What are you doing in your restaurant to incorporate local ingredients?
Are you capitalizing on the popularity of martinis? They’ve long been a great way to build alcoholic beverage sales and raise average gross profit per drink sold.
One thing I’ll never forgive formal culinary schools for, is teaching new impressionable would-be chefs to use a budgeted cost percentage to price food menus. Chain restaurants share an equal responsibility for perpetuating this bad practice by focusing their managers on food cost percentages without letting them in on the secret that the cost percentage is a management tool, not a pricing tool.
Though most culinary programs teach many different methods for pricing food, every culinary student seems to emerge from the Culinary Institute of America or Le Cordon Bleu believing in the world of restaurants, all they have to do to be profitable is serve great food and deliver a 33% food cost, or is it 25%, or 35% or 30% or 19%? The truth is, hitting a budgeted food cost does nothing to guarantee there will be enough money left over from the sale to pay for things like labor, rent, insurance, linens, smallwares, uniforms, utilities, taxes, etc, etc, etc. Hitting that cost percentage really means nothing. Further, not hitting it only means, “I should give things a closer look.” It doesn’t mean there is a problem. On the contrary, a high food cost could mean you’ve been selling a lot of high cost items that contribute more gross profit per sale. Are you going to make more money selling 50 hamburgers priced at $6 that cost $1.50, or 50 lobsters priced at $30 that cost $15? As long as there isn’t a significant increase in the overhead of serving the lobster, gross profit dollars win every time. You don’t want to sell the item with the 25% cost and $4.50 gross profit, you want to sell the item with the 50% cost and the $15 gross profit. Rather than comparing the food costs, you should be comparing the gross profits from each item. Obviously, if you have $15 left over from the sale after paying for food (gross profit) compared to $4.50, you’re going to have a lot more money to pay your overhead and turn a profit.
If you want to create prices in your restaurant that guarantee you’ll have enough dollars left over after paying for food, you’ll need to make three important considerations:
- Market price point – What does your market consider a fair price for the food you are preparing, served in the atmosphere you offer?
- Menu item cost – I know I said you shouldn’t use cost percentages. That doesn’t mean you don’t include the cost of the food into the price. You need to keep up-to-date recipe dollar costs for every item on your menu, and use those costs to figure into your pricing.
- Needed gross profit – What does every person who walks through your door cost you to serve? You have a lot more costs to cover than just food. That’s just a fraction of the picture. You must consider every expense of running your business when pricing menu items, including the profit you need to make.
I guess now the question is, “How do I price by gross profit?”.
I’m glad you asked.
Market Price Point
You can’t throw prices out there, whether based on cost percentages or gross profit, without considering what your market is already paying for those products elsewhere. Just like your potential customers, you must consider what other operations are charging for the same type of food, or even the same dishes, that you are offering. If you are going to charge more for the same dish than your competitor down the street, you have to be able to justify your price with added value. Added value could be larger portions, more exotic ingredients, better atmosphere, better location, live entertainment or something else. It could also be the promise and delivery of a unique selling point that your competition doesn’t have.
Whatever your prices, they must offer value to your customers. If your customers don’t feel your food is worth what you’re charging, you won’t have enough of them to make money no matter your pricing method.
Menu Item Cost
How much does each menu item cost you to make? Ingredient costs go up all the time. When is the last time you updated your menu item costs? Without knowing exactly what a menu item costs you to make, and how many dollars you need to add on to the price to pay for the ingredients, you can’t possibly come up with prices you KNOW are going to make you money.
The easiest way to track recipe costs (menu item costs) in my opinion is with Microsoft Excel spreadsheets. While there are many commercial food costing and inventory programs out there that will help you cost out your items, many use costing formulas based on valuation methods I don’t endorse, or require too much input to keep prices up-to-date. Some do have the capability of linking directly to broadline vendor’s invoicing systems to update prices automatically, but most smaller vendors don’t have this capabibility and you’re still left doing a lot of extra manual input. For my money, there is nothing simpler, less time consuming and easier to use than Excel spreadsheets. That doesn’t mean you shouldn’t use other inventory and costing tools. Any effort you make toward calculating recipe costs and inventory is going to pay off. Even the more expensive softwares will make you money in the end.
Don’t make the mistake of getting lazy with your recipe cost tracking. Many operators only price out menu items when they’re making a menu change (which are normally too few are far between). Between changes, they don’t see how the cost of ingredients is impacting certain menu items, and without that information they don’t have the urgency to make the necessary pricing changes needed when they are needed.
Needed Gross Profit
This is the most important consideration in setting menu prices. You must know what your guests cost you to serve. Without knowing what they cost you to serve, you can’t know how much money you need from each of them to pay all your bills and make a profit.
Look at your financial picture this way. Your food costs make up anywhere from 20-35% of your financial picture in most restaurants. Depending on your labor costs, your food cost could be the largest expense of running your business, and it needs consideration when forming menu prices. BUT…… What about the other 65-80% of your financial picture? It’s not all profit. Most of that picture is expenses other than food cost, and if you’re lucky a little profit left over. Doesn’t it go to reason that you have to include those costs in your pricing? Of course it does. Without knowing those costs are covered, you can’t know you’ll make money.
