F & B 2 Finals PDF - Student Learning Module

Issue No. 1 Page 168 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines...

Issue No. 1 Page 168 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Lesson 7 Pricing (3 hours Lecture, 6 hours Lab) Competence, Course Outcomes and Learning Outcomes Competence: Develop and Update Industry Knowledge Course Outcome/s: By the end of this course, the student is able to: 1. Forecast production requirements 2. Identify quantity to purchase 3. Determine food cost and assign prices for menu items Learning Outcomes: At the end of this lesson, the student is able to: 6. Discuss how each factor can influence pricing of products 7. Illustrate how prices can be assigned 8. Apply special pricing to restaurant operations 9. Illustrate how to forecast sales Overview In this part of the lesson, you will be going to encounter topics that will help you on how to determine prices of your offered foods and beverages. The factors that can influence the pricing of products are discussed here, illustrations of how prices can be assigned are also shown and you will learn the application of special pricing to the operations of the restaurant and lastly, illustrations on how to forecast sales is also included in this lesson. © All Rights Reserved  Issue No. 1 Page 169 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Discussion Learning Module 7.1 Factors Affecting Pricing A great deal of important information has been written in the area of menu pricing and strategy. For the serious foodservice operator, menu pricing is a topic that deserves its own significant research and study. Revenue – Expense = Profit When foodservice operators find that profits are too low, they frequently question whether prices (revenues) are too low. It is important to remember, however, that revenue and price are not synonymous terms. Revenue means the amount spent by all guests, while price refers to the amount charged to one guest. Thus, total revenue is generated by the following formula: Price x Number Sold = Total Revenue From this formula, it can be seen that there are two components of total revenue. While price is one component, the other is the number of items sold and thus, guests served. It is a truism that as price increases, the number of items sold will generally decrease. For this reason, price increases must be evaluated based on their impact on total revenue and not price alone. Assume, for example, that you own a quick-service restaurant chain. You are considering raising the price of small drinks from $1.00 to $1.25. Table illustrates the possible effects of this price increase on total revenue in a single unit. Note especially that, in at least one alternative result, increasing price has the effect of actually decreasing total revenue. Experienced foodservice managers know that increasing prices without giving added value can result in higher prices but, frequently, lower revenue because of reduced guest counts. Old Price New Price Number Served Total Revenue Revenue Result $1.00 200 $200.00 © All Rights Reserved  Issue No. 1 Page 170 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President $1.25 250 $312.5 Increase $1.25 200 $250.00 Increase $1.25 160 $200.00 No change $1.25 150 $187.50 Decrease Perhaps no area of hospitality management is less understood than the area of pricing. This is not surprising when you consider the many factors that play a part in the pricing decision. For some foodservice operators, inefficiency in cost control is passed on to the guest in terms of higher prices. In fact, sound pricing decisions should be based on establishing a positive price/value relationship in the mind of the guest. Most foodservice operators face similar product costs when selecting their goods on the open market. Whether the product is oranges or beer, wholesale prices vary little from supplier to supplier. In some cases, this variation is due to volume buying, while, in others, it is the result of the relationship established with the vendor. Regardless of their source, the fact remains that the variations are small relative to variations in menu pricing. This becomes easier to understand when you realize that selling price is a function of much more than product cost. It may be said that price is significantly affected by all of the following factors: Factors Influencing Menu Price 1. Local Competition This factor is often too closely monitored by the typical foodservice operator. It may seem to some that the average guest is vitally concerned with price and nothing more. In reality, small variations in price generally make little difference to the average guest. If a group of young professionals goes out for pizza and beer after work, the major determinant will not be whether the selling price for the beer is $3.00 in one establishment or $3.25 in another. Your competition's selling price is somewhat important when establishing price, but it is a well-known fact in foodservice that someone can always sell a lesser quality product for a lesser price. The price a competitor charges for his or her product can be © All Rights Reserved  Issue No. 1 Page 171 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President useful information in helping you arrive at your own selling price. It should not, however, be the only determining factor in your pricing decision. Successful foodservice operators spend their time focusing on building guest value in their own operation and not in attempting to mimic the efforts of t he competition. 2. Service Levels Guests expect to pay more for the same product when service levels are higher. The can of soda sold from a vending machine is generally less expensive than one served by a human being. In a like manner, many pizza chains charge a lower price, For example, for a large pizza that is picked up by the guest than for that same pizza when it is delivered to the guest's door. This is as it should be. The hospitality industry is, in fact, a service industry. As the personal level of service increases, prices may also increase. This personal service may range from the delivery of products, as in the pizza example, to simply increasing the number of servers in a dining room and thus, reducing the number of guests each must serve. This is not to imply that menu price increases based on service levels are reserved exclusively to pay for the labor required to increase those service levels. Guests are willing to pay more for increased service levels, but this higher price should provide for extra profit as well. In the hospitality industry, those companies that have been able to survive and thrive over the years have done so because of their uncompromising commitment to high levels of guest service. This trend will continue. 