11.1: Arriving at the Correct Menu Price
- Page ID
- 22115
- Understand the factors that affect pricing decisions.
- Understand how consumers react to pricing.
- How to consider the consumer’s environmental influences.
- Understand the aspect of price as perceived value.
- Understand the various strategies for item markup.
- Comprehend demand-based pricing.
- How to determine the appropriate price based on cost factors.
- Understand price difference, duration control and price fences.
- Understand the importance of the ‘purchasing’ function.
“Everyone has a price,” she said. But clearly not everyone has a soul,”
Ruta Sepetys“Don't tell me what you value, show me your budget, and I'll tell you what you value.”
Joe Biden“There can be no value in the whole unless there is value in the parts.”
Bertrand Russell“Price is what you pay and value is what you get.”
Warren Buffett
Restauranteurs need to be adept at various pricing methods but first, and foremost; they need to be aware of the new factors that come into play when determining how to price items for sale. First, the good news. Food prices, with few exceptions, have stabilized over the past few years. Now for the bad news. The price of pretty much everything else has gone up. Food cost was the highest cost in the past. Now, the current order is occupancy cost, followed by labor cost, followed by food cost. That makes managing the cost of what goes on the plate even more crucial to turning a profit.
There are various methods available to determine the pricing strategy organizations will use to attract a clientele. Pricing is one of the most important functions of the restaurant operation. Pricing has direct links to both value and profitability. It is also a tool to direct and channel customer patterns and usage. To consider the pricing function as simply 'what the operation charges for the products we sell' is to miss interpret the 'value' function of what pricing accomplishes and thus, as a result of such narrow thinking, the profitability mark of the operation's offerings would usually be missed as well.
Price is an important component of the four major components of the marketing mix. While the other three components of the mix – promotion, product, and distribution - create value and are recognized on the operations income statement as expenses, pricing is the organization's tool to create value, and it directly affects the revenue section of the income statement. Pricing is actually the easiest of the marketing mix components to change or adjust and again, has that direct link to revenue. In the twenty-first century marketplace, a great deal of effort must go into the formulation of pricing strategies. The restaurant operation must always remember that every product and service has two valuations - the one created by the organization and the value placed on the operations offerings by the actual consumers. If the respective definitions of value differs to some extreme based on cost, or some other circumstance that adjusts the consumers opinion of worth, then the customers view and support for the operation, and thus profitability, can become problematic.
Factors That Affect Pricing Decisions
The pricing decision has historically been a critical component of the marketing mix and the positioning of a product or service. Pricing is a continual process that requires a firm understanding of the market and its environments. In the twenty-first century, the dynamic nature of any marketplace has heightened rather than subsided which creates formidable challenges for even the most experienced managers. Therefore, the best tactic is to pursue a systematic approach to pricing that includes establishing pricing objectives consistent with the overall objectives of the firm, assessing consumer price sensitivity, and monitoring the external environment. The days of economic consistency are past.
Pricing Objectives
While the possible pricing objectives are numerous, they usually fall into four overarching categories based on an organization's goals related to: financial performance, amount of volume, competition, and desired image. All pricing objectives should closely relate to the company's organizational objectives. Thus, pricing, in many ways, is a large part of the means to the end.
Financial performance objectives
These objectives focus on financial areas of the restaurant operation such as the company's level of profitability, desired rates of return on sales and equity, and cash flow. Most large companies continually monitor these performance measures and, over time, find it prudent to use these measures as benchmarks or objectives. The closer one observes performance measures, the more clearly they can see the impact of price on financial performance outcomes.
Volume objectives
These objectives focus on sales and market share. These measures can be based either on the number of units sold or on the dollar amount of the units sold. The sales measure looks at the firm in term s of individual accountability, while the market share views the company relative to the competition. Volume objectives are particularly common in the early stages of the product life cycle, when companies are willing to forgo profits in exchange for building long-term sales and market share. It would also be wise to see that price competition stays strong in the maturity stage in an attempt to hold market share.
Competition objectives
Competition objectives focus on the nature of the competitive environment. A firm may want to maintain competitive similarity with the market leader, widen the gap between itself and market followers, or simply survive. If strong competitive forces or economies of scale are at play. There is typically a great deal of head-to-head competition in the hospitality and tourism industry. A change in price by one organization in the market generally sees reciprocation by other organizations in the marketplace.