Before you can know how to add gross profit into a menu price, you have to know how to calculate it. Here are some explanations to try and illustrate how to calculate a needed gross profit per person. The needed gross profit per person is what you add to your recipe cost to arrive at a menu price. Unlike the menu price, the needed gross profit per person is a fluid number. Since it is important to keep menu items within the price point of your market, you will likely have to increase the gross profit you add to some items, while decreasing it on other items. It’s only important that the end result gives you an average gross profit per person that delivers enough gross profit to pay the bills.
You can start to calculate your needed gross profit by looking at your financials and customer count records. It’s best to use financials from months where you achieved as many of your financial goals as possible to establish your needed gross profit numbers. You can use an average of all months by using a year-end profit and loss statement. From your P&L, you need to find how much all your operating expenses for the year were without including product costs. This is your overhead. To this, you’ll add the ideal profit you should have made during that time period.
Total expenses for year - product costs + ideal profit = Total needed gross profit
Once you know how much gross profit you would have needed to collect during the last year to make the profit you should have made, you have the beginnings of your pricing method. Before we go any further, you need to take into consideration any inflation or cost increases you can assume for the following year. Operating costs will always go up, and you need to price for those cost increases. If you’re smart, you’ll re-price your menu every 3-4 months to make sure those costs are covered, but that is another article. To be on the safe side, I add a 5% cost increase into the total needed gross profit to come up with a target for the next year. With the ever increasing cost of gas, you could either add in a higher buffer, or do what I suggest and evaluate your pricing every 3 to 4 months. It’s much better to do regular, small increases to some menu items than annual large increases to all of them.
Total needed gross profit x cost plus increase (105%) = Total needed gross profit (adjusted for next year)
Now that you have your new needed gross profit, it is very easy to figure out how much of it you’ll need to collect from each person to cover all your expenses. That is, assuming you track how many people come into your restaurant. If you don’t, you need to start doing it now, and you’ll need to estimate how many covers you did for the previous year. Estimate low to be on the safe side.
To find out how much you need to collect from each person, simply divide your total neeeded gross profit for the upcoming year by your total customer count for the last year.
Total needed gross profit ÷ previous year customer count = Needed gross profit per customer
This number is simply the amount of gross profit you would have had to collect from each of last year’s customers to achieve your financial goals for the upcoming year. What this gives you, is a target gross profit to collect from every person this year to achieve profit. That profit will be achieved if you can meet or exceed your customer counts from the year before, or you can exceed the gross profit average per customer.
Gross profit per customer x customers per year = Actual gross profit
If you can exceed your total needed gross profit per year with your actual gross profit, and you do a good job of controlling your expenses, you will exceed the profit you budgeted for.
Remember in all this that your budgeted food cost percentage hasn’t entered into the equation once. You are adding the actual cost of your menu items to the needed gross profit per customer to come up with a selling price. That’s all it takes.
There are a few other things to consider though. Your needed gross profit per customer is collected from a few different sources. You don’t have to mark up every menu item by your needed gross profit. Your needed gross profit per customer is collected by combining gross profits from everything a customer buys. The markup on entrees, appetizers, desserts, soft beverages, alcohol and merchandise all contribute to gross profit. If you need $7 in markup from 30,000 customers per year to make your total needed gross profit, you have many different avenues to get it from and don’t have to mark up every menu item by $7.
Another factor that majorly affects these averages is your customer count.
If you’ve determined that you need $7 gross profit from each of 30,000 customers that walks through your door to reach your total needed gross profit, then you can also reach that number ($210,000) by serving more customers at a lower gross profit markup. If you could double your covers to 60,000, you could theoretically collect $3.50 in markup from each to collect the same total gross profit. Whenever considering cover changes however, you must also consider how serving more people will change your overhead. If you serve twice as many people, some of your expenses will also increase. They WILL NOT however, increase exponentially. Additional customers are always cheaper to serve than your primary customers, as they are the ones you are covering your fixed costs with. Add your additional expenses to your year end numbers and start over calculating your needed gross profit.
I hope I’ve laid out this method in a way that you can understand it. While it isn’t complicated, it does go against the principles being taught in classrooms, chains and kitchens all over the country. If you have followed along well though, you can see how this pricing method takes into consideration every cost of doing business, and leaves no guessing as to what you need to do to make money. This method of more effective planning could do a world of good for your profitability. Try it out. If you need some help, give me a call.
Posted in Articles
Tags: beer pricing, emotion based marekting, food cost percentage, gross profit, gross profit pricing, menu price, pricing a menu, pricing beer, pricing by food cost, pricing by gross profit, pricing food, pricing liquor, pricing methods, restaurant consultant, restaurant consulting, unique selling point
We currently have 60 entrees and 24 soup/salad/apps. We are known for our pizza, so we have a full pizza section which includes 6 sizes, 2 types of dough, 33 toppings, calzones, strombolis, 6 specialty pizzas, 7 sandwiches, beer, wine, and standard beverages.Which is better, 50 items or 100?
