11.2: Other pricing concerns

As previously stated, pricing should create value in the minds of consumers. It should also be complimentary to other aspects of the restaurant operation. Pricing of one form of product or service should not result in a competitive environment for all products and services. Pricing should channel consumers and aid their decision process in a fruitful way for the restaurant. A few other concerns need attention.

Daily specials

If you offer daily specials that servers recite at tableside, make sure to present them in an enthusiastic way and tell guests the prices. You do not want them to be surprised when the check arrives at the table. Another important reason for making the customer clear about cost is the fact that many customers budget their disposable income. If they are uncertain regarding the cost of the special, they may shy away from it when in fact they could have afforded that meal. Always give customers the best chances to make a purchase.

Side Items

If your operation offers a menu item that in most restaurants customarily included a side dish (such as a hamburger and a side of fries), but you want to price the side dish separately, make sure that the servers bring this to the guests' attention. For example, train servers to suggestive sell the side item in a way that helps the customer understand that the dish is not free but it is still a reasonable purchase. For example, 'can I bring a basket of fries for the table to share? It would only cost $2.50’.

Menu price spread

For every menu item category listed on your menu, attempt to keep a reasonable spread between the highest and the lowest prices. Maintain a spread of no more than 100 percent. If, for example, the lowest-priced appetizer is $4.95, the highest-priced one should be no more than $9.95. If the operator wanted to sell an appetizer that has to have pricing a great deal higher than $9.95, try to reduce its cost so that you can add it to the menu without throwing the category off balance and possibly scaring away customers. If that is not possible, list it on the menu at 'market price.' This would allow the restaurant to serve it, but without advertising the price.

Items for take-out

If some of the operation's regular items are popular with take-out customers, it might be necessary to raise the prices a bit on these items. If you operate a quick-service operation, where take-out and drive-through business is standard, then the regular menu prices already consider this. However, if you have a table service restaurant, it can be more costly to offer take-out, especially for items requiring expensive packaging. The expense of a phone ordering system may also need to factor into the cost, and there may be extra labor involved.

On the other hand, take-out customers do not occupy tables in your restaurant, thereby allowing you to increase your guest count without substantial change in your operating costs and procedures. The key is to have a good idea of all costs involved to calculate appropriate prices. If necessary, a simple action would be to print separate take-out menus to avoid confusion and to inform customers of any take-out item limitations.

Offering delivery service

Delivery service is another way of increasing guest counts, but unless it is traditional for your operation to offer this amenity, you should approach this decision with caution. Delivery can be a very unpredictable business. Staffing can be arduous, insurance costs can be exorbitant, the operation must usually establish a minimum dollar figure per order, and it may well be necessary to restrict the delivery area (larger delivery area - greater number of delivery personnel needed).

Another important issue affected by delivery is quality. It can be very difficult to maintain product quality. This might put restrictions on the number and types of items you deliver. Quality control is even more troublesome if you outsource the delivery function to an independent 'waiter on wheels' type of operation. If the operator can control such risks, there are ample rewards, as these types of guests are willing to pay a premium for the service, in addition to tipping the delivery personnel. Your rewards will increase even more if you offer guaranteed delivery time or else the cost receives a discount. Consumers love this amenity, however, any form of 'guaranteed' delivery will most certainly drastically increase your delivery insurance expenses - if not completely eliminate insurance protection. Nonetheless, speed of delivery is a primary consideration in the consumer's decision process. The operator would best benefit from by tighter delivery configurations and impact delivery times using shorter distances. To be beneficial to all interests, manageability is key.

Live Entertainment

If your restaurant operation offers entertainment on occasion, there may a need to institute a cover charge. This is not necessary if all you offer is prerecorded background music. But if live music is featured on certain nights of the week, it is necessary to earn enough in cover charges to pay for the band, defray related expenses 9 such as extra security and complimentary food and drinks), and generate a profit.

The easiest way to calculate a cover charge is to add up all relevant expenses and divide by the expected number of guests. In conjunction with this, you could capture this cover charge by establishing a minimum purchase per guest to five you the dollars you need to generate a sufficient profit. If, for instance, the entertainment expense for one night is $1000, and you expect to serve 250 guests. A straight cover charge would be $4 per guest just to break even, and more than that amount per guest to generate a modest profit for the operation. This is another possible option. In lieu of a cover charge, you might require guests to purchase a minimum of two drinks at slightly higher prices per drink. This strategy has higher profit potential because some guests will order more than the minimum number of drinks.

