The Pricing Decision

Of all the business decisions a restaurateur must make once a operation is up and running, pricing the menu can be the most difficult. Rational pricing methodologies traditionally have employed quantitative factors to mark up food and beverage costs. But what seems at first to be a quantitatively based process actually requires consideration of a number of subjective factors, turning the pricing process into more of an art than a science. If pricing were a simple markup over cost, any calculator or computer program could set menu prices. Logically, price must cover your cost and return a profit.

There is a tendency to rationalize price as a means of returning an amount that will reflect a fair profit for the time, effort, and risk involved. Costs serve only as a starting point for the pricing decision. In order to remain in business, you must cover your costs. So if an item costs $3 to prepare and serve, your selling price must cover that cost.

The task of menu pricing is marked by doubts and uncertainties. Pricing decisions will be determined, in part, the clientele and the amount of business the restaurant will generate. Charging too much for a product or service will discourage purchases, while charging too little will reduce profit. The consumer sometimes sees price as an indication of quality of the product or service. A high price tends to imply quality, while a low price may be inferred, not as a bargain, but as low quality.

Business people are more comfortable using logical and objective criteria in the pricing decision, which is why we always want to begin by determining our cost to produce a product or service. While the cost process is objective and absolute, the pricing decision is not. Many indirect cost factors influence the price you can charge and how much the customer is willing to pay.

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