If you ask me, you need to eliminate 2/3rds of your menu. Big menus mean big waste, big inventory, big kitchen staff, big cost control issues, big ticket times and big confusion for your customers.
One thing to keep in mind with a restaurant. You are only ever going to be as profitable as your peak dining periods. Meaning…. when you have a large menu, you can not serve as many customers in any given period of time. With a large menu, people take longer to order. Big menus clutter POS’s, making the average time to input a ticket longer. They mean more prep for the kitchen, resulting in more kitchen employees in earlier to prep, and more employees on the line to produce too many different types of food. Even with more employees on the line, it takes longer to produce food when you have less multiple orders of the same items being made at the same time. All this extra time means you can’t serve as many people during your peak periods, which is where 80-90% of your revenue, and 100% of your profit is made. If you can increase your customer counts during peak periods by 10%, then you can increase your profit by more than 10%.
From a customer viewpoint, more choices doesn’t mean you’ll get more regulars because you have so much to choose from that people will keep coming back to try everything. That is a huge misnomer among owners and managers, that perpetuates the use of large, inefficient menus. More choices on a menu for customers means more confusion about who you are, what your specialities are, and why they should like you better than the Italian restaurant down the road.
Simply put, more choices isn’t better for business, it’s worse.
As far as what’s better, 50 items or 100? Neither. They’re both way too many. If you want to be known for having great food, you need to have a limited number of items, that stand out to people each on their own merit. If you have 4 or 5 great menu items that stand out from your others, people may remember them if there are only 10 or 15 surrounding them. If you bury them under 60 other items, people are less likely to remember what it was they had that was so great, and they’ll be less equipped to sell their friends on how great your food is. Confusing your customers isn’t good for business.
Stripping down a menu isn’t hard to do. The hardest part is convincing yourself it’s a good idea when you believe that more=better. Simply take your sales mix report, and eliminate most the items on the bottom half of your report that aren’t selling as much. Within the top half, keep all your top sellers, then make a list of what kitchen station those items are prepared in, saute, grill, fry, cold, etc. Use your top sellers, and a selection of the rest of the items you haven’t already eliminated to create a menu that balances your menu between each of your production stations. When you finish, I would suggest having NO MORE than 20 main course dishes, including sandwiches (10-15 would be better, I would eliminate the sandwiches altogether), 4-6 starters and 2-3 salads. If you are known for your pizza, then pizza should maybe make up 2/3rds of your main course selections. 6 sizes of pizzza is ridiculous though. Any more than 3 is complicating things unnecessarily. You could even think about going to only 1 individual adult size, and 1 individual kid size. This, and eliminating the sandwiches on your menu would greatly increase your average gross profit per item sold.
Stop worrying about trying to be everything to all your customers. While you should still accomodate special requests if possible, you should make sure you are charging a special price for that accomodation, and you also shouldn’t be encouraging them. Your servers and your kitchen staff don’t like it, regardless of what they tell you. It makes their job harder. If you cut your menu down, you are more likely to gain new customers, than to lose old ones. Take this statement to heart, THERE IS NO CUSTOMER OF YOURS THAT ORDERS ALL 60-80 MENU ITEMS. They WILL NOT be dissapointed enough about losing a few options to quit dining with you, especially if they are regulars, and especially if you train your staff to explain that your reduction in choices helps you give them better food, better service, and serve more people.
Discourage the ordering of those old menu items, clean up your POS, simplify your training, and make your operation capable of serving more people during your peak times. Your employees and your pocketbook will thank you.
Is the cost of food and supplies less when you own a franchise because of their buying power, or the same, or even more because of kick-backs from suppliers?
The franchise I am looking at shows cost of goods to be from 34% – 38%.
This sounds a little high to me. Is this what the norm is in this industry?
It all depends on the menu and prices. If you’re evaluating a potential franchise purchase, the food cost percentage is the last thing you should be worried about. Percentages don’t equal profit.
You should be concentrating more on the average profit and investment, how large the investment is, how fast that profit will earn back your investment, and whether that profit makes the investment worth your time.
Franchises do normally have increased buying power. Whether that results in a lower food cost percentage depends on the pricing, not the purchasing.
There is no “norm” for the industry. Some operations make a profit with 45% food costs, some need to be under 20%. Achieving either one doesn’t mean either will even make a profit. The profit is made with the money that is left over AFTER you pay for the food. While operating efficiently, and not wasting product is important to profit, the importance of running a particular food cost percentage is grossly overstated in the restaurant business.
The following are excerpts from discussions I had with restaurant owners in the Restaurantowner.com discussion forums regarding pricing by gross profit.
