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Pricing

Pricing. Cost plus Prime costing methods Backward pricing Rate of return pricing Profit per customer pricing Elasticity pricing . PRICING & DESIGNING THE MENU. Demand Oriented Price.

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Pricing

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  1. Pricing • Cost plus • Prime costing methods • Backward pricing • Rate of return pricing • Profit per customer pricing • Elasticity pricing 

  2. PRICING & DESIGNING THE MENU Demand Oriented Price • Market Skimming (Selective Market Penetration): In the market skimming approach to pricing, operators use a relatively high price to attract a small segment of the market, who can and will pay the higher prices, where the competition is probably to undercut the prices set for similar products, and where the customers perceive that the value given in the form of the restaurant experience is greater than the prices charged. • Market Penetration: market penetration on the other hand, involves setting prices as low as possible, while still contributing to profits. In general, lower prices generates greater sales volume and long term profitability. This philosophy works best when demand is price elastic, that is, when changes in price result in a greater change in demand. 

  3. PRICING & DESIGNING THE MENU Demand Oriented Price • Market Skimming (Selective Market Penetration): In the market skimming approach to pricing, operators use a relatively high price to attract a small segment of the market, who can and will pay the higher prices, where the competition is probably to undercut the prices set for similar products, and where the customers perceive that the value given in the form of the restaurant experience is greater than the prices charged. • Market Penetration: market penetration on the other hand, involves setting prices as low as possible, while still contributing to profits. In general, lower prices generates greater sales volume and long term profitability. This philosophy works best when demand is price elastic, that is, when changes in price result in a greater change in demand. 

  4. PRICING & DESIGNING THE MENU Competition Pricing • Competitive pricing establishes prices according to those set by the competition. Prices are typically slightly below or above those of the competition. • It is not advisable to compete principally on the basis of price, because price is a factor that can be easily be met by a strong competitor. • It is also not advisable to offer the same product as the competition but at a higher price. An increasing value-conscious and educated consuming public will by from the competition. 

  5. PRICING & DESIGNING THE MENU Menu Price Rounding Strategy When a restaurant sets menu prices by only applying a formula, you see strange prices such as YTL7.32 orYTL 19.68 Value perception pricing dictates that for mid and expensive items, the guest does not recognize price points other than $0.50. When the guest subconscious “read” one cheap price, they only see the 2 in YTL 2.95.As a general rule, menu items with price points set as level of .25, .50, .75 and .95 seem to be friendly. In other words, if you can charge YTL1.15 for a menu, you can probably charge YTL1.25 without any resistance. Once a restaurant operator just apply this simple pricing philosophy, the profit will increase by at least 2-3%. 

  6. PRICING & DESIGNING THE MENU Importance of the Menu • First, the menu is a contract with the customer, an indication that what is described on the menu is what will be delivered to the customer. Respect truth in Menu: (freshness, geographical origin, picture, quantity…) • Second, the menu is a form of a product brochure. The menu should identify the name of each dish, major ingredients and how the dish is prepared in a appealing way, and without too many unfamiliar items. (the use of complicated names are risky) • Third, it is an essential part of the marketing effort. It is the first tangible connection your guests have between their interest in buying (why they are there) and what you have to sell. The menu is a selling tool: properly priced designed, and presented, the menu can increase the average check, the frequency of visits, the party size, or attract new guests. 

  7. PRICING & DESIGNING THE MENU Listing Prices • À la Carte Menu: Food & Beverage items are listed and priced separately. The guest choose from various appetizers, main courses, desserts. For the guest, the initial perception is that prices look low. This approach appeals to customers who like to individualize their meal. It does complicate the pricing of checks for the employees. • Table d’Hôte Menu: List of a complete meal (3 to 8 course) for one price. This menu can be called “fixed price” or “meal package”. The guest eats a complete menu that has been planed in advance for them. • Combination Menu: some restaurants offers both, Table d’Hôte & À la Carte Menus. (Chinese Restaurants, Fast Food). The guest can compare prices between the meal packages with the à la Carte Menu. 

  8. PRICING & DESIGNING THE MENU Page Positioning • There are two theories regarding the placement of items on a menu: Menu Sequence & Focal Points. • Menu Sequence: Some believe that sequence of dishes on the menu should follow the progression of a meal. Others believe that focal points should be used on a menu. Customers’ eyes are naturally drawn to specific points, focal points, when presented with a menu. The restaurateur should place menu items that he/she wants to push in the focal points of a menu.

  9. PRICING & DESIGNING THE MENU Menu Item Placement

  10. PRICING & DESIGNING THE MENU Menu Sequence • According to western countries and based on the French food culture, a meal include the following courses (maximum 8): • 1) cold appetizer 2) soup 3) hot appetizers to 4) Fish5) Sherbet (which is a water ice) 6) Main Course or Entrée 7) Cheese and 8) Dessert. • An “À la Carte” or “Table d’Hôte” menu can follow this meal progression. 

  11. PRICING & DESIGNING THE MENU Menu Item Placement • Within these categories, select 3-8 menu items. If there are less than 3, you lose variety value in the category. If there are more than 8, the guest have to read too much, so, will not read at all. • As said before, people do not read menus, they scan them. When the eyes come across a category (such as Desserts), the subconscious reaction is to resist studying every item listed. As a result, the most frequently selected items are those in the first and last position in the category list, because these are the easiest for the reader’s mind to understand. Therefore, the first and last menu items in the category must have the highest gross profit contribution, without being the most expensive items. • Within the category, placing (or hiding) the most expensive item in the middle, and, having a relation between the cheapest and most expensive item of 1 to 2 are advised, because pricing is a marketing tool as well. to be continued…

  12. ANALYZING AN INCOME & CASH FLOW STATEMENT Definition • To control cost, managers need to be able to calculate the net profit, or loss. The Income & cash flow statement is the financial document showing a company's income, expenses and cash balance over a given period . 

  13. Food Sales • Include revenue from food, coffee, tea, milk, juices and other non-alcoholic items typically part of a meal. If there is no alcoholic beverage service, soft drinks would also be included in this category. 

  14. Exercise A2

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