July 2005 Edition
Value Pricing: The Key to Filling the Seats

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!