Know The Market You Operate In

Although the above cost-based approach to setting prices is relatively straightforward, it is your customers that will ultimately determine what you will be able to charge. Bear in mind that your customers are not concerned with your gross profit calculations; their decisions whether to pay a certain price are based on their perceived value of the dish and any added value they obtain by eating in your pub.

You need to understand your target customers in terms of their levels of disposable income, the eating establishments they frequent, and the prices they are used to paying. You also need to know what your competitors are charging and what they offer. Look at their food operation and compare it with your own:

• location (prime site or back street?);
• food quality;
• portion sizes;
• service;
• décor;
• atmosphere;
• access;
• reputation.

 

Use your competitors’ prices as benchmarks but be prepared to adjust the price of your own dishes in line with the above. Customers will be willing to spend more for your dishes if your food quality, service and facilities are superior to your competitors. Conversely, if they are inferior, don’t expect customers to pay the same price as they would in your competitors’ establishments.

Examine Your Sales

Studying your food sales provides you with useful information. It is good practice to keep a record of sales for each dish you sell. If you are selling a large percentage of higher-priced items, this can indicate that your customers are not so ‘price sensitive’ (influenced by price) and that their buying decisions are influenced by other factors.

Other Ways To Establish Prices

Your staff often have a very good understanding of your customers through the large amount of interaction they have with them. They are present when customers order their meals and can see their reactions to the menu. This is useful feedback for you. Regular comments about the expense of certain dishes may indicate that customers consider them to be overpriced. Alternatively, comments like ‘great value’ may mean that these dishes are perceived as being underpriced.

Specials boards can also be used to test the water of dishes prior to adding them to your main menu. They provide an opportunity to test levels of demand for dishes at different prices. For example, what is the effect on demand if the price is increased or decreased by 50p or £ 1? (It is much easier to change the price of a dish on a specials board than on a printed menu.)

Menu Engineering

Menu engineering is a way of analysing your menu and making changes in order to maximise the profitability of your food operation. It examines the sales history of each dish and the gross profit it contributes. It then relates the profit margin to the popularity of the dish to see which items are both popular and profitable.

Though it is usually undertaken by the larger food operators, some menu engineering techniques are useful to the pub food operator.

A fictional example is given on page 270 for a range of pizza dishes:

Explanation Of The Table

35% of all pizzas sold are cheese pizzas and they contribute £ 3.76 gross profit per pizza. 5% of pizzas sold are ‘Jumbo specials’ and they contribute £ 4.10 per pizza. The average sales percentage is 14.3% (ie 100% divided by the number of dishes – 7 types of pizza), and the average gross profit is £ 3.16 (ie total gross profit of each pizza divided by the number of dishes.) These figures are then used as a benchmark to assess the profitability and popularity of each pizza dish.

Pizza type	Sales percentage (sales as a percentage of total pizza sales)	Gross profit (£) per pizza
Cheese	35.0%	£ 3.76
Seafood special	14.2%	£ 2.50
Spicy chicken	9.2%	£ 2.74
Jumbo special	5.0%	£ 4.10
Tuna	10.6%	£ 2.89
Beef	15.0%	£ 2.25
Super deluxe	11.0%	£ 3.86
Average:	14.3%	£ 3.16

Dishes are placed into four categories according to their profitability and popularity. Using a useful US menu engineering model, these categories are given memorable names.

STARS	Stars are high in both popularity and profit margin. These are the Signature Items.
These dishes should have prime place on your menu and be promoted by staff to further improve your overall profitability. Other than finding ways to reduce the recipe cost of these items (increasing dish gross profit further), they should be left alone.
Examples (using fictional data from previous table): Cheese pizza

 

PLOUGH HORSES	Plough horses are high in popularity but low in profit margin. Price-sensitive.
These dishes are typically very price-sensitive and sometimes used as ‘loss leaders’. They can be pushed into the ‘star’ category by improving profit margins by reducing recipe cost.
Examples: Beef pizza

 

PUZZLES	Puzzles are low in popularity but high in profit margin. Higher in profit per sale but hard to sell.
Typically the more expensive dishes on a menu. May act as ‘image makers’ but too many of these dishes should be avoided. Price reductions may be a way of improving popularity but must be carefully assessed. Otherwise candidates for repackaging, replacing or elimination.
Examples: Jumbo and Super deluxe pizzas.

 

DOGS	Dogs are low in popularity and low in profit margin. Unpopular and little profit.
Possible candidates for elimination, repackaging, repricing or replacing. However, these dishes may serve a particular market segment such as kids’ menus and need to remain in place to be competitive.
Examples: Spicy chicken.