From “Pricing by gross profit” thread – RO.com
Posted Jul 30,2004 1:08 PM
|I realized while typing a post in the bar pricing program thread, I might as well start a thread discussing pricing as a whole and explain how to price by gross profit for food too for those that don’t know how. Pricing by gross profit is really the only sure fire method I’ve found to price a profit into your sales items. Many operators have gotten by from having enough experience working with certain types of food to know if they price by a certain cost percentage and work with menu foods that have worked in their system in the past, they can control cost well enough to make a profit. I have done the same in the past and have made my operations money doing it, but it seemed every once in awhile, something did not calculate right and I would inexplicably lose money or make less in a month I could’ve swore was a good month. By pricing by gross profit, I’ve come to realize the most important factor in my profitability in congruency to how many items I sell, is which items I sell. The majority of our mentors in this business have preached “cost percentage, food cost, liquor cost”. While controlling cost percentages is a needed part of the equation of profitability, it is not the most important part. All too often operators build their marketing around their low cost menu items. While these items return them a great cost percentage, they most often don’t return the gross profit per item that higher cost items may.I would like to start with a question to managers and operators out there. How many of you currently structure your pricing off of a target cost percentage? How many of you already price based on a target gross profit per item? For those of you, likely the majority based on my experience, who price by cost percentage, has anyone ever shown you how to price by gross profit and explained the differences between the two systems?Reply|
|Posted Jul 30,2004 8:39 PM||Clemmons8085|
|Posted Jul 31,2004 6:06 AM||VirginiaBeach717|
I’ve been trying to use your pricing concept since 1980. I’m running a low food cost on most sandwiches and appetizers and a high food cost on dinner entrees. It just makes since that if you sell a dinner with a 45% food cost and make $9.00, that you’d want to sell more of those than a sandwich at 18% that you make $3.50 profit. I keep trying to jack up the sandwich prices to make it easier for the customer to “jump” up to a dinner entre. Over the last four years I’ve become much more aggressive in this marketing attempt. There has been a 2% increase in dinner entrees which is statistically insignificant. The good news that I’m making a lot more money on the low end of the menu. In June I increased prices on the biggest sellers in the sand and app category by as much as 10-15% (with some masking of certain items). There was nary a word said from the customers and I would know because we have a solid group of regulars, daily, weekly and bi-weekly and I talk to most of them. (Sales have continued to grow as well, not just from the price increases.) At that time I raised alcohol prices after 7PM by 10% and it virtually went unnoticed (again our regulars would have let me know and quite vocally at that). Sales taxes increase Sept. 1 and I plan to use this as an opportunity to raise prices for Happy Hour. Again I’ll use “masking” because instead of raising the price of drinks, I’m “lowering” the price two cents but adding the sales tax to the item instead of including it. I realize I have gotten off the original topic but I wanted to share this experience since Jim’s survey and some earlier threads about wholesale price increases and the need to raise retail prices. My advice: If you have a good operation, DON’T BE AFRAID.
|Posted Jul 31,2004 1:49 PM||brandon|
|I think that was right on topic. You seem to be well ahead of the pack on your pricing structure. This obviously isn’t my original idea, many consultants have been trying to educate restaurant owners for years. I have just managed to use it to create my own personal structure and used the pricing method to drive customers toward higher cost, higher gross profit menu items. Congratulations on your forward thinking and resulting success.BrandonReply|
|Posted Jul 31,2004 2:35 PM||brandon|
I’ll continue my explanation of pricing out bar items in the “Bar Pricing Program” thread Kyle. Maybe we can continue with food on this thread. Food is slightly more complicated, but your existing experience with pricing will keep it reasonably simple still.
|Posted Aug 03,2004 11:53 AM||lemoyne|
Well, i guess it starts with the basic thought of what you are here to do. Maximize profits or minimize costs. Basic economic theory states that the level of maximum profitability is when the marginal revenue meets the marginal profit meets marginal cost. In other words you are here to maximize profit and if by lowering your price outside your target range of food /liquor cost you can sell more then you should as long as the additional gross profit is greater than the reduction in price
|Posted Aug 11,2004 6:42 AM||toms|
|Hi Brandon and everyone else,Brandon- I just joined RestaurantOwner.com based on your advice from another site’s discussion forum. Thanks for the advice. I really believe it’s going to pay off. I realize I need to think of myself as a marketer first and a restaurateur second if there is going to be any success here.Anyway, to your topic. About 4 months ago I changed my price structure from a food cost % pricing structure to a gross profit per item structure. I was tired of worrying about the percentages if we were selling a lot of high cost (%) items. I repriced to achieve about an $8 gross profit on all dinner entrees. Now I don’t have to worry about what we’re selling. It’s all good. And percentages have stay in line as well. From this point forward all menu categories will have an assured gross profit built into the pricing. I think it foolish to do it any other way.Reply|
|Posted Aug 11,2004 3:15 PM||brandon|
|Welcome Tom,Good to see you here. Maybe you can help explain pricing by gross profit for food while I’m still posting about beer, liquor and wine. I’m sure people would love to hear from another person who’s already adopted the technique.BrandonReply|
|Posted Aug 12,2004 1:34 PM||toms|
|1. Decide on what you want your gross profit in each category. Say on apps you want to achieve a $4.50 gross per item sold, entrees an $8.00 gross and desserts a $3.00 gross.2. Then cost out your menu item by item. Then add your target gross to each item cost to achieve your menu pricing. Of course you will have to raise or lower the prices to based on percieved value and prep times.Example: Spinach & Artichoke Dip with Toasted Ciabatta Bread
Target Gross: $4.50
Total of Cost plus Gross: $6.63 or $6.95 Menu priceReply
From “Bar pricing programs” thread – RO.com
Posted Jul 28,2004 11:14 AM
|After posting with a couple other members in here, I am curious to see how many members have an actual plan for bar pricing. Do you use formulas? Do you attempt simply to price match with competitors? Do you try to keep your price changes to categories such as well, calls, premiums and super-premiums with liquor and make everything just fit into one or the other? Do you concentrate on selling the lower cost percentage items such as draft beer and well liquors, or do you concentrate on the high gross profit items such as wine and premium scotches or martinis?I think the majority of restaurants and bars price their drinks out on a simple cost percentage markup or maybe with no formula at all, just using their experience in selling alcohol for so long.What do you do?Reply|
|Posted Jul 28,2004 10:00 PM||Clemmons8085|
|We price based on cost and also what the market will pay. We also sell alot of martinis, in our town I have seen them anywhere from $5 to $10.