3. Guest Type Some guests are simply less price sensitive than others. All guests, however, want value for their money. The question of what represents value can vary, of course, due to the type of clientele. If you truly understand this principle, you can use it to benefit your operation. An example of this can clearly be seen in the pricing decisions of convenience stores across the United States. In these facilities, food products such as sandwiches, fruit, drinks, cookies, and the like are sold at relatively high prices. The guests those stores cater to, however, value speed and convenience above all else. For this convenience and a wider range of products that would be found at most quick-service restaurants, they are willing to pay a premium price. In a like manner, gues ts at an expensive steakhouse restaurant are less likely to respond negatively to small variations in drink © All Rights Reserved  Issue No. 1 Page 172 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President prices than are guests at a corner tavern. A thorough analysis of who their guests are and what they value most is critical to the success of foodservice operators. 4. Product Quality In nearly every instance, the guest's quality perception of any specific product offered for sale in the foodservice business can range from very low to very high. This is not to say that the wholesomeness or safety of the product will vary. They should not. But the guest's perception of quality will be based on a variety of factors. As the product itself and those quality-influencing factors vary, so, too, does the guest's perception of quality. For example, when average foodservice guests think of a “hamburger,” they actually think, not of one product, but of a range of products. A hamburger may be a rather small burger patty on a regular bun, wrapped in paper and served in a sack. If so, its price will be low and so perhaps may service levels and, thus perceived quality. If however, the guest's thoughts turn to an 8-ounce gourmet burger with avocado slices and alfalfa sprouts on a toasted whole grain bun served in a white tablecloth restaurant, the price will be much higher and so, probably, will service levels and perceived quality. As an effective foodservice manager, you will choose from a variety of quality levels when developing product specifications and consequently, planning menus and establishing prices. If you select the market's cheapest bourbon as your well brand, you will likely be able to charge less for drinks made from it than your competitor who selects a better brand. Your drink quality levels, however, may also be perceived by your guests as lower. To be successful. You should select the quality level that best represents your guests' anticipated desire as well as your goals, and then price your products accordingly. 5. Portion Size Portion size plays a large role in determining menu pricing. It is a relatively misunderstood concept, yet it is probably the second most significant factor (next to sales mix) in overall pricing. The great chefs know that people “eat with their eyes first!” This relates to presenting food that is visually appealing. It also relates to portion size. A 4-ounce drink in a 5-ounce glass looks good. The same 4-ounce drink in a 6-ounce glass looks as if the operator is attempting to skimp at the guest's expense. A burger and fries may fill © All Rights Reserved  Issue No. 1 Page 173 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President an 8-inch plate, but will be lost on an 11-inch plate. Portion size, then, is a function of both food quantity and how it is presented. It is no secret why successful cafeteria chains use smaller than average dishes to plate their food. For their guests, the image of price/value comes across loud and clear. In some dining situations, particularly in an “all you care to eat” operation, the previously mentioned principle again holds true. The proper dish size is just as critical as the proper size scoop or ladle when serving the food. Of course, in a traditional table service operation, management controls (or should control!) portion size. Simply put, the larger the portion size, the higher your costs. One very good way to determine whether portion sizes are too large is simply to watch the dishwashing area and see what comes back from the dining room as uneaten. In this regard, the dish room operator becomes an important player in the cost control team. Many of today's consumers prefer lighter food with more choices in fruits and vegetables. The portion sizes of these items can be increased at a fairly low increase in cost. At the same time, average beverage sizes are increasing, as are the size of side items such as French fries. Again, these tend to be lower cost items. This can be good news for the foodservice operator if prices can be increased to adequately cover the larger portion sizes. Every menu item should be analyzed with an eye toward determining if the quantity being served is the “proper” quantity. You would, of course, like to serve this proper amount, but no more than that. The effect of portion size on menu price is significant, and it will be your job to establish and maintain strict control over proper portion size. 6. Ambiance If people ate only because they were hungry, few restaurants would be open today. People eat out for a variety of reasons, some of which have little to do with food. Fun, companionship, time limitations, adventure, and variety are just a few reasons diners cite for eating out rather than eating at home. For the foodservice operator who provides an attractive ambiance, menu prices can be increased. In fact, the operator in such a situation is selling much more than food and thus justly deserves in increased price. A caveat is in order, however, since some foodservice operations that counted on ambiance alone to carry their business started well but were not ultimately © All Rights Reserved  Issue No. 1 Page 174 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President successful. Excellent product quality with outstanding service goes much further over the long run than do clever restaurant designs. Ambiance may draw guests to a location the first time. When this is true, prices may be somewhat higher if the quality of products also supports the price structure. It is always the price/value relationship, however, that will bring the guest back again and again. 