher the Volume / Turn Over lower the Overheads and vice versa. </li></ul></ul><ul><ul><li>Competition </li></ul></ul><ul><ul><li>USP – Unique Sales Proposition </li></ul></ul>
    70. 71. Evaluating the Menu <ul><li>The menu is the most important tool influencing the success or failure or a Food & Beverage Operation. </li></ul><ul><li>The Process of Menu Engineering is an increasingly popular tool in Evaluating the menu. </li></ul><ul><li>Any menu item is evaluated on the basis of two criteria Popularity and Profitability . </li></ul>
    71. 72. Evaluating the Menu <ul><li>Based upon the criteria of Popularity and Profitability , the Menu item can be classified into 4 Categories: </li></ul><ul><li>STARS: High Popularity and High Profitability </li></ul><ul><li>PLOWHORSES: High Popularity and Low Profitability </li></ul><ul><li>PUZZLES: Low Popularity and High Profitability </li></ul><ul><li>DOGS: Low Popularity and Low Profitability </li></ul>
    72. 73. MENU MIX POPULARITY CONTRIBUTION MARGIN THE MENU ENGINEERING GRID PUZZLES PLOWHORSE STARS DOGS PUZZLES
    73. 74. Evaluating the Menu <ul><li>In order to classify the Menu Item into these 4 categories, we must device a standard measure of Popularity and Profitability . </li></ul>
    74. 75. Evaluating the Menu <ul><li>Defining Profitability: </li></ul><ul><ul><li>The basis of measuring the degree of Profitability of a menu item is the “Average Contribution Margin (A.C.M.). </li></ul></ul><ul><ul><li>A menu item is said to be Profitable when it’s individual C.M. is greater than A.C.M. </li></ul></ul><ul><li>A.C.M. = Total Contribution Margin </li></ul><ul><li> Total Menu Items Sold </li></ul>
    75. 76. Evaluating the Menu <ul><li>Defining Popularity: </li></ul><ul><ul><li>The basis of measuring the degree of Popularity of a Menu Item is called as the “ Popularity Index .” </li></ul></ul><ul><ul><li>The purpose of analysis, each menu item is said to be equally popular: i.e. each menu item contributes an equal share to the total number of units sold. </li></ul></ul>
    76. 77. Evaluating the Menu <ul><li>Therefore, ideally the Popularity of each menu item is computed as 100% (Total No. of Units Sold) / Total No. of Items on the Menu. </li></ul><ul><ul><li>Example: If there are 10 Items listed on the menu, then ideally the expected popularity of each menu item should be 100% / 10 = 10% (10% of the Total No. of Units Sold). </li></ul></ul>
    77. 78. Evaluating the Menu <ul><li>Menu Engineering assumes that an item is Popular if it’s unit sales equal or exceed 70% of the Expected Sales of the Item or 70% of 10% as per the above example = 7% </li></ul>
    78. 80. IMPROVING THE MENU <ul><li>Carrying out the Menu Engineering Exercise is only useful if the information obtained from it is used to improve the Menu. </li></ul><ul><li>WHAT WOULD YOU DO WITH THIS INFORMATION??? </li></ul>
    79. 81. IMPROVING THE MENU <ul><li>Managing the Plow Horses: </li></ul><ul><ul><li>(High Popularity / Low Profitability): </li></ul></ul><ul><ul><ul><li>Guests like these items, however, they do not Contribute much to your Profit Requirements (Low Contribution Margin). </li></ul></ul></ul><ul><ul><li>Increase the Prices: </li></ul></ul><ul><ul><ul><li>The item is Popular as it may represent great value to the guest. Upon increasing the Price, the item may still remain popular due to it’s uniqueness to your property and will hence contribute a higher C.M. </li></ul></ul></ul>
    80. 82. IMPROVING THE MENU <ul><li>Relocate the item to a lower profile of the menu. Since, it is popular, some guests will search it out and other will then concentrate on a more desirable areas of the Menu where we could position more Profitable Items. </li></ul><ul><li>Shift Demand to more more Profitable Menu Items by Suggestive Selling. </li></ul><ul><li>Provide lower cost meal accompaniments, in this way the C.M. of the Menu Item would increase. </li></ul>
    81. 83. IMPROVING THE MENU <ul><li>Assess the Direct Labor Cost involved. </li></ul><ul><li>Consider Portion Reduction. By reducing the quantity of the food served, the Food Cost of the Item may be reduced increasing the C.M. </li></ul>
    82. 84. IMPROVING THE MENU <ul><li>Managing Puzzles: </li></ul><ul><ul><li>(High Profitability and Low Popularity Items) </li></ul></ul><ul><ul><li>In this case the challenge is to increase the Unit Sales of this menu item. </li></ul></ul><ul><ul><ul><li>Shift demand to these items: Techniques are re-positioning on the menu, Suggestive Selling, Advertising (Table Talkers / Menu Boards / Promotions etc.) </li></ul></ul></ul><ul><ul><ul><li>Reducing the Price: By reducing the price such that the C.M. of the item still remains higher than the average, the Value to Guests might be increased. </li></ul></ul></ul>
    83. 85. IMPROVING THE MENU <ul><li>Add Value to the Item: </li></ul><ul><li>Offering a larger Portion size, more accompaniments, better quality ingredients and garnish may all add value to the item. These steps will decrease your C.M. and hence Profits, but maintain it so that it is still greater than average. </li></ul>
