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Behind the Line: Menu pricing is more science than art
The right price is crucial to restaurants’ success
By Lauren Kramer
December 03, 2013
Establishing the pricing on a restaurant menu can be a tricky affair. Dishes deemed too expensive will drive diners away, but the opposite is true as well. At the Culinary Institute of America in Hyde Park, N.Y., professor Ezra Eichelberger tells his students about a California restaurateur who had great food but few diners.
“He would see people read the menu outside the door and walk away,” he recalls. “One time, when he eavesdropped, he heard folks say that while the dishes looked good, the prices were too low. In the end, he had to raise prices to attract diners.”
Eichelberger teaches his students to cost out the dish and multiply it by three to obtain a selling price for most entrées. If that price seems too high, then raise or lower it depending on the amount of labor required to make the dish.
“A seafood ravioli, for example, is more labor intensive than broiling, sautéing or grilling, so you could price it a bit higher,” he suggests. “Pricing is not an exact science because there’s so much more involved besides the actual product.”
Inappropriate pricing is one of the biggest mistakes Leonard Jackson sees on menus. “It’s one of the reasons there’s such a high failure rate in the restaurant business,” says the director of hotel finance and investment at Georgia State University’s School of Hospitality Administration. “I see restaurateurs underprice their food all the time and follow the market leader, not realizing that the larger restaurants they are following can absorb the lower costs, but that they themselves cannot,” he says.
That said, you have to consider the local competition when setting menu prices, bearing in mind that diners have reference points for what they assume food should cost in a particular environment, be it a QSR, a college campus or a fine-dining restaurant.
“What kind of product do you have on your menu? That and portion size will also dictate your price,” Jackson says.
One pricing theory is that the market determines the price. “Look around at the competition and ask yourself if you can get more for a particular dish, if the market will bear it,” Eichelberger suggests. “If it doesn’t sell, either you didn’t make it sound good enough or the price was too high.”
Jackson teaches his students to ensure the price of their dishes contributes to their fixed cost while still creating the perception of value in the consumers’ mind.
“We create value by carefully selecting menu price endings. For example, $9.99 is better than $10 and 69 cents is better than 71 cents in the consumers’ mind, because of the perceived distance between the former and latter numbers,” he explains. “Each digit has symbolic and visual qualities that we have to take into consideration when pricing.”
Not everyone agrees with that theory. Eichelberger teaches students that it looks better to round an item off to $9 than to price it at $8.99. “You’ll appreciate the penny or nickel and the guest won’t miss it,” he says. “We generally say to round something off in increments of 25 cents.”
Establishing the actual cost of a dish can be a science in itself, and it’s something that corporations do better than individual restaurateurs, says Eichelberger.
“Quite often chefs just estimate what they think the dish costs, whereas we teach the prudence of costing out an entire recipe. Sure, there are things you’ll estimate, like salt and pepper. But with so many more exotic ingredients going into dishes these days, their costs add up and you just can’t guess anymore,” says Eichelberger.
Jackson agrees that price differences as high as a dollar or two can make a significant impact on restaurants’ profits. “Restaurateurs need to work out the contribution market for each menu item, how much it should contribute to the restaurant’s profitability and how much of each item you need to sell for each meal period,” he says.
Golden Corral, a large all-you-can-eat buffet franchise, has its pricing down to a fine art. The national chain with 480 stores based in Raleigh, N.C., has to work hard to find seafood that fits within its cost guidelines.
“Our guest makes us work really hard to do that, because they really like seafood on the buffet,” says Bob McDevitt, senior VP of franchise development. “We have a pretty good idea how many ounces of product our guests eat when they come in, and that’s how we manage our pricing — assuming the quantities of protein, vegetables and starches each diner will eat.”
Golden Corral recently did a weekend promotion on a prime rib and shrimp meal, charging $12.99, when the normal pricing is around $11.19 for it. “It was very successful and it drove our customer counts,” McDevitt says. “We merchandise seafood aggressively because we get customers to respond to it. We believe if you offer the right products, customers do have flexibility on their budgets.”
Not everything on a restaurant menu will be equally profitable. “We want to have items that are high in popularity but also high in profitability, but there are some things you can sell at a small loss because they drive the sale of bigger, high-value items,” Jackson says. In a seafood restaurant, that loss might be french fries, or servings of macaroni and cheese for kids. In a sports bar, where profits are made primarily on alcohol, chicken wings could be sold at a loss because customers are primarily there to drink.
When it comes to pricing seafood, your location will certainly have a lot to do with the price. “If you’re in Boston, you don’t have to charge as much for fresh seafood as you might have to in Indiana, if you’re incurring the extra cost of shipping it in fresh,” says Eichelberger.
Different restaurateurs adopt various strategies for moving fresh seafood fast. Some will reconcile themselves to making a smaller profit on the product to sell it faster while it’s still fresh, while other restaurants will cover their losses on other products by charging more for fresh seafood.
“Which one works for you depends on your reputation, how good you are at writing menus and how good your servers are, among other factors,” he says.
Contributing Editor Lauren Kramer lives in Richmond, British Columbia
Find other SeaFood Business articles discussing menu pricing here.