7. Meal Period In some cases, diners expect to pay more for an item serve din the evening than that same item served at a lunch period. Sometimes this is the result of a smaller “luncheon” portion size, but in other cases the portion size, as well as service levels, may be the same in the evening as earlier in the day. You must exercise caution in this area. Guests should clearly understand why a menu item's price changes with the time of day. If this cannot be answered to the guest's satisfaction, it may not be wise to implement a time-sensitive pricing structure. 8. Location Location can be a major factor in determining price. One needs look no further than America's many themed amusement parks or sports arenas to see evidence of this. Foodservice operators in these places are able to charge premium prices because they have, in effect, a monopoly on food sol to the visitors. The only all -night diner on the interstate highway exit is in much the same situation. Contrast that with an operator who is one of 10 seafood restaurants on restaurant row. It used to be said of restaurants that success was due to three things: location, location, and location! This may have been true before so many operations opened in the Unites States. There is, of course, no discounting the value of a prime restaurant location, and location alone can influence price. It does not, however, guarantee success. Each foodservice operator must analyze his or her own operation. Location can be an asset or a liability. If it is an asset, menu prices may reflect that fact. If location is indeed a liability, menu prices may need to be lower to attract a sufficient clientele to ensure the operation's total revenue requirements. 9. Sales Mix Of all the factors mentioned thus far, sales mix would most heavily influence the menu pricing decision, just as guest purchase decisions will influence total product costs. Recall that sales mix © All Rights Reserved  Issue No. 1 Page 175 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President refers to the specific menu items selected by guests. Managers can respond to this situation by employing a concept called price blending. Price blending refers to the process of pricing products; with very different individual cost percentages, in groups with the intent of achieving a favorable overall cost situation. The ability to knowledgeably blend prices is a useful skill and one that is well worth mastering. As an example, assume that you are the operations vice president for a chain of upscale hamburger restaurants known as Texas Red's. Assume also that you hope to achieve an overall food cost of 40% in your units. For purposes of simplicity, assume that Table illustrates the three products you sell and their corresponding selling price if each is priced to achieve a 40% food cost. Texas Red's Burgers Item Item Cost Desired Food Cost Proposed Selling Price Hamburger $1.50 40.00% $3.75 French Fries 0.32 40 0.8 Soft Drinks (12 oz) 0.18 40 0.45 Total 2 40 5 The formula for computing food cost percentage is as follows: Cost of Food Sold/ Food Sales = Food Cost % This formula can be worded somewhat differently for single menu item without changing its accuracy. Consider that: Cost of Specific Food Item Sold/ Food Sales of that item = Food Cost % of that item It is important to understand that the food sales value in the preceding formula is a synonymous term to the selling price when evaluating the menu price of a single menu item. The principles of algebra allow you to re-arrange the formula as follows: Cost of a Specific Food Item Sold/ Food Cost % of that Item = Food Sales (Selling Price) of that Item Thus, in above Table, the hamburger's selling price is established as: $1.50/0.40 = $3.75 © All Rights Reserved  Issue No. 1 Page 176 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Notice that in above table all products are priced to sell at a price that would result in a 40% food cost. Certainly, under this system, sales mix, that is, the individual menu selection of guests, would not affect overall food cost %. The sales mix resulting from this pricing strategy could, however, have very damaging results on your profitability. The reason is very simple. If you use the price structure indicated previously, your drink prices are too low. Most guests expect to pay far in excess of 45 cents for a soft drink at a quick-service restaurant. You run the risk, in this example, of attracting many guests who are interested in buying only soft drinks at your restaurants. Your French fries may also be priced too low. Your burger itself, however, may be priced too high relative to your competitors. However, if you use the price-blending concept, and if you assume that each guest coming into your restaurants will buy a burger, French fries and a soft drink, you can create a different menu price structure and still achieve your overall cost objective as seen in Table below. Note that, in this example, you would actually achieve a total food cost slightly lower than 40%. Your hamburger price is now less than $2.50 and in line with local competitors. Note also, however, that you have assumed each guest coming to Texas Red's will buy one of each item. In reality, of course, not all guests will select one of each item. Some guests will not elect fries, while others may stop in only for a soft drink. It is for this reason that guest selection data is so critical. These histories let you know exactly what your guests are buying when they visit your outlets. You can then apply percent selecting figures to your pricing strategy. To illustrate how this works, assume that you monitored a sample of 100 guests who came into one of your units and found the results presented in table below. As you can see from the table, you can use the price-blending concept to achieve your overall cost objectives if you have a good understanding of how many people buy each menu item. In this example, you have achieved the 40% food cost you sought. It matters little if the burger has a 60.2% food cost if the burger is sold in conjunction with the sample number of soft drinks and fries. © All Rights Reserved  