We charge $7.00 for house 5oz
$7.50 call Absolul, stoli, ketele
$8.00 for Goose, belvedere
Beers like Bud lt Bud, miller lt coors $2.75
Imports like Corona ect… $3.25
Draft pints $3.75 for everything from Ultra, New Castle, Sam AdamsHow do you guys charge for rocks drinks and doubles. Are your doubles true doubles or long pours?
|Posted Jul 29,2004 10:21 AM||brandon|
|When you say, “price based on cost”, what type of formula do you use? Do you mark up to obtain a certain cost percentage?A big martini market helps the profitability a lot. The objective of selling martinis is to get the most money out of one drink as possible while still offering value, saving money on labor, glassware, condiments, garnishes, mixes, etc. You’re fortunate to have a big martini crowd.In your martini pricing and pouring, 5 oz. is a huge pour for any drink, but $7 is a good amount to get for it too. Maybe that is your draw. In your 5 oz martinis, are you stating the glass size, the amount of liquor, or the amount of liquor + vermouth? Or is it 5 oz when talking of martini cocktails in general, but less for the traditional martini? I ask because martinis vary so much regionally. In a certain area, people expect certain things.The tradition martini recipe found in many book call for 2 oz of gin or vodka mixed with 1/2 oz of dry vermouth. In my area, if you put more than a drop of vermouth in a martini, you’ll be strung up. Many operations here drizzle and swirl a small amount of vermouth in a glass or a shaker, pour the excess out, add ice, then add 2 1/4 oz gin or vodka. If the martini is on the rocks, you make it in a glass, garnish, then serve. If it is up, it’s made the same way in a mixing tin, swirled, then strained. In the finished product, most restaurants here only have around 2 1/2 oz of liquid in the drink. In my operations, I serve and price every martini simply as a double. Two 1 1/2 oz shots of gin or vodka, drop of vermouth. When served on the rocks, it fills a 10 oz rocks glass and results in quite a big martini, compared to what other restaurants are serving here. The exceptions are the martini cocktails popularized by martini bars. The amount of booze in these martinis are about the same as a traditional martini, but after adding ingredients like sour mix, grenadine and fruit juices, they come out to around 5 or 6 oz.That should give you a basis for information to compare to my pricing program. I’ll start a new post for that so this one doesn’t ramble on so much.BrandonReply
|Posted Jul 30,2004 12:47 PM||brandon|
|PricingHere’s how I price out all my sales items.First thought in pricing is not what kind of percentage cost I want to sell items at, it’s how much gross profit I need to make per item to cover everything other than the product cost including profit. Gross profit figured by simply adding every cost in your restaurant, other than product cost, but including profit (yes, you should consider this a cost of doing business), then determine what proportion of that total cost should be used to cover the sale of a particular sales category.? Not as difficult as it sounds if you keep a good P&L. The easy way to figure this would be use your year end P&L from last year. Take your total expenses for the year. Subtract your product cost for the year. Add the dollar amount of profit you SHOULD have made for the year, maybe 15-20% of sales. Maybe more, maybe less. Your choice. This number equals your Accumulated Gross Profit for the year, meaning, your sales minus product cost (gross profit) should add up to equal your expenses plus profit minus product cost. It will be necessary to add an increase to last year’s expenses to cover costs other than product that may have risen in the last year. (Remember, product cost is not figured into gross profit). Usually a standard cost of living index increase will do, about 4% most years.Now that we’ve figured what we need to make in Accumulated Gross Profit, we need to break it down to figure how much gross profit we need to make in food, beer, liquor and wine separately. This is the reason it is important for operations to track these sales and these costs separately. Each has a different cost structure and requires a different pricing structure. To figure how much gross profit we need for each different area, we simply look at our sales mix from the previous year and determine what percentage of total sales was due to liquor, for example, then divide the Accumulated Gross Profit between each of the sales categories proportionate to their portion of last year’s total sales. These will then show you the Accumulated Gross Profit for Food, Accumulated Gross Profit for Beer, Accumulated Gross Profit for Liquor and Accumulated Gross Profit for Wine.From the Accumulated Gross Profit for each sales category, we need to determine a gross profit per item needed. This is the number that shapes the pricing structure. In order to figure gross profit per item, you need to have accurate sales counts in each of the sales categories. Item counts. This is where a POS system takes a huge load of work from you. Many operators do still track sales items by hand on a daily basis. Those that don’t track at all, there’s a good reason why you may not be making as much money as you could.
