Research shows that over 90% of restaurants forget one key ingredient in menu pricing
There is probably no greater part of owning a restaurant that will determine success than menu pricing, yet consider this from a recent restaurant journal…
One thing I’ll never forgive formal culinary schools for, is teaching new impressionable would-be chefs to use a budgeted cost percentage to price food menus. Chain restaurants share an equal responsibility for perpetuating this bad practice by focusing their managers on food cost percentages without letting them in on the secret that the cost percentage is a management tool, not a pricing tool.*
The dark art of menu pricing is something that every restaurant faces. Of course, every owner wants to charge the maximum because they want to make the maximum – makes sense - but how can a savvy restaurateur do this?
The solution advocated by the ‘experts’ and used by most restaurants is the Cost Plus method. It is a simple process:-
1) Calculate the cost of ingredients
2) Calculate and amortize the cost of labour (by amortize they mean guess)
3) Calculate and amortize the cost of overheads (by amortize they mean guess)
4) Add wiggle room for local factors such as competition
5) Top it off with the desired profit. (Hoped for profit!!!)
In rough terms, many work on 30/30/30/10 (food/labour/overheads/profit), or some go simple, 35% for food, and multiply by 3.5 for menu price.
This method is littered with challenges. For example, what should the amortization be for staff and overheads per menu item? Reality is that every restaurant price is just a best guess and nothing more. It might sound scientifically generated using complex ingredient focused percentage calculations, but it is nothing more than a guess, and probably a wrong guess!! Will that menu price actually cover the costs, because if overhead/staff amortization is wrong, and if we sell less dishes, then the price is wrong and too low. But, the issue is that this method has a far greater problem – it looks at the trees and not the forest. It focuses on the wrong part of the financial process, costs not revenues.
THIS IS A FUNDAMENTAL MISTAKE because whilst every restaurant has to work out costs, just like any business, they should also look to maximize revenue and gross profit, not net profit. The secret of sales is to get bums on seats and fill the seats with paying customers. The mission is to get revenue, not an arbitrary made up net profit per item that is probably wrong anyway. The maxim of ‘pile them high sell them cheap’ is not right for restaurants, but it does share the understanding of revenue generation over item profit maximization.
We can look at a great example within the menuvenu.com partner stable where we have an amazingly successful partner, Ali’s BBQ in Chalong, Phuket. Ali and his daughter Dorna are very savvy business owners who run the most popular restaurant in the area. Reading their many 5 star reviews online and the reason is soon clear – they sell great food, at a great price to people they know want protein. Competition is super tough in the area, yet they stand out and they succeed. Why, because they have focused on revenue generation not net profit cost control. Sure, they know the cost of stuff, but, they also know they want bums on seats..... and they get it.
Secondly, this ‘cost plus’ pricing method most restaurants use excludes the single most important part of any pricing strategy – SUPPLY AND DEMAND. Every marketing or economics graduate leaves university with at least one thing in their head, the Power of the 5 P’s - Product, Price, Promotion, Place, and People. Stock markets, condo rental, airlines, hotels supermarkets, in fact every part of our daily spending life includes price variation by supply and demand. Yet restaurants mostly have fixed menu prices. They simply do not consider the single most important pricing factor - SUPPLY AND DEMAND. This is interesting because every restaurant every day has supply and demand influences - it's called breakfast, lunch and dinner!
The historical reason for this is inflexibility is simple, paper menu’s do not lend easily to fast pricing reaction and variation, printing new ones or multi menu's is not feasible. It is a technology failure!! But now restaurants can go digital and this opens up the opportunity to radically change how they set their pricing strategy. Now they CAN include and react to demand, on an instant basis.
Consider how this technology change has affected other markets. Ten to fifteen years ago we bought flight tickets and booked hotels via agents. They had rack rates and we paid the set charge. Then the online revolution came and they could reflect price change by demand. There was no longer a fixed price, but one based on costs AND demand. As consumers we all know how this has changed the industry and how we all now have benefited. It's also fueled the massive boom because as Air Asia say ‘now everyone can fly’.
If smart restaurants realise the power of this new strategy, then they also can gain in filling empty seats.
Menuvenu.com are pioneering the move from brick and mortar restaurants to mobile digital restaurants and the core of this change is the restaurant menu. This is the one thing that every foodie considers when they visit a restaurant, so menuvenu.com make it the focus. Once the restaurant menu is on the customers' mobile, the restaurant has a connection and they can use this to make the leap – to dynamic demand driven pricing.
Now a restaurant can consider costs, net profit, AND they can focus on revenue generation. No longer need those empty seats be empty and consuming costs and overhead. The days of sitting back, opening the doors and hoping that people will walk in are over. Now, at a click of a button restaurateurs can respond and can fill seats.
When creating a menu strategy, the menu itself might be profitable, but that doesn’t mean your business is profitable! Cash is king, and the actual baht you bring in matters most. It’s revenue and gross profit margin in baht – not percentage – that is the number you need to watch.