Issue No. 1 Page 177 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Obviously, there may be a danger if your guests begin to order nothing but hamburgers when they come to your establishment. Again, careful monitoring of guest preferences will allow you to make price adjustments, as needed, to keep your overall costs and prices in line. A word of caution regarding the manipulation of sales mix and price blending is, however, in order. Since price itself is one of the factors that impact percent selecting figures, a change in menu price may cause a change in item popularity. If, in an effort to reduce overall product cost percentage, you were to increase the price of soft drinks at Texas Red's, For example, you might find that a higher percentage of guests would elect not to purchase a soft drink. This could have the effect of actually increasing your overall Texas Red's Burgers Item Item Cost Desired Food Cost Proposed Selling Price Hamburger $1.50 60.20% $2.49 French Fries 0.32 21.5 1.49 Soft Drinks (12 oz) 0.18 16.5 1.09 Total 2 39.4 5.07 product cost percentage since fewer guests would choose to buy the one item with an extremely low food cost percentage. The sales mix and the concept of price blending will have a major impact on your overall menu pricing philosophy and strategy. 7.2 Assigning Menu Prices The methods used to assign menu prices are as varied as foodservice managers themselves. In general, however, menu prices are most often assigned on the basis of one of the following two concepts: Product Cost Percentage and Product Contribution Margin Product Cost Percentage This method of pricing is based on the idea that product cost should be a predetermined percentage of selling price. If you have a menu item that costs $1.50 (EP) to produce, and your desired cost percentage equals 40%, the following formula can be used to determine what the item's menu price should be: © All Rights Reserved  Issue No. 1 Page 178 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Cost of a Specific Food Item Sold/ Food Cost % of that Item = Food Sales (selling price) of that Item Or $1.50/0.40 = $3.75 Thus, the recommended selling price, given a $1.50 product cost, is $3.75. If the item is sold for $3.75, then a 40% food cost should be achieved for that item. A check on this work can also be done using the food cost percentage formula: $1.50/3.75 = 40% When management uses a predetermined food cost percentage to price menu items, it is stating its belief that product cost in relationship to selling price is of vital importance. Experienced foodservice managers know that a second method of arriving at appropriate selling prices based on predetermined food cost % goals can be employed. This method uses a cost factor or multiplier that can be assigned to each desired food cost percentage. This factor, when multiplied times the item's EP cost, will result in a selling price that yields the desired food cost percentage. Table below details such a factor table. In each case, the factor is arrived at by the following formula: 1.00/ Desired Product Cost% = Pricing Factor Thus, if one were attempting to price a product and achieve a product cost of 40%, the computation would be Desired Product Cost % Factor 20 5 23 4.35 25 4 28 3.57 30 3.33 33 1/3 3 35 2.86 38 2.63 © All Rights Reserved  Issue No. 1 Page 179 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President 40 2.5 43 2.33 45 2.22 1.00/ 0.40 = 2.5 This price factor of 2.5 when multiplied by any product cost will yield a selling price that is based on a 40% product cost. The formula is as follows: Pricing Factor X Product Cost = Menu Price To return to our example, you could use the previous version of the formula to establish your selling price if you hope to achieve a 40% product cost and your item costs $1.50 to produce. The computation would be as follows: 2.5 1.50 = $3.75 As can be seen, these two methods of arriving at the proposed selling price yield the same results. One formula simply relies on division, while the other relies on multiplication. The decision about which formula to use is completely up to you. With either approach, the selling price will be determined with a goal of achieving a given product cost percentage for each item. Obviously, due to sales mix and the price-blending concept, the appropriate product cost percentage desired for any given item may vary according to your own view of the best selling price for each menu item. Product Contribution Margin Some foodservice managers prefer an approach to menu pricing that is focused not on product cost percentage, but rather on a menu item's contribution margin. Contribution margin, in this case, is defined as the amount that remains after the product cost of the menu item is subtracted from the item's selling price. Contribution margin, then, is the amount that “contributes” to paying for your labor and other expenses and providing a profit. Thus, if an item sells for $3.75 and the product cost for this item is $1.50, the contribution margin would be computed as follows: Selling Price – Product Cost = Contribution Margin Or $3.75 - $1.50 = $2.25 When this approach is used, the formula for determining selling price is © All Rights Reserved  Issue No. 1 Page 180 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Product Cost + Contribution Margin Desired = Selling Price-blending Establishing menu price, in this case, is a simple matter of combining product cost with a predetermined contribution margin. Management's role here is to determine the desired contribution margin for each menu item. When using this approach, you would likely establish different contribution margins for various menu items or groups of items. For example, in a cafeteria where items are priced separately, entrees might be priced with a contribution margin of $2.50 each, desserts with a contribution margin of $1.25, and drinks, perhaps with a contribution margin of $0.75 Again, menu price would be established by combining desired contribution margin with actual product cost. Those managers who rely on the contribution margin approach to pricing do so in the belief that the average contribution margin per item is a more important consideration in pricing decisions than food cost percentage. Product Cost Percentage or Product Contribution Margin Proponents exist for both of these approaches to menu pricing. Indeed, there are additional methods to menu pricing, beyond the