HOW TO PRICE FOOD AND MENU ITEMS FOR PROFITS:
IT'S SIMPLE: THE MAGIC PRICE FORMULA.
The “magic” price optimizes profits, by selling the highest possible volume at the highest price before which profitability starts to decrease. Maximum gross profit is often potentially hiding behind a price too low or too high. Now other than in economic theory there is no perfect way to maintain this equilibrium, but if you're not using it as a target, you're missing opportunities. I came across this philosophy clearly explained in The Advantage Company handbook. I think it's a wonderful method to determine if you are making a positive or negative business decision while monitoring pricing changes. Consider how this example in fashion retail could apply to your restaurant or food retailing business. Engage our team to help you or consider what you should ask yourself below:
Source: http://www.theadvantage.com/handbook/the-magic-price.php
The Magic Price
gen•ius n. extraordinary intellectual and creative power.
Criteria for lowering a price.
Guidance: As we all know, the starting point for pricing your food is intimately understanding it's cost. We find that our clients rarely are in tune with these numbers.
Concession & dining menus and retail pricing overlooked for 6 months have become stale and are vulnerable for many reasons. Changing menu costs, customer needs & wants, target price points, and culinary innovations cannot be solved by raising prices to cover revenue targets.
Source: http://www.theadvantage.com/handbook/the-magic-price.php
The Magic Price
gen•ius n. extraordinary intellectual and creative power.
Criteria for lowering a price.
- If the new price is at a lower margin, does the increase in volume make up for the loss of gross profit?
- If there is still a loss in gross profit after test #1, does the increase in associated sales make up for the remaining loss of gross profit?
- And finally, if there is still a loss of profit, does the customer retrieval and word of mouth make it worthwhile? This is seen as an advertising cost. For example:
- When we decided to lower the price of our Jeans from $29.90 to $19.90, we first looked at the increase in volume to see if it made up for the loss of gross profit. Since the gross profit per jean was going from $16 to $6, we would need an increase in sales of 2.7 times [16/6]. Fortunately, our sales more than tripled.
Next, we looked at associated sales. Our average associated sale with a pair of jeans was $10 [with a gross profit of $3]. This means that our actual gross profit per total sale was not $16 but rather $19, and it went down to $9, not $6. Therefore, our necessary increase in sales only needed to be 2.1 times. The bonus in this scenario was that associated sales per purchase actually went up because everyone had more left to spend and it made everything appear to be a better value. Not to mention the word of mouth. The news of great jeans at $1990 spreads a lot faster than jeans at $2990.
Guidance: As we all know, the starting point for pricing your food is intimately understanding it's cost. We find that our clients rarely are in tune with these numbers.
Concession & dining menus and retail pricing overlooked for 6 months have become stale and are vulnerable for many reasons. Changing menu costs, customer needs & wants, target price points, and culinary innovations cannot be solved by raising prices to cover revenue targets.