    84. 86. IMPROVING THE MENU <ul><li>Managing Stars: </li></ul><ul><ul><li>(High Profitability and High Popularity) </li></ul></ul><ul><li>Maintain rigid specification. To not try to alter the quality of product. </li></ul><ul><li>Place in a highly visible / desirable area of the menu. Make sure that guests are aware of it. </li></ul><ul><li>Test for Price In-elasticity. The item may be Popular with a guest because it represent Value for Money or because it is unique to your operation only. </li></ul><ul><li>Suggestive Selling </li></ul>
    85. 87. IMPROVING THE MENU <ul><li>Managing Dogs: </li></ul><ul><ul><li>(Low Profitability and Low Popularity). </li></ul></ul><ul><ul><li>These deserve removal from the menu. However, if you are not going to revise your Menu Items in the near future we could at least raise the Price of the Item so that it’s C.M. increases. </li></ul></ul><ul><ul><li>When a Dog involves significant Labor Costs, is not Popular and Profit Oriented and does not allow for the use of the leftovers and has a relatively short storage life, then reasons for removal from menu become more compelling. </li></ul></ul>
    86. 88. COMPUTER BASED MENU MANAGEMENT <ul><li>Data can be entered into a Program’s Database Manually. </li></ul><ul><li>This can also be done automatically through an interfaced system with a Recipe Management Software or an external POS System. </li></ul><ul><li>The Parameters to be entered would include: </li></ul><ul><ul><li>Menu Item Name </li></ul></ul><ul><ul><li>No. of units of the Menu Item Sold </li></ul></ul><ul><ul><li>Food Cost of the Item </li></ul></ul><ul><ul><li>Selling Price of the Item </li></ul></ul>
    87. 89. COMPUTER BASED MENU MANAGEMENT <ul><li>Reports generated by the Computer Based Menu Management Software are: </li></ul><ul><ul><li>Menu Item Analysis </li></ul></ul><ul><ul><li>Menu Mix Analysis </li></ul></ul><ul><ul><li>Menu Engineering Summary </li></ul></ul><ul><ul><li>Four Box Analysis </li></ul></ul><ul><ul><li>Menu Engineering Graph </li></ul></ul>
    88. 90. COMPUTER BASED MENU MANAGEMENT – Sample Menu Item Analysis Report
    89. 91. COMPUTER BASED MENU MANAGEMENT – Sample Menu Mix Analysis Report
    90. 92. COMPUTER BASED MENU MANAGEMENT –
    91. 93. COMPUTER BASED MENU MANAGEMENT – Four Box Analysis ************************************************************ STARS DOGS HORSE PUZZLE NY Strip Steak Top Sirloin Fried Shrimp Fried Chicken Prime Rib Red Snapper Tenderloin Tips King Prime Rib Lobster Tail Chopped Sirloin
    92. 94. Menu Engineering Graph
    93. 95. Additional Information (For the Smart Guys Only) 07/11/10 F&B Management - III Yr. - Bhavin Parekh
    94. 96. Additional Info and Review <ul><li>MARKUPS: A markup is the difference between the cost of the item and selling price. Some operations can take a low markup depending on high volume while others require high markups due to lower volumes.Hence the prices must not only cover the cost but also the desired profit. </li></ul>07/11/10 F&B Management - III Yr. - Bhavin Parekh
    95. 97. Additional Info and Review <ul><li>VALUE PERCEPTION: What the consumers think of the desirability of the product as compared with its menu price. This is important for the menu pricing. Prices influence the customers thinking on the value of the menu item. The way in which customers perceive value is often manipulated favorably by suggesting that there is something special about a product that competing products do not have. </li></ul><ul><li>We call this development of special, unique characteristics in a product or DIFFERENTIATION. If a product can be given favorable differentiation, buyers will choose this instead of a competing product, and the seller has better control of the market and its pricing. </li></ul>07/11/10 F&B Management - III Yr. - Bhavin Parekh
    96. 98. Additional Info and Review <ul><li>PRICING PSYCHOLOGY : According to studies made by various planners on pricing and how price affects demand, many pricing strategies try to avoid the whole numbers and shade prices just below them thereby using the highest decimal denominations. Hence market research should be able to point out as to what the market will pay in the way of prices . Adequate market information has to be made available which will lead to precision pricing. A menu can be worked by first deciding a base price and top price and the menu can be worked within that range. </li></ul>07/11/10 F&B Management - III Yr. - Bhavin Parekh
    97. 99. Additional Info and Review <ul><li>SUPPLY AND DEMAND PRICING: </li></ul><ul><li>Many operators are either not aware or do not know how the laws of supply and demand work. Supply increases when someone in the neighborhood opens a competing operation nearby. Hence prices at the older unit have to drop to retain the demand if not to increase it. If cost of the food rises then prices on the menu must also adjust to this. </li></ul>07/11/10 F&B Management - III Yr. - Bhavin Parekh
    98. 100. Additional Info and Review <ul><li>Advertising can also create demand. A bar may decide to have a two for one promotion, which is merely a device for low pricing-Happy hours. This is specifically done to stimulate demand during low-volume periods. Thus the extra volume generated can help to recover the extra bar cost. Conversely, to slow down demand in a certain period, a night club may raise its price to maximize the yield. </li></ul>07/11/10 F&B Management - III Yr. - Bhavin Parekh
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