scope of an introduction to pricing theory. Some large foodservice organizations have established highly complex computer-driven formulas for determining appropriate menu prices. For the average foodservice operator, however, product cost percentage, contribution margin, or a combination of both will suffice when attempting to arrive at appropriate pricing decisions. While the debate over the “best” pricing method is likely to continue for some time, you should remember to view pricing not as an attempt to take advantage of the guest, but rather as an important process with an end goal of establishing a good price/value relationship in the mind of your guest. Each foodservice manager may, of course, have his or her own method of pricing menu items. In all cases, however, pricing should be based on the total cost of goods sold. It is not appropriate for management to pass on to guests the cost of production errors or simple managerial inefficiencies. If management is not committed to controlling food and beverage as well as other expenses, and thus providing consumers with high quality products at fair prices, the operation will suffer. Regardless of whether the pricing method used is based on food cost percentage or contribut ion margin, the selling price selected must provide for a predetermined operational profit. For this reason, it is important that the menu not be priced so low that no profit is possible or so high that you will not be able to sell a © All Rights Reserved  Issue No. 1 Page 181 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President sufficient number of items to make a profit. In the final analysis, it is the market that will eventually determine what your sales will be on any given term. Being sensitive to both required profit and your guests – their needs, wants and desires – is very critical to a pricing philosophy. Menu Pricing and Strategy by Jack Miller and Davis Pavesic, provides an excellent treatment of the menu development, marketing strategies, price support systems, and pricing strategies necessary to effectively design and assign price to a menu. It is highly recommended as an addition to your management library. 7.2 Special Pricing Situations Some pricing decisions faced by foodservice manager's call for a unique approach. In many cases, pricing is used as a way to influence guests' purchasing decisions or ot respond to particularly difficult pricing situations. The following are examples: Coupons Value pricing Bundling Salad bars and buffets Bottled wine Beverages at receptions and parties Coupons Coupons are a popular way to vary menu price. Essentially, there are two types of coupons in use in the hospitality industry. The first type generally allows the guest to get a free item when he or she buys another item. This has the effect of reducing by 50% the menu price of the couponed item. In the second type, some for of restriction is placed on the coupon. The restriction, for example, may be that the coupon can only be used at a certain time of day or that a specific reduction in price is given if the guest purchases a designated menu item. In either case, coupons have the effect of © All Rights Reserved  Issue No. 1 Page 182 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President reducing sales revenue from each guest in the hope that the total number of guests increases to the point that total sales revenue increases. Coupons are a popular marketing tool but their use should be carefully evaluated in terms of effect on menu price, product cost percentage, and product contribution margin. Value Pricing Value pricing refers to the practice of reducing all or most prices on the menu in the belief that, as in couponing, total guest counts will increase to the point that total sales revenue also increases. A potential danger, of course, with value pricing is that if guest counts do not increase significantly, total sales revenue may, in fact, decline rather than increase. Bundling Bundling refers to the practice of selecting specific menu items and pricing them as a group, in such a manner that the single menu price of the group is lower than if the items comprising the group were purchased individually. The most common example is the combination meals offered by many quick-service hamburger restaurants. In many cases, these bundled meals consist of a sandwich, French fries and a drink. These bundled meals, often promoted as “value priced” or “combo” meals, encourage each individual guest to buy one of each menu item rather than only one or two of them. The bundled meal generally is priced so competitively that a strong value perception is established in the guest's mind. When bundling, as in couponing or value pricing, lower menu prices are accepted by management in the belief that this pricing strategy will increase total sales revenue and thus, profit by increasing the number of guests served. Salad Bars and Buffets The difficulty in establishing a set price for either a salad bar or a buffet is, of course, that total portion cost can vary greatly from one guest to the next. A person weighing 100 pound s will, most likely, consume fewer products from a buffet or an all you can eat line than a 300 pound person will. The general rule, however, is that each of these guests will pay the same price to go through the salad bar or buffet line? Short of charging guests for the amount they actually © All Rights Reserved  Issue No. 1 Page 183 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President consume (a technique that has been tried by some operators with little success). In Lotus Gardens, a Chinese restaurant where patrons pay one price, but may return as often as they like to a buffet table. Mei finds that a form such as that presented in the table below is helpful in recording both product usage and guests served. Note that Mei uses the ABC method to determine her menu items. She does so because total food costs on a buffet line or salad bar are a function of both how much is eaten and what is eaten. She also notes the amount of product she puts on the buffet to begin the dinner meal period (Beginning Amount), any additions during the meal period (Additions), and the amount of usable product left at the conclusion of the meal period (Ending Amount). From this information, Mei can compute her total product usage and thus, her total product cost. The determining a single selling price must be established. This price must