Achieving image objectives
These objectives focus on the organization's overall positioning strategy. Often, a restaurant operation's position in the market is a direct result of its 'price-quality' relationship as perceived by consumers. Price is the main segmentation factor useful to the restaurant to distinguish quick service (QSR), casual, upscale, and luxury categories.
Consumer Reaction to Price
An important moderating factor in setting prices is ‘consumer price sensitivity’, or how consumers react to changes in price. There are numerous ‘situation’ factors affecting consumer price sensitivity, and these factors can actually vary from one purchase decision to another. For example, a married couple with children may be less price-sensitive when choosing a restaurant for a special occasion than they would be if they were having a normal meal after work. Some of the more common perceptions affecting consumer price sensitivity follow.
The price-quality connection
In many situations, consumers use price as an indicator of a product's quality, especially when they do not have much experience with the product category. In such cases, consumers be less sensitive to a product's price to the extent that they believe higher prices signify higher quality. An example would be travelers who often use price as a gauge of quality because they lack familiarity with the travel products in a different city. This pertains to all components of the travel product, such as hotels, restaurants, car rentals, and tourist attractions. This lack of information is one of the main reasons that consumers would use price as a signal of quality, along with the perceived risk of making a bad choice and the belief that quality differences exist between brands. Pricing perceptions related to the trading area is an important consideration.
Unique- value relationship
Consumers will be less price-sensitive when a product stays unique and does not have close substitutes. If a firm successfully differentiates its products and services from those of its competition, it can charge a higher price. Consumers must remain aware of the differentiation and convinced of its value in order to pay the higher price. In essence, the organization's strategy is to reduce the presence of substitutes in the mind of consumers, thereby eliminating the consumer's reference value for the product. Many fine-dining restaurants use this approach and differentiate themselves on attributes such as the chef, the atmosphere, and menu.
How customers see substitutes
Customers will become more price sensitive when comparing a product's higher price with the lower prices of substitutes for that product. The prices for substitutes help consumers’ forma reference price, or a reasonable price range for the product. The restaurant operator should always be aware of the number of substitutes that consumers are aware of for different dining options. Substitutes tend to put downward pressure on price resulting in a relatively narrow acceptable range of prices for each different type of restaurant category. As such, price differentials were instrumental in creating the different restaurant categories so it is not surprising that there is little significant price difference between products in quick=service, casual and fine-dining categories.
When comparisons are difficult
While consumers may be aware of competitive substitutes, at times, the differences between competitors can become difficult to discern. At this point, consumers tend to be less concerned with price differentials. Thus, when it becomes harder for consumers to compare different brands price sensitivity goes down. Therefore, many organizations try to differentiate themselves from their competition on those attributes that are historically difficult for customer comparisons. As an example, restaurants may serve food and drink in different quantities and packaged configurations from their competition, to make direct comparisons more difficult. In general, the competitive winner will typically be the strongest brand. Rather than spend the time and effort t make comparisons, many consumers are content simply choosing a brand that they perceive as satisfactory. Franchise operations are strong beneficiaries of this consumer action because they focus on providing consistent products and services under a recognizable brand name. Even though consumers have avoided direct comparisons and not familiarized themselves with all of the alternatives, consumers still feel safe in choosing one of these well-known brands.
Shared cost
Consumers are generally less concerned with price if another organization or individual is sharing in the cost of a product. Typically, the smaller the portion of the price paid by the consumer, the less concerned the consumer will be about price. This sharing could be in the form of a tax deduction, a business reimbursement, or some type of sales promotion such as a coupon or a rebate. When business travelers eat at restaurants, they tend to be less concerned about price because their organizations' pay for most of their travel expenses. A usual tactic for hospitality organizations is to charge higher relative prices for their products that target business companies. The exception would be an organization that targets business travelers with lower prices to obtain a larger portion of that potential revenue segment.
Income and price concern
As a rule of thumb, consumers tend to be more concerned with price in direct relation to the amount of the total expenditure. This amount is measurable in terms of the individual purchase, or as a percentage of income. For instance, a consumer purchasing a vacation package for $5,000 will be more sensitive to the cost of the package that the price of a meal in a restaurant. The cost of the vacation is a relatively large travel expenditure, whereas the cost of a meal in small in comparison. However, a consumer with an income of $500,000 a year will be less concerned about the cost of the vacation that the consumer who earns $50,000 per year. Further, consumers with higher incomes tend to place a greater value on their time and may decide to accept higher prices without evaluating alternative products.