An appropriate corkage fee

Some guests enjoy bringing their own beverages (usually wines) with them when they visit a restaurant. If the commission in your trading area grants patrons this option, you need to decide whether you will allow your customers this privilege. If you do, you must determine the fee you would charge guests for handling the product, providing the drink setups, and generating a profit.

This can be a sensitive issue with patrons. On the one hand, guests know that they will have to pay something. On the other hand, guests who bring their own alcoholic beverages tend to be quite sophisticated and so are very aware of what a standard corkage fee should be. Thus, if you charge a corkage fee, research what other restaurants charge. If you are in that range, you run the risk of alienating these guests.

Realistically, corkage fees should be reasonable. The operator must hope that by allowing guests to show off their personal wine cellars, they will reciprocate and purchase highly profitable dishes from your restaurant. With that in mind, if many of your guests bring their own wines, another option is to completely eliminate the corkage fee and increase the multiples you use to price the food menu items. A slightly higher food menu price is more palatable to such guests than a corkage fee. This is one of those situations where 'it's the principle' that rules the day. Consumers will pay for food, but prefer not to pay for wine glasses when they provide the wine - so make your restaurant a value in terms of convenience as well as preference options for alcoholic beverages.

Demand-based Pricing in Restaurants

Restaurants use differing price structures over different meal periods. The most common price differentiation is lunch and dinner pricing. Special events and holidays can also utilize different pricing structures. Another important factor is ‘duration control’. How long does the operation want customers to remain in the restaurant? This is an important issue if it is necessary to ‘turn tables’ based on space or volume considerations. Kimes (2000) discussed demand based pricing, or fences, and customer perception in a study published in the Cornell Hotel and Restaurant Quarterly. While demand-based pricing is still new to the restaurant industry, this pricing strategy bares mention of the various ways to consider this form of pricing.

Price fencing

Price fences are a mechanism used to maximize profit potential based on demand factors and the aspect of controlling the duration of the customers’ restaurant experience. ‘Fences’ are designed to allow customers to segment themselves based on their willingness to pay, their behavior, and their needs.

Price fences offer consumers discounted prices but impose rules and regulations at every level of discount to balance the perceived value for different market segments, and to avoid automatically offering discounts to customers who are willing to pay a higher price. Fences may include requirements for advance purchase, cancellation and change restrictions, refund penalties, time-of-use restrictions, and the requirements for minimum purchase. Fences need to be logical, transparent, upfront, and fixed so that customers cannot circumvent them thus maintaining the perception of fairness.

Duration control

Some restaurant managers try to manage duration by changing their service delivery e.g., speeding up the delivery process. For example, the ability to enact a certain amount of duration control is important to a popular operation with limited dining capability. It can also be an important element to use in staying off growing pains – growing in an initial location rather than having to expand to another site prematurely.

Demand-based Pricing

Most restaurants use demand based pricing such as happy hours, and early bird specials but they are reluctant to vary prices by time of day, day of week, or table location. The main reason – customers refuse to patronize companies that they perceive as unfair. Several demand-based approaches are possible:

• Differential lunch vs. dinner pricing,
• Differential weekday vs. weekend pricing
• Coupon pricing (including restrictions)
• Table-location pricing (e.g., charging extra for a table with a view).

Some important points to consider:

• Fair behavior on the part of operators is instrumental to the maximization of their long-term profits.
• Consumers may perceive “new” higher regular prices as less fair during high demand periods.
• Consumers normally adhere to the concept of dual entitlement – they are entitled to reasonable prices and firms are entitled to a reasonable profit.

There are two types of rate fences available to the restauranteur: physical and nonphysical. Physical rate fences include the restaurant location; furnishings; the presence of amenities, or a spectacular view to name a few. Examples in a restaurant setting are table location, tables with a scenic view, or tables in a private room with fresh cut flowers as exemplars.

Non-physical rate fences include the day of the week (weekend dinners might cost more or meals consumed before 6pm might cost less). Another involves ‘transaction characteristics’ (customers who make a reservation over a month in advance might pay less). Buyer characteristics provide another example - frequent customers might pay less or get free extras) and ‘controlled availability’ (customers with coupons will pay less).

