Restaurant patrons always have the choice about where they choose to dine and spend their hard-earned money. The message for foodservice operators is simple: Increased perceived value means increased patronage. One method of increasing value to customers is to lower menu prices. While this approach may appear controversial and self-defeating, it does have a basis in economics. In fact, when properly executed, menu price reductions can actually increase bottom line profits! Consider the following...
• Rent, taxes, utilities, insurance and minimum staffing are all FIXED costs. They remain fairly static regardless of sales volume.
• A full dining room keeps the staff busy all of the time.
• Gross profit dollars (the difference between selling prices and the cost of food and beverages) pay the bills - percentages do not!
• Patrons that find greater value in entrée prices are more likely to purchase secondary items such as appetizers, salads, wines and desserts.
• If gross profit dollars increase by more than the additional operating costs required (extra labour, linens, etc.) bottom lines will grow.
Here’s a simple example:
1. Red’s Pub lowered its average entree prices from $12.95 to $9.95
2. Secondary menu item sales improved substantially (at original prices)
3. Daily sales improved by $310.95
4. Food cost percent rose from 31% to 38%, but gross profit dollars increased!
5. The $161.25 daily gross profit improvement more than covered the small increase in labour (more service help) and linens.
6. Value pricing to fill the seats proved to be good business!