The value of meal components
A product may represent only one portion of the total desired benefit. Consumers tend to evaluate the desired end benefit of their purchase and their price concerns for something that contributes to that end benefit. Specifically, in the restaurant industry, consumers are more price conscious when the cost of component (say an appetizer or dessert), represents a larger portion of the total cost than they perceive is fair. For example, while $20 might be acceptable for a pasta entree, $7.95 for onion rings and $9 for a slice of chocolate cake may appear high given the cost of an onion and cake mix. Said differently, although the restaurant operator has justification for charging certain prices, the consumer is under no obligation to agree with a restaurant's pricing structure. Income is an important consideration regarding price and end benefits from the consumers' perspective. The use of packages, or bundles, by resorts and restaurants in tourist destinations is an attempt to pair the end benefits desired by consumers with a high perception of value.
The Consumers' Environment
Environmental factors drive many consumer-pricing decisions over which they, or the restaurant, have little control. Restaurant operators' must stay abreast of existing and developing events and situations pertinent to the consumers in their marketplace. While these events generally uncontrollable by either consumer or restaurant operator, such events can nonetheless affect pricing decisions because they affect an organization's costs, the demand for its products, and the competition. The components of the external environment would include the economy environment, the social changes, the governmental issues, technological advances, and the competition.
Economic factors
Constant changes occur in the state of the economy and it is measurable by indicators such as business growth, inflation, consumer spending, unemployment rates, and interest rates. If the organization is to compete and earn an acceptable profit, their pricing strategies should reflect changes in the economy. Organizations that compete in international markets must consider the state of the economy in the foreign markets as well as the domestic markets. On the local level, many items sold as part of the product mix are international in origin. Food products from various nations find their way into even local restaurants and wine from different parts of the world are now common. In each case, exchange rates and economic climates come into play. Foreign exchange rates can affect an organization's income statement drastically and influence the future of the firm. Prices change in accordance with changes in consumer income, resulting spending patterns, as well as with variations in the organizations product costs resulting from changes in the domestic environment (possibly a drought), or in foreign markets (warring factions, religious ideology, transportation costs, and so forth).
Consumer preferences - social change
Consumers’ tastes often change over time and organizations that do not adapt find it hard to survive in the marketplace. On a broad scale, changes in cultures and sub-cultures throughout the world are affecting many societies. The natural tendencies of consumers are not the same. Different cultures have different spending patterns and saving practices. For instance, many Asians tend t same more of their incomes than other nationalities do, but they also tend to purchase name brands that are associated with high quality. As such, Asians are more concerned with quality than price. Further, as cultures, come together, they influence the eating habits of others. Consumers in the United States are eating more sushi and drinking more tea than in the past. Culture now fuse in many more ways than before.
Political aspects - local to global
Each level of government can have a highly significant impact on the operations of hospitality and tourism organizations throughout the country and beyond. The effects of a change in the minimum wage could touch the cost structure in virtually all areas of a restaurant operation due to the labor-intense nature of the industry - and its suppliers. Changes in tax laws related to business expenses could negatively affect the demand in restaurants. Restaurant management must consider the political environment and possible changes that may result from new and changing laws when menu pricing is under consideration.
In tourist locales such as New Orleans and Las Vegas, an increase in city amusement taxes could easily have a detrimental effect on the restaurant environment as cost become too severe for travelers - and locals cannot afford to purchase in that trading area. A government's taxing authority is by no means the limit in terms of potential harms that could occur as the result of political decision-making. In addition, governments impose many fees on businesses, and organizations operation in international markets must contend with still additional fees, tariffs, and operation costs. On the other hand, some cities are quite sensitive to the needs of the hospitality industry and attempt to ameliorate market conditions where possible. Pricing must absorb and move beyond such costs and expenses.
Advancing technology
While the pace of changes appears to move faster and faster each day, restaurant operations must constantly be concerned with keeping up not only with advances in technology, but also with how such advances could be utilized in the operation to improve products and services, as well as an operation's competitive edge. Many new technologies designed for the hospitality and tourism field intend to improve operational efficiency and thereby reduce cost factors. For example, with the advent of the new hand-held terminals to place orders, servers no longer need to enter the kitchen or move to a stationary terminal in another location. These new point-of-sale (POS) systems also enable organizations' to track costs and demand for particular food items. This type of information can be invaluable in both setting prices and in gauging the customer reactions and resulting purchase decisions.