Framing of price differences

Presentations that emphasize customer gains are preferable to frames that emphasize customer losses (a discount vs. a surcharge – reduced prices have a more favorable perception). Recent study results:

• Lunch - vs. - Dinner pricing viewed as reasonable and fair
• Weekend -vs. - Weekday price differences viewed acceptable if framed correctly.
• Time-of-day pricing viewed as fair if framed as a discount during lower demand hours.
• Two-for-one coupons viewed as very fair and no significant difference with or without restrictions.
• Table location pricing viewed as moderately acceptable.

Overall, the operator must always take to utilize demand-based pricing effectively with the following suggestions. Create a revenue management team to predict changes in demand for upcoming periods. Any special events? Weather implications? Other changes in traffic patterns? Reservation build-up compared to similar periods. Feature menu items based on predicted demand. Frame price fences as discounts rather than surcharges. Frame price surcharges as addition value provided to the customer.

Menu Pricing

Determining appropriate menu prices centers on the targeted customer, our competitors, demand-based considerations, psychological considerations, product quality, product quantity, labor requirements and the menu mix.

Procedures:

Standardized Recipes

1. Quality of ingredients
2. Preparation methods
3. Portions/size
4. Yield
5. Prep time
6. Cook time
7. Presentation of final product (plate, hotel pan, or nontraditional presentation platform).
8. Batch recipes
9. Number of items needed on inventory based on variety of menu item selection (typical 1,500 items to execute a menu).
10. Overall menu size: How many choices? Typical dinner menu 4-7 appetizers and 15-18 entrees.
11. What about condiments? Average plate costs (i.e. vegetable, starch, soup or salad)?

Menu Pricing Methods of mark-up and rationale

Mark-up methods

Food Cost Driven (Sales Price X Food Cost %) = Cost of Food (Most common)

• Food cost percentage varies by meal period, course type, business segment, etc.
• Some firms use this method to create an advantage regarding bottle wine sales.
• It can also be useable for food sales as a quasi-demand based sales method.

Prime Costs Method - an estimate of all direct variable costs.

• Food and Labor associated with the item. What labor is included?

Contribution Margin - A general policy of a minimum contribution in $ per menu item sold on the menu to cover fixed costs, variable costs, and profit.

Many chain restaurants have adopted this approach for pricing appetizers.
Assumes menu item courses take up valuable seat hours and each course should contribute an acceptable contribution margin.

This method is similar to a contribution margin except it is also usable as a way to provide a higher value for the customer, increase total sales and still provide an acceptable contribution. Usually a percentage times the food cost.

Labor requirements

Make or buy decisions: Should this item be prepared from scratch or purchased partially, or wholly prefabricated? Will you use sous vide packaging? Will you serve prepared vegetables, sauces, soups, baked goods, etc.? When pricing food items, was ‘preparation time’ taken into account for the final pricing?

Are there additional service requirements associated with this item?

• Tableside cooking
• Demonstration cooking
• Overall service levels
• Training of staff - front and back-of-the-house on preparation and service of this item.

Product availability

• Is the item regularly obtainable?
• How much does the price fluctuate?
• Any additional expenses associated with it (shipping, minimum orders, purchasing staff time, waste or utilization of by-products, etc.)?
• How often will we change the menu (seasonally, weekly, daily, annually, etc.)?

Product mix or menu mix

• Percentage of sales in each category (appetizers, entrees, desserts, beverages, etc.)?
• Within each menu item category, how many of each item do we anticipate selling (popularity index)?

Menu Pre-cost

• The cost of each item based on the standardized recipe.
• Percentage of sales for each item or a calculation of the number of each item sold for a given level of sales volume.

Other pricing considerations

• Price elasticity or inelasticity (product affordability)
• Psychological pricing strategies: odd number pricing, even number pricing, cultural differences, value v. quality indicators, unlucky numbers, etc.
• Pricing when the customer has control over portions: buffets, salad bars, “all you can eat” items, condiments, etc. Generally, the pricing of these items uses an average inventory method.
• Pricing related to competitors: positioning strategy
• Differentiation premium pricing
• Demand-based pricing
  • Fences – restrictions or additional requirements to receive special pricing
  • Differential pricing based on demand during day of the week, meal period or physical location (i.e. “chef’s table”, etc.).