be based on a known, overall cost for the average diner who selects the all-you-can-eat option. The price may be different, of course, if your average client weighs 300 pounds rather than 100 pounds. The point is that the selling price must be established and monitored so that either guest could be accommodated at a price you find acceptable. This can be accomplished rather easily if record keeping is accurate and timely. The secret to keeping the selling price low in a salad bar or buffet situation is to apply the ABC inventory approach. That is, A items, which are expensive, should comprise no more than 20% of the total product available. B items, which are moderate in price, should comprise about 30% of the item offerings. And C items, which are inexpensive, should comprise 50% of the offerings. Using this approach, a menu listing of items can be prepared to ensure that only items that stay within these predetermined ranges are offered for sale. Regardless of the buffet items to be sold, their usage must be accurately recorded. Consider the situation of Mei, the manager of Lotus Gardens. Unit name: Lotus Gardens Date 1/1 (Dinner) Beginning Ending Total Item Category Amount Additions Amount Usage Unit Cost Total Cost Sweet and A 6lb 44lb 13lb 37lb $4.40/lb $162.80 sour pork © All Rights Reserved  Issue No. 1 Page 184 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Bean B 3lb 17lb 2lb 18lb 1.60/lb 28.8 sprouts Egg Rolls B 40 each 85 each 17 each 108 each 0.56 each 60.48 Fried Rice C 10lb 21.5lb 8.5lb 23lb 0.60/lb 13.8 Steamed C 10lb 30lb 6.5lb 33.5lb 0.40/lb 13.4 Rice Wonton C 2 gal 6 gal 1.5 gal 6.5 gal 4.00/ gal 26 Soup Total Product 305.28 Cost Total Product Cost: $305.28 Guests Served: 125 Cost per Guest: $2.44 Based on the data in the above Table, Mei knows that her total product cost for dinner on January 1 was $305.28. She can then use the following formula to determine her buffet product cost per guest: Total Buffet Product Cost / Guest Served = Buffet Product Cost per Guest Or $305.28 / 125 = $2.44 Thus, on her buffet, Mei had a portion cost per guest of $2.44. She can use this information to establish a menu price that she feels is appropriate. Assume, for example, that Mei uses the food cost percentage approach to establishing menu price and she has determined a 25% food cost to be © All Rights Reserved  Issue No. 1 Page 185 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President her goal. Using the pricing factor table, Mei would use the following formula to establish her per-person buffet price: $2.44 (Per person cost) x 4.00 (Pricing Factor) = $9.76 For marketing purposes, and to ensure her desired food cost percentage, Mei may well round her buffet selling price up, to say $9.99 per person. The significant point to remember here is that the amount consumed by any individual guest is relatively unimportant. It is the consumption of the average, or typical guest that is used to establish menu price. It is to be expected that Mei's buffet product cost per guest will vary somewhat each day. This is not a cause for great concern. Minor variations in product cost per guest should be covered if sell ing price is properly established. By monitoring buffet costs on a regular basis, you can be assured that you can keep good control over both costs per guest and your most appropriate selling price. Bottled Wine Few areas of menu pricing create more controversy than that of pricing wines by the bottle. The reason for this may be the incredible variance in cost among different vintages, or years of production, as well as the quality of alternative wine offerings. If your foodservice operation will sell wine by the bottle, it is likely that you will have some wine products that appeal to value-oriented guests and other, higher priced wines that are preferred by higher spending guests. An additional element that affects wine pricing is the fact that many wines that are sold by the bottle in restaurants are also sold in retail grocery or liquor stores. Thus, guests have a good idea of what a similar bottle of wine would cost them if it were purchased in either of these locations. How you decide to price the bottled-wine offerings on your own menu will definitely affect your guest's perception of the price/value relationship offered by your operation. Properly priced wine by the bottle calls for skill and insight. Consider the case of Claudia, who owns and manages a fine-dining Italian restaurant. Using the product cost percentage method of pricing; Claudia attempts to achieve an overall wine product cost in her restaurant of 25%. Thus, when pricing her wines and using the pricing factor Table, Claudia multiplies the cost of each bottled wine © All Rights Reserved  Issue No. 1 Page 186 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President she sells by four to arrive at her desired selling price. Following are the four wines she sells and the costs and prices associated with each type: Wine Product Cost Selling Price Product Cost % 1 $ 4.00 $16.00 25.00% 2 6 24 25 3 15 60 25 4 20 80 25 Claudia decides that she would like to explore the contribution margin approach to wine pricing. She, therefore, computes the contribution margin (selling price – product cost = contribution margin) for each wine she sells and finds the following results: Wine Selling Price Product Cost Contribution Margin 1 $16.00 $4.00 $12.00 2 24 6 18 3 60 15 45 4 80 20 60 Her conclusion, after evaluating the contribution margin approach to her pricing and what she believes to be her customers' perception of the price/value relationship she offers, is that she may be hurting sales of wine 3 and 4 by pricing these products too high, even though they are currently priced to achieve a 25% product cost as are wines 1 and 2. In the case of bottled wine, the contribution margin approach to price can often be used to your advantage. Guests appear to be quite pricing conscious when it comes to bottled wine. When operators seek to achieve profits guests feel are inappropriate, bottled-wine sales may decline. Following is an alternative pricing structure that Claudia has developed for use in her restaurant. She must, however, give this price structure a test run and monitor its effect on overall product sales and profitability if she is to determine whether this pricing strategy will be effective. © All Rights Reserved  Issue No. 1 Page 187 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Wine