The Accumulated Gross Profit for each sales category is then divided by the total item count sold in that category. If you are figuring liquor, for example, each drink counts as one item. Doubles are only one item. Each individual sale counts as one. Food is the same way, if a food item is sold at a separate price, appetizers for example, that item counts as 1, if you charge extra for salads, that counts too. The focus is to get a needed average gross profit per item, no matter how big or small.
The gross profit per item we need is the basis for the pricing structure of every item we sell. If collect the proper gross profit per item, plus the cost we are paying for the product, we will achieve the profit we priced for. This is the only pricing method I know of that allows you to pick how much money you want to make and accurately budget for it.
I was intended to go into detail about liquor pricing in this post, but realized without explaining gross profit, it was pointless. I will continue in another post.
|Posted Aug 01,2004 2:15 AM||brandon|
|Pricing Beer by Gross ProfitI thought I’d start with beer since there are less variations in pricing in the beer category.From the “Pricing” post, we have already established a needed gross profit per item on beer from dividing our accumulated gross profit by the sales mix percentage for beer.Ex. –
Total Accumulated Gross Profit = Expenses + Needed Profit + Cost of Living Increase Accumulated Gross Profit*Beer Sales Mix Percentage (% of total sales dollar volume attributed to beer) = Accumulated Gross Profit for BeerAccumulated Gross Profit for Beer/Total Units of Beer Sold = Gross Profit per Item on BeerThis number is what we need to average for every beer sold in order for our beer sales to hold up their end of our profitability program. For the purpose of this post, we’ll say that number came out to be $2.00 per item. That is the amount we need to average above our product cost in order to achieve the amount of profit we budgeted into our needed gross profit.
The first step to pricing based on gross profit is simply to add our needed gross profit per item to our product cost plus tax and waste. We will later adjust up or down from there based on a couple factors to influence our customer’s buying habits and increase our realized gross profit per item purchased.
Premium draft 16oz – $153.10 after tax and waste (great beer) / 150 pours per keg = $1.02 per draft product cost. $2.00 needed gross profit per item + $1.02 product cost = $3.02 needed per premium draft
Domestic bottle – $.78 per bottle product cost after tax and waste + $2.00 needed gross profit per item = $2.78 needed per domestic bottle
Premium bottle – $1.19 per bottle product cost after tax and waste + $2.00 needed gross profit per item = $3.19 needed per premium bottle
The first thing you may notice when performing this first step in pricing by gross profit is that while lower priced items seem to be about what you are used to seeing, you don’t seem to need near as much for premium items as you were taught to believe. The main point at this stage of implementing this pricing structure is to figure a base price to adjust from that will allow us to obtain our profit margin we calculated into our gross profit. If we sold all of these items at the prices we determined with our gross profit per item markup, we will achieve that profit margin.
Now that we have a profitable formula, next we will try to manipulate it to exceed our profit goals as opposed to just realizing them. That will be our next post.
|Posted Aug 04,2004 7:48 AM||VirginiaBeach717|
WOW!!!What a concept. Is anyone reading this?? I’ve been waiting days to see if someone would respond. I’m not sure I buy into this concept; heck, I’m not even sure I understand it completely but here goes anyway. Say I want to make $50K more next year. If I follow what you say, then I need to break out my beer percentage sales. So I take 28.19%(beer sales) of $50K which gives me $14095 profit dollars for beer sales. I then divide that by 132,126 unit sales of beer which comes to ten cents per beer. Ten Cents!!! That’s all?? Of course, I’ve got to apply the same theory to all other items. But I just raised the price of beer .25 so I should enjoy a handsome $49,333 additional profit from the beer alone. (Mixed beverages went up a quarter and food prices caught with the increase in cost of goods.) I can see new golf clubs in my future. Am I understanding this correctly?
|Posted Aug 04,2004 8:55 AM||VirginiaBeach717|
Don’t you hate interruptions? My profit with a twenty-five cent increase is $33031. Sorry about the math.