Competitive reactions
Organizations must stay abreast of their competitions' impressions, anticipated changes, and moves toward innovation. New organizations entering the market will naturally change the overall supply of the trading area, thereby changing the market structure and enacting downward pressure on market prices. Competitors will also engage in promotional consumers' perceptions of value. Campaigns offering price discounts or free merchandise that will affect consumers' perceptions of value. Short-term price wars in the quest for additional market share are normal in the restaurant industry at all business segment levels.
Price as Perceived value
What customers can afford
Before setting prices for individual menu items, catering events, or other merchandise, gather as much information as possible to determine how much your typical customer is most likely to spend when visiting your restaurant. Said differently, what is the most likely average check you can expect to obtain, given the type of business you have and the customers you service? This type of information comes about from past sales records if the restaurant is part of an existing operation, or, if opening a new business, you can get a good idea of this dollar amount by reviewing your initial competitor analysis of the trading area. Keep in mind that your menu is generally your only means to cover your expenses and produce a profit. Of course, you would like for pricing to be as high as possible but the need for revenue must always maintain a balance with the consumers’ ability to spend. This is one of the reasons we begin any project by scrutinizing the city. If consumer income is low, their ability to spend is equally low and thus decisions to spend become based on 'need' to buy versus 'nice' to buy. Table 1 above provides pricing options to consider.
If you determine that the average lunch check is $10; that is, you anticipate that each guest will spend $10 per lunch visit. If that is the case, you need to determine the best way to arrive at a $10 lunch meal. For instance, if you develop and price entrees at about $9.95, your typical guest would be unlikely to order anything else, such as a beverage, appetizer, or dessert. At that point, in the mind of the consumer, you are 'too expensive.' Always remember that consumers tend to use phrasing that can be too extreme - and worse, their friends trust their opinion. But, if you price entrees at $6.95 to $7.95, the guest will more than likely order a beverage, a dessert 9 possibly shared with someone), or some other item. Consumers naturally perceive a greater value when they can purchase several products for that $10 rather than only one. It is important to know and understand your customers as much as possible because, as this scenario would tend to indicate, the process of developing prices, as in other areas of your business, requires that you think like your typical guest.
Some operators prefer ˋa la carte’ pricing while others prefer to use a bundling approach as usually price everything. Fine-dining operations and cafeterias usually price everything ˋa la carte. On the other hand, restaurant categories such as quick -service, family-style, and casual-dining restaurants typically offer some sort of bundling. As a rule of thumb, businesses with lower average checks and more value-conscious customers should offer guests some bundling opportunities.
Table 1: Pricing Objectives & Typical Actions to Achieve Them
| Objective | Possible Action |
|---|---|
| Survival | Adjust price levels so that the operation can increase sales volume to match organizational expenses both fixed and variable. |
| Profit | Identify price and cost levels that enable the operation to maximize profit. |
| Return On Investment | Identify price levels that enable the operation to yield a determined return on the money invested (ROI) in the operation. |
| Market Share | Adjust price levels so that the operation can maintain or increase sales relative to competitors' sales. |
| Cash Flow | Set price levels to encourage rapid sales. |
| Status Quo | Identify price levels that help stabilize product demand and sales. |
| Product Quality | Set prices to recover research and development expenditures and establish high-quality image. |
In a fine-dining restaurant, consumers are accustomed to paying individually for every little thing they order, even for such items as bread and water. Cafeteria patrons are also accustomed to this form of pricing structure. ˋA la carte’ pricing tends to work well in these situations. In quick-service operations, however, offerings such as 'value meals' are very important; consumers who frequent these operations expect them. Quick service, family-style, and casual-dining restaurants typically offer a combination of ˋa la carte and bundling pricing methods. They also may have a few all-you-can eat, or free soft drink, specials.
Value is often in the eye of the beholder. You need to maintain a firm handle on your clientele's value perceptions, although it is not always easy and requires constant vigilance. Although you feel that you do understand the needs and concerns or your guests, everything can easily change tomorrow; you need to focus on this issue constantly.
While ‘value’ is a theme that spans all areas of marketing, it closely relates to quality, price, and service. There is a direct relationship between quality and price; guests expect higher quality to accompany a higher price. The same relationship exists between service and price; more service and better service costs more. The trick is to find out how far guests are willing to go. What appeals to them? How much will they pay for added benefits? What are their priorities? Although the list seems endless, eventually the operation will develop a feel for what its guests want. Then it is up to the operator to monitor their needs and modify the restaurant's pricing strategy accordingly.
