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Pricing Strategies for the Catering Industry
Part 2: Mechanics and Methodology
By Carl Sacks
In the previous issue of Get ...
Clearly, in many of the most expensive markets around the country, a catered wedding package
includes a greater quantity o...
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Pricing strategies for the catering industry midterms


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Pricing strategies for the catering industry midterms

  1. 1. Pricing Strategies for the Catering Industry Part 2: Mechanics and Methodology By Carl Sacks In the previous issue of Get Fresh we discussed models for pricing in the various catering sectors, as well as how pricing differs around the country. Today we’ll discuss the mechanics and methodology of pricing from a management perspective. Earlier I talked about the goal of optimal pricing from the seller side, mostly relating to using various pricing strategies to improve a caterers’ competitive position. But the other aspect of a successful pricing strategy is to create a pricing model that will ensure a reasonable profit for the company. This is in many ways an ever greater challenge, albeit one that differs by type of catering company. Off-premise full-service cost multiple pricing Back in the early part of my own career in catering, pricing off-premise catering was easy—the cost of the raw food was treated as the baseline cost and a multiplier (typically 3 to 5) was used to arrive at a retail price. If there were other components of the catered event, such as labor or rentals in full- service, or disposables and delivery in corporate catering, they were often charged as pass-through items, sometimes with no markup whatsoever. This was a very simple pricing method, and back before the great catering boom that began in the mid 1980s, was perfectly appropriate. But as events became more complex with more components, using food cost multipliers as the sole determinant of prices proved to be inadequate. Full-service caterers found that if their only profit center was in the markup on food, then the odds of making a reasonable net profit were slim. Full-service off-premise caterers began to look for other areas as profit centers. No other component of a typical catered event offers the same kind of markup as food does, but all of the pieces of a full- service event offer a profit opportunity. The markups (or conversely, the cost percentages) of the other main components of full service catering tend to vary drastically. For example, we have seen labor marked up 100 percent and we have also seen labor marked up 10 percent. Outside rental markups are also all over the map. Most full-service caterers get a minimum 10 percent discount or rebate from their rental company, but we know of caterers that are getting as much as 30 percent back—and at the same time putting on an additional markup. There are some common pass-through components of a full-service catering package that usually are not marked up. The most common examples are venue fees, but some caterers also do not mark up third-party services. One relatively recent development is the administrative fee that many caterers now add to full-service events. Since there is no offsetting cost for this particular revenue item, it can add quite a bit to the profitability of a catering company. Is there currently an industry standard for food cost multiple pricing? As I noted last month, the variance in pricing for full-service catering in different markets around the country is vast, even though the raw cost of the food products that most caterers buy is actually quite similar no matter where in the country the caterer is located. When reviewing financial reports from caterers around the country, the food cost percentage that we see calculated as a percentage of gross revenue is usually 33 percent or less; for full-service caterers in expensive markets, it’s often less than 18 percent. The lowest food cost I have ever seen was from a boutique caterer operating in a high-end market; this company showed a food on gross revenue percentage of considerably less than 10 percent. When drilling down to arrive at food cost as a percentage of menu price, the variance is not nearly as drastic. The range we see in full-service off-premise catering typically runs from a high of about 28 percent down to about 22 percent. Considering the range of prices for full-service catered functions around the country, the fact that the cost percentages are so consistent raises an interesting question about what the buyer gets for a dollar.
  2. 2. Clearly, in many of the most expensive markets around the country, a catered wedding package includes a greater quantity of food items, more expensive food, higher service levels and more amenities. The difference is great enough so that the percentage profit margin on a $50 wedding in a mid-range market and the profit margin on a $150 wedding in a high-end market are almost the same. On-premise full-service cost multiple pricing In the regions of the country that have large numbers of commercial on-premise caterers (primarily the Northeast), the market seems to drive pricing as much or more than any cost multiple calculation. For example, in the New York/New Jersey/Long Island market, the vast majority of banquet hall operators offer similar packages. Frequently, they will have several price points, but the overall menu structure will be almost the same. Despite this similarity in the product provided, the prices can vary drastically. For example, it is not at all unusual for one banquet hall to charge $149 per person for almost the exact same package for which another banquet hall would charge $79. Clearly in the on-premise market, the idea of using a food cost multiplier does not apply. The perceived value that allows one operator to charge almost twice as much as another for the same product is based on other factors—décor, location, convenience, image, service etc. Many of these on- premise banquet operators are profitable whether at a 15 percent food cost or at a 25 percent food cost. Another reason that the on-premise business is so clearly market driven is that there is much more pricing transparency in the on-premise world. Most off-premise caterers don’t post their prices, but many on-premise caterers do. The complexity of a typical off-premise event sometimes makes it difficult to do an apples-to-apples price comparison, but with the on-premise world package pricing, it is possible to compare. Conclusions As the catering industry has become much more complex, with many additional moving parts, the old pricing models have proven inadequate. For a catering company to maintain both a competitive edge and a reasonable profit, it must have cost/price models for all of the different components of its business. On- and off-premise caterers sell similar products but because of the differences in the competitive environment, on-premise catering pricing is primarily market driven, while off-premise pricing is most often built from a cost multiplier formula. The most successful (read “most profitable”) caterers are the companies that have a clear understanding of what goes into their cost structure and how their pricing relates to their profitability. They know their costs calculated per event as cost of goods, and in fixed expenses.