|Posted Aug 04,2004 8:39 PM||Clemmons8085|
Virginiabeach, I am with you,
|Posted Aug 06,2004 3:22 PM||brandon|
|>>>I’m not sure I buy into this concept; heck, I’m not even sure I understand it completely but here goes anyway. Say I want to make $50K more next year. If I follow what you say, then I need to break out my beer percentage sales. So I take 28.19%(beer sales) of $50K which gives me $14095 profit dollars for beer sales. I then divide that by 132,126 unit sales of beer which comes to ten cents per beer. Ten Cents!!! That’s all?? Of course, I’ve got to apply the same theory to all other items. But I just raised the price of beer .25 so I should enjoy a handsome $49,333 additional profit from the beer alone.<<<Not sure I follow your math, but you have the numbers necessary to figure out how to make more money next year. If you are trying to make $50,000 on your bottom line next year, you simply have to increase sales by $50,000 without increasing expenses. A price raise would accomplish this, but the math needs to be a little different. A $.10 price increase across 132,000 units, without a drop in # of items sold, would result in $13,200 straight to the bottom line, not $50,000. To reach $50,000 you divide $50,000 across 132,000 units sold to figure how much more you need per unit. It comes out to just under $.38 per unit in needed price increase without a drop in volume.BrandonReply|
|Posted Aug 06,2004 3:23 PM||brandon|
|>>>Don’t you hate interruptions? My profit with a twenty-five cent increase is $33031. Sorry about the math.<<<Sorry, didn’t realize you had already corrected your math.Reply|
|Posted Aug 06,2004 4:16 PM||brandon|
|Price StructuringNow that we have a profitable formula, next we will try to manipulate it to exceed our profit goals as opposed to just realizing them. That will be our next post.”We left off by determining a needed gross profit per item and adding it to our product cost to create a formula that will net us the profit we priced for. For many people, this is enough, but you will notice, while bottom prices are somewhat comparable and not necessarily a great bargain in comparison to other operations, the premium prices seem like a steal. This is where many operations run afowl and lose focus on the ultimate goal, increasing the average gross profit per item.By pricing by product cost, most operations come out with comparable prices on the low price items as they would in pricing by gross profit. Their prices on the premium items are usually well above the baseline price for pricing by gross profit though. Pricing by product cost encourages the idea that most people come in your restaurant/bar to drink what’s cheap, then you make up as much as possible on the premium drinks with the people who simply won’t sacrifice quality. We need to set up our pricing structure so it not only increases the perception of value, but encourages the sale of premium products through agressive pricing and results in an increase of gross profit per item through the increased sale volume of premium items. Our goal is to become “The Place” to drink premium drinks affordably.With our baseline pricing, currently we are making the same gross profit per item on premium beers as we are on domestic beers, but we left ourselves a lot of room to manuveur on the premium beer pricing and a little room to use added value on domestic beers to further draw in a crowd.Stated example for our baseline pricing from earlier:
Domestic draft 16oz – $76.55 after tax and waste / 150 pours per keg = $.51 per draft product cost. $2.00 needed gross profit per item + $.51 product cost = $2.51 needed per domestic draft
Premium draft 16oz – $153.10 after tax and waste (great beer) / 150 pours per keg = $1.02 per draft product cost. $2.00 needed gross profit per item + $1.02 product cost = $3.02 needed per premium draft
Domestic bottle – $.78 per bottle product cost after tax and waste + $2.00 needed gross profit per item = $2.78 needed per domestic bottle
Premium bottle – $1.19 per bottle product cost after tax and waste + $2.00 needed gross profit per item = $3.19 needed per premium bottle”
Now we adjust the baseline pricing to 1) Still meet the average gross profit per item if our sales mix does not change, and 2) Increase our gross profit per item when value in premium beer is realized and sales mix shifts further toward premiums.
We do this by doing two things:
Truthfully, on beer, there is not a lot of room to play with pricing because of the limited range of product sold in the beer category, but there still is some room.
First we set a minimum markup that will still allow us to sustain our average gross profit per item, then we set a maximum gross profit per item necessary. The minimum markup will apply to all items, no matter how little they cost us. The maximum markup will also apply to all items, no matter how much it costs us.
Given the example baseline prices we determined above, here is how I would structure them:
Our established minimum markup for beer products is $1.74. Our established maximum markup is $2.31. No matter how much we pay for a 12 oz bottle of beer, the most we will mark it up is $2.31.
The focus now that the prices are set is to start marketing our premium beers. Increasing the selection of premium beers and focusing in house marketing, such as a monthly featured beer or beer suggestions with the specials, on the premium beers are going to help draw focus to our new agressive pricing. The low reasonably low prices on domestics in addition to very low prices on premiums serve to break down the resistance of our customers to trying new beers. They know they are always paying a good price, and the more expensive the beer, the better the value (remember, we never mark any beer up more than $2.31). The more you focus on beers that normally cost you too much to make a good product cost percentage on, the more your agressive pricing will be evident to your customers. Instead of having to charge $6 to make your percentage on an expensive imported beer that cost you $2, you now only have to charge $4.31, blowing out the competition.