Product Cost Selling Price Contribution Margin Product Cost% 1 $ 4.00 $19.00 $15.00 21.10% 2 6 22 16 27.3 3 15 33 18 45.5 4 20 39 19 51.3 Note that, while selling price has been increased in the case of wine 1, it has been reduced for wines 2, 3 and 4. Contribution margin still is higher for wine 4 than for wine 1. The difference is, however, not as dramatic as before. Product cost percentages have, of course, been altered due to the price changes Claudia is proposing. Note also that the price spread, defined as the range between the lowest and the highest priced menu item, has been drastically reduced. Where the price spread was previously $16.00 to $80.00, it is now $19.00 to $39.00. This reduction in price spread may assist Claudia in selling more, higher priced wine because her guests may be more comfortable with the price/value relationship perceived under this new pricing approach. It is important to remember, however, that Claudia must monitor sales and determine if her new strategy is successful. As a rule, it may be stated that pricing bottled wine only by the product percentage method is a strategy that may result in overall decreased bottled-wine sales. In this specific pricing situation, the best approach to establishing selling price calls for you to evaluate both your product cost percentage and your contribution margin. 7.3 Forecasting Sales Forecasting plays a crucial role in the development of plans for the future. It is an essential tool for the organization to know what level of activities one is planning before investment in inputs i.e. man, machine and materials be made. Before making an investment decision, many questions will arise like: What should be the size or amount of capital required? How large should be the size of the work force? What should be the size of the order and safety stock? What should be the capacity of the plant? © All Rights Reserved  Issue No. 1 Page 188 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President The answer to above question depends upon the forecast for the future level of operations. Forecasting as defined by the American Marketing Association is: “an estimate of sales in physical units (or monetary value) for a specified future period under proposed marketing plan or program and under the assumed set of economic and other forces outside the organization for which the forecast is made”. Forecasting VS Prediction Prediction is an estimate of future event through subjective considerations other than just the past data. For prediction, a good subjective estimation is based on managers’ skill, experience and judgment. Forecasting is based on the historical data and it requires statistical and management science techniques. It is an estimate of future event achieved by systematically combining and casting forward in a predetermined way data about the past. Needs for Sales Forecasting: Majority of the activities of the industries depend upon the future sales. Projected sales for the future assists in decision-making with respect to investment in plant and machinery, market planning programs. To schedule the production activity to ensure optimum utilization of plant’s capacity. To prepare material planning to take up the replenishment action to make the materials available at right quantity and right time. To provide an information about the relationship between sales for different products as a function of time. Forecasting is going to provide a future rend which is very much essential for products design and development. Long Term and Short Term Forecasting: Forecast which cover the period of less than 1 year are called as short term forecasting. Short term forecast are made for the purpose of material control, loading and scheduling and budgeting. © All Rights Reserved  Issue No. 1 Page 189 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Forecast which cover the period of more than 1 year (5 years to 10 years) are termed as long term forecasting. Long term forecast are made for the purposes of product diversification, sales and advertising budgets, capacity panning and investment planning. Factors Affecting Sales Forecasting External Factors: Internal Factors: Relative state of the economy Labor problems Direct and indirect competition Inventory shortages Styles or fashions Working capital shortage Consumer earnings Price changes Population changes Change in distribution method Weather Production capability shortage New product lines Classification of Forecasting Methods 1. Judgmental (subjective method) 2. Timer Series (based on past data arranged in a chronological order) 3. Econometric (cause and effect relationship) Judgmental (subjective method) Opinion survey method Executive opinion method Customer and distributor surveys Marketing trials Market research Delphi technique Timer Series (based on past data arranged in a chronological order) Based on the past data arranged in chronological order as a dependent variable and time as an independent variable. For e.g. sales of TV sets for the last four years are: YEAR 1993-94 1994-95 1995-96 1996-97 NO. OF 20 30 40 58 TV SETS © All Rights Reserved  Issue No. 1 Page 190 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Time series method does not study the factors that influence the demand, in this method all the factors that shape the demand are grouped into one factor-time and demand is expressed as a series of data with respect to time. Four Components of Time Series Analysis Most commonly used expression for a time series forecast is: Y=TCSR where: Y = Forecasted value T = Secular trend C = Cyclic variations S = Seasonal variations R = Irregular fluctuations Moving Averages The sales results of multiple prior periods are averaged to predict a future period. Called “moving” because it is continually recomputed as new data becomes available it progresses by dropping the earliest value and adding the latest value. Exponential Smoothing Similar to moving average method. Used for short run forecasts. Instead of weighing all observations equally in generating the forecast, exponential smoothing weighs the most recent observations heaviest Next year’s sale = a (this year’s sale) + (1-a) (this year’s forecast). (a) is smoothing constant taken in scale 0-1. © All Rights Reserved  Issue No. 1 Page 191 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Market Test Method Used for developing one time forecasts particularly relating to new products. A market