Pricing Daily Specials
Many restaurants consider it wise to offer one or two specials for each part of the day. This is a good way to provide variety to guests without moving to a complete menu revision. Ordinarily, you would price these menu items the same way you would any other regular menu item. Typically, you do not want to price them any lower. An operator may get a good deal on a food product, have leftovers to utilize, or attempt to test future menu products at an inviting price to obtain feedback. In these cases, a restaurant operator may choose to run a special with a bargain price. However, be careful with this strategy because it can reduce your bottom line. If customers who normally purchase more expensive menu item suddenly take the bargain special, the gross profit (in the way of contribution margin) for those guests plunge.
On the other hand, if , say, you have very costly leftovers such as an expensive protein that is on the verge of losing its quality, cannibalization of the more expensive item may be acceptable on occasion - preferably not on a consistent basis which would tend to indicate other difficulties. Although you may reduce your contribution margin if a guest is distracted from an expensive menu item to the daily special, you might make up the difference by avoiding the need to toss out some expensive food.
Pricing All-you-can-eat Menu Items
Should you offer one or two all-you-can-eat (or drink) options on the menu, they should be priced in the same way as any other item on your regular menu. The primary difference is that, when costing out these menu items, 'average' cost figures are more effective in lieu of exact cost figures. With the initial offered of the item, the operator will have to estimate the average cost. Since this can be a bit tricky, it is best to offer only a few of these many items and only those that are inexpensive (such as soft drinks) and have the potential to draw customers who are likely to buy other things from your operation.
Once you have introduced one of these items as part of your regular menu, keep close track of how much of the food or beverage you use in the first week or two. This will help an operator to gather enough cost and usage information to adjust the menu prices, if necessary, to bring them into line with your pricing requirements. Take a beginning inventory, add in your purchases of the relevant ingredients during this initial period, and then subtract the ending inventory from this amount. This will give you the actual amount of food and beverage used during this timeframe. Cost this out and divide the total cost by the number of guests who ordered this many item, which will give you the average cost per guest. While this cost figure is not as accurate as you might like it to be, it is better than guessing.
Should you prefer a less formal approach, contact the purveyor of the particular food or beverage item and asked for a best guesstimate on cost factors. For instance, the soft drink vendor who services many restaurant outlets probably knows of a few restaurants that offer similar menu items and might be willing to share product cost and/or product usage information with your operation.
If you offer an all-you-can-eat buffet, salad bar, and/or breakfast bar option along with a regular menu, use the same approach to calculate the average cost per guest. This can be a little trickier when doing calculations for several such items, because, typically, there is considerably more waste. Options such as free soft-drink refills, or all-you-can-eat pasta or fried foods would allow you more control. Food bars require special handling; you have to keep up their appearance, you have to rotate the items, and you usually discard things now and then that might still be edible but have passed their peak of quality or food safety limits.
Merchandise Pricing
Logo merchandise can generate extra revenue, most of which is pure profit. If you are a unique or well-known restaurant such as the Hard Rock Cafe, you may actually generate more sales and revenue selling T-shirts than by selling menu items.
Risks involved
Selling merchandise is not risk free. Two of the main drawbacks are the up-front charges the operation must pay to develop the products and the large minimum quantity purchase requirements and storage costs to get the best possible deals. For example, the logo-imprinted bottled waters you see for $2.95 each may cost you less than 30 cents per bottle. However, you have to pay several hundred to several thousand dollars up front to develop the proprietary label. In addition, you are usually required to purchase several pallets, each one containing several cases, to get the 30-cent-per-bottle purchase price.
If your operation can absorb the up-front charges and the large amount and variety of inventories you must have on hand, consider buying and selling various kinds of merchandise. Guests love logo products – but it is not unusual for them to get upset if you run out of a particular item that they made a special trip to obtain. Further, other potential customers may see the logo are decide to try your concept. Continuous sight leads to familiarity in the eye of the consumer.
There are two typical ways to price these items. One is to include the product's cost when costing out a food or beverage menu item. For instance, use a very high multiple price for specialty drinks if you let guests keep the glasses or cups. The other way is to price them separately, after seeking the vendor's guidance. Vendors often have a sixth sense when it comes to pricing such merchandise. Over time, they have learned what customers are willing to pay. Oddly enough, they also seem to know instinctively when an operator is becoming too greedy.