The ending result is to try and make your place, “The Place” to go for a great beer for a great price not the place to go to drink cheap. People come in because they know everything is a bargain, not because Tuesdays are 2-4-1 drafts or beers are $1 from 4 to 6 on Happy Hour Wednesdays. Your customers focus should be on the special selection, not the deal that’s too good to pass up one day a week.
We started with beer because of the simplicity of the beer pricing. The basic premise of pricing by gross profit should be clear now. Next, we’ll focus on liquor, where the difference in pricing by gross profit and pricing by product cost are easier to realize.
|Posted Aug 06,2004 4:20 PM||brandon|
|After re-reading, I see I stated our maximum markup at $2.31 whereas we used $2.48 in the example.The maximum markup stated for any product should be $2.48, not $2.31.|
From “Liquor and Wine cost percentages for fine dining” thread – RO.com
Posted Jul 26,2004 1:21 PM
|We are a fine dining restaurant (white table cloth only at dinner)located in the Pittsburgh area. Our Per Person Average is $30.33 (including lunch and dinner). I would like to see Liquor Cost Percent, Wine Cost Percent and Food Cost Percent for similar restaurants. Thank youEd Lewis
|Posted Jul 26,2004 4:06 PM||brandon|
|Percentages are really only useful after you have a profitable formula worked out to determine what your pricing should be in order to make a profit. Comparing your cost percentage to a different operation’s cost percentage could be very misleading. Another operation may have higher product cost percentages but make it up in saved labor, low rent or no advertising costs. Comparing your cost percentage really is not going to give you much useful information.That being said, I’ll still offer what I’ve done at some locations. My background includes quite a bit of time in Country Club settings. Overhead in those settings are completely different, but cost percentages are usually higher than in public settings so they may give you some sort of maximum guideline. With an 8-10% profit margin in a Country Club setting which included 4 ala carte dining rooms, 8 banquet rooms and 4 snack outlets, our year end costs would break down to something similar to this: 35% food cost including soft beverages (free snacks to members and employee meals expensed out), 24% liquor cost, 35% beer cost, 31% wine cost.Our overall alcoholic beverage cost for the year would be around 29.5%. That would be considered high in many restaurants, but the cost reflects a mixture of 60% of our alcoholic beverage sales being wine. 75% if I looked at ala carte exclusively. My beverage program was very, very profitable due to my high mixture of wine sales. My wine cost percentage was not indicative of my wine pricing structure either. I offered very aggressive pricing on wine that showed more value, the more expensive the wine cost was. My members flocked to the wines. Many people that were not habitual wine drinkers started drinking more wine because of the buzz created and the natural resistance that accompanies insecurity about their ability to choose wine. They knew they always received a great value. The increase in sales of our low, low cost, good quality house wines due to the break down of the resistance of fence sitting could-be wine drinkers drove our wine cost percentage down and our sales of all wines, especially the premium wines through the roof. All that despite the fact that outside of my house wines, I never marked a bottle up more than $25 over what I paid for it.1999 Chateau Lafite Rothschild (France)………………$230
Two restaurants down the street sold the same wine for $475 (40% cost)Members would notice my price on the most expensive wines were below the price they paid at the liquor store. The whole focus was to drive everyone toward bottles that returned me a $6.25 gross profit per glass instead of the $3.50 per glass I made on the house wines or the $2 per drink I made on beer. Pricing for liquor was equally aggressive on the high end liquors to push people toward drinks that return a higher profit dollar, not lower cost percentage.I would be more that willing to talk more about structuring your beverage program if you’re interested. I have reproduced my method, even in small towns, to success in every instance.Brandon
|Posted Jul 27,2004 8:11 AM||jimlaube|
|Ed, according to the latest NRA Industry Operations Report for Restaurants with a PPA of $25 to $32.99, the median (half above and have below) is 31.3% for all alcoholic beverages combined. This is not broken down by category so I know it’s of limited value. Sales mix, pricing structure, etc. can have a major impact on beverage costs. From my experience in upper casual and fine dining restaurants, I’ve normally seen a straight liquor cost of 18%-20%, however, I have seen it as low as 14%. Once in a Mexican restaurant that sold LOTS of margaritas and at a high end restaurant in Vail (very high price points). Many restaurant break out bar consumables and reflect those items that includes garnishes, cocktail mixes, etc. in a separate account within the cost of sales category. Bar consumables normally runs 4%-5% of liquor sales.Personally, I like to see draft and bottled beer broken out both as sales and costs because the cost structure is very different. Draft normally runs 14% – 18% while bottled 24% – 28%. Selling a large share of imported or specialty beers can however push these percentages up.Wines cost, as Brandon alluded to, can be all over the board depending on bottled versus by the glass sales and the type of wine list you have. Obviously the more expensive the bottled wine the higher the cost but the greater the gross profit margin. I’ve seen wine sales in higher end restaurants run anywhere from the low 30’s to 40%.I think Brandon’s wine strategy is brilliant and I’ve seen a few restaurant operators take a similar approach in developing a “bargain” reputation on quality wine with much success.Let me know if you have any follow up questions or comments.JimReply