test provides data about consumers’ actual purchases and responsiveness to the various elements of the marketing mix. On the basis of the response received to a sample market test, product sales forecast is prepared. Regression Analysis Identifies a statistical relationship between sales (dependent variable) and one or more influencing factors, which are termed the independent variables. When just one independent variable is considered (e.g. population growth), it is called a linear regression, and the results can be shown as a line graph predicting future values of sales based on changes in the independent variable. When more than one independent variable is considered, it is called a multiple regression. Benefits of sales Forecasting: Better control of inventory, Staffing, Customer information, Use for sales people, Obtaining financing. Limitations of Sales Forecasting: Part hard fact, part guesswork, Forecast may be wrong, and Times may change. References T3 – 3G Elearning. (2014). Principles of food, beverage and labor cost controls.3G Elearning Ankit Saxena, Assistant Professor (Published on July 5, 2016). Sales Forecasting. https://www.slideshare.net/saxenaankit2010/sales-forecasting-63750155 Pavankumar H. K., (Published on December 5, 2015). Concept and Definition of Pricing. https://www.slideshare.net/PavankumarHK/concept-and-definition-of-pricing © All Rights Reserved  Issue No. 1 Page 192 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Checkpoint It is now time to use those skills you have learned so far. Goodluck! Activity 21 Enumeration. Answer what is being asked. 1 – 9: Factors Influencing Menu Price Answer Sheet 1. ___________________________________________________________ 2. ___________________________________________________________ 3. ___________________________________________________________ 4. ___________________________________________________________ 5. ___________________________________________________________ 6. ___________________________________________________________ 7. ___________________________________________________________ 8. ___________________________________________________________ 9. ___________________________________________________________ © All Rights Reserved  Issue No. 1 Page 193 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Do this Activity 22 Enumeration. Answer what is being asked. 1 – 6: Special Pricing Situations 7 – 9: Forecasting Method Classification Answer Sheet 1. ___________________________________________________________ 2. ___________________________________________________________ 3. ___________________________________________________________ 4. ___________________________________________________________ 5. ___________________________________________________________ 6. ___________________________________________________________ 7. ___________________________________________________________ 8. ___________________________________________________________ 9. ___________________________________________________________ © All Rights Reserved  Issue No. 1 Page 194 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE MANAGEMENT R C E OL. T H AND COST CONTROL LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 01 Sept 2021 QMR President Assessment Activity 18 Essay. Express your understanding on the question below: 1. Discuss what is a product cost percentage and product contribution margin For Handwritten output: a. Write your output in an A4 size bond paper b. Write legibly For computerized output (online/physical submission) a. Use A4 size bond paper b. Font style/size: Arial Narrow 12 c. Spacing: 1.5 d. Alignment: Justified e. Margin: 1 inch in all sides Activity 19 Laboratory Exercises Instruction. Refer to your Book of Exercises and perform the Laboratory Exercise: 1. Determine Selling Price © All Rights Reserved  Issue No. 1 Page 195 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE PURCHASING R C E OL. T H CONTROL SYSTEM LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 10 Aug 2020 QMR President Lesson 8 Cost Analysis and Control (3 hours Lecture, 6 hours Lab) Competence, Course Outcomes and Learning Outcomes Competence: Develop and Update Industry Knowledge Course Outcome/s: By the end of this course, the student is able to: 1. Determine food cost and assign prices for menu items 2. Minimize expense thru implementation of effective control systems Learning Outcomes: At the end of this lesson, the student is able to: 1. Explain the implication of a high or low food cost percentage to the business 2. Describe how contribution margin is used to insure profits 3. Explain the need to compare potential and actual costs Overview In this part of the lesson, implication of a high or low food cost percentage to the business is discussed here. How contribution margin is used to insure profits and the importance of potential and actual costs are also given here. Discussion Learning Module 8.1 Food Cost Percentage © All Rights Reserved  Issue No. 1 Page 196 of 296 S E MT C ST. THERESE- MTC COLLEGES F AND B 2 Iloilo, Philippines E FOOD & BEVERAGE PURCHASING R C E OL. T H CONTROL SYSTEM LEGES ST Revision No. 1 Effectivity date: STUDENT LEARNING MODULE Reviewed by: Approved by: 10 Aug 2020 QMR President Food cost is defined as the cost incurred to produce the food to be sold. This is expressed in percentage (%). Hence, food cost % is mathematically defined as the ration of the cost of food to the total sales. It is mathematically expressed as: Food Cost % = Cost of Food / Total Sales X 100 The food cost is directly proportional to the cost of food. This implies that the higher the cost of ingredients, the higher will be the food cost percentage. The higher the food cost percentage, the lower is your profit. The food cost is indirectly proportional to the total sales. This implies that the higher the sales, the lower is the cost of food cost percentage and vice versa. Food Cost – Understanding Impact on Profit The higher the cost of ingredients used to prepare the dish, the higher is the food cost percentage. The higher the total sales, the lower is the food cost percentage and vice versa. A higher food cost percentage will eat into a larger share of a piece (1 whole pizza), leaving you with a smaller piece and vice versa. Understanding Food Cost – The Pizza 1 person gets the whole pizza i.e. 1 person = 100% 2 persons get half of a pizza each i.e. 2 person = 50% 4 persons get only a quarter pizza each