Sales Promotion Pricing
Many restaurants prefer to offer pricing specials in order to generate more customer traffic. The idea is to get people to visit during normally slow periods or draw customers who will buy other, more profitable things. It can also be an effective strategy to help spread out your fixed costs over a wider customer base.
Discount pricing
Two-for-one sales, early-bird specials, happy hours, and other forms of discount pricing are usually attempts to bolster business during times when you are open but have few customers (such as Monday evenings or from 4 p.m. to 6 p.m. on weekdays). If you can get guests interested in one of these deals, then you have a chance to sell them something else. As such, discount pricing is an additional tool for value creation.
The popularity of discount pricing among restaurant operators is controversial. In some competitive environments, it may be the preferred pricing method. However, even though it may generate customer traffic, what type of custo0mer are you getting? This become an important question in direct relation to overall profitability. Are you getting the customers with limited financial resources who are looking just for the deal and nothing else? Are these customers more problematic than the amount they spend in your operation? Do they irritate your service staff, by tipping only on the discounted dollar amount instead of the full value? Do they irritate your steady customer base? Ultimately, the deal-breaking question surfaces: Do they harm your reputation in any way?
In many instances, customers who are continuously attracted to your operation solely for the special deal are generally of the mindset that they are paying what the product is worth and that all the other guests are overpaying. Furthermore, these customers are not loyal to your operation, nor can you expect to build loyalty among them. They are price-sensitive and therefore loyal only to special deals - and thus to whomever offers it.
Discount pricing can have many ramifications - one good, and the rest less so. If your restaurant starts down that road do it with your eyes wide open and be ready to commit to this strategy for the long haul. Once a patron becomes accustomed to the discount price, from a psychological standpoint, this guest will never pay any more than that. The guest will visit you only when you are offering discounts. If you try to reverse the discount strategy, your business will drop. Once you get involved with discounting, the basic human nature of consumers makes it hard to turn back guests using coupons or visiting only during off-price times can also create security problems. If their coupons have expired or if the happy hour ends just as they come in the door, they will not be happy. They can become aggressive, want to argue, and put you on the defensive. Since it is never appropriate to argue with a guest, you might be force to cave in and give them the discounted prices. Sooner, or later, a coupon's expiration date and the happy-hour timeframe may become meaningless.
Marginal pricing
If you feel the need to offer pricing promotions, you need to decide first on the items to promote, as well as the times during which the promotion prices are valid. You could then use the 'marginal' pricing method allowing you to earn a small profit based on the cost of the product and other related variables expenses, plus a small profit markup.
This technique requires the operator to determine the cost the food or beverage product plus the cost of any other variable expense associated with selling that menu item. These other variable costs can take some thought and are not always easy to compute since not many of the associated costs, like the labor or utility cost per item, are readily available. Still, these costs are manageable with a little thought, for example, if you already have staff in place; the labor cost would be ‘fixed’ rather than ‘variable’ for the purposes of the calculation.
To arrive at this calculation, a good rule of thumb to use is to cost out the menu item and add a small markup to cover other variable costs needed to prepare and serve it. For instance, if you cost out a pasta dish at $3, add at least ten percent, giving you a total variable cost of $3.30. This out-of-pocket cost is the lowest price you should charge if you expect to break even on that menu item. The price to charge the customer should be somewhere between $3.30 and what the price would be if you used the normal price structure. If the normal selling price for the menu item is $12 then the discounted price to your customers should be somewhere between $3.30 and $12, say $9. The customer receives a discount and your operation remains profitable. You could also occasionally utilize a two-for-one deal and effectively price the item at $6.
The idea is to price the promotions in such a way that you never go below your variable costs. It is one thing to offer a discounted price, on which you make a small profit; it is something else to offer discounts for which you actually have an out-of-pocket expense. If the operation makes a small profit, there should also be something built in to the operational scheme that can be used to help defray the large amount of fixed costs all restaurants will typically experience.
If everything works to plan, the operation's overall income statement will show a bit more profit. The fact that you are creating extra business even though it is not as profitable as one would like it to be, nevertheless give the operator an additional modest income stream. The key word is extra business. If your pricing promotions merely reward existing customers who would normally pay the full price, your operation could be heading for trouble. Should you suspect this to be happening, the promotions should be stopped (if you can), go back to the drawing board, and research other possibilities that do not result encourage existing customers to engage in lower spending patterns.