5.3. Management of Revenue and Expenses 

Pricing 

Several factors influence menu pricing, all of which must be considered to establish financially viable prices. Determining appropriate prices for menu items is one of the most challenging decisions for food managers. Prices must account for the cost of food, labor, and operational expenses (such as rent, energy, and advertising). Additionally, the perceived value (what customers believe the menu is worth) and competition must be considered.

There are two primary approaches to menu pricing: the marketing approach and the cost approach. The marketing approach aims to align prices with customer expectations, focusing on maximizing sales volume and maintaining a competitive position within the market. The cost approach, on the other hand, considers the operation’s costs and profit goals, commonly utilizing the food cost percentage and item contribution margin methods.

The food cost percentage method is based on the raw food cost (determined by costing the standardized recipe for each menu item) plus a pricing factor to derive a selling price suitable for the type of organization and the desired food cost percentage level that the foodservice aims to maintain. The formula is:

Selling Price = Item Food Cost × Pricing Factor

The pricing factor is determined by dividing the desired food cost percentage into 100 (representing total sales or 100%). The result is known as the pricing or markup factor. It is important to note that the pricing factor cannot be used in isolation to calculate the selling price. Other factors must be considered, including complimentary items (such as salt, pepper, sugar, cream, sauces), hidden losses during preparation, cooking, and serving, overproduction, and unavoidable waste. To account for these hidden costs, managers typically add 10 percent to the recipe cost before applying the markup.

Prime cost includes the raw food cost and direct labor cost of employees involved in food preparation, excluding service, sanitation, or administrative costs.

Actual cost is the method employed in operations that maintain precise cost records. This method has the advantage of encompassing all costs and the desired profit in the selling price of the menu item. The primary disadvantage is the time required to gather the necessary data for calculations.