Cost Plus Pricing This method involves the calculation of the food cost per unit of sales and then a given percentage of gross profit is added to the value to arrive at the selling price per unit. This percentage is intended to cover the cost of labour and overhead expenses while also leaving a margin of net profit. The net profit percentage required will depend on the pricing policy of the particular establishment. Food operations generally add 150 per cent to food cost.
The cost plus method is easy to apply and understand, and is therefore widely used. It has, however certain disadvantages like
Cost plus pricing is based on cost, and does not take into account the demand for the product or service. Its indiscriminate use, therefore, becomes irrational
Net profit becomes the direct function of sales turnover
The gross profit margin is added to the food cost and the net profit is unrelated to the capital invested.
Rate of Return Pricing: This method is based on the relationship of net profit to capital investment. By this method the likelihood of reaching net profit targets is greater, provided that the estimated sales volume is achieved and the gross profit margins are maintained. The rate of return method of pricing, however, also has some disadvantages
It is purely profit-oriented and has little scope for flexibility.
Its approach to pricing problems is too simple to be realistic.
It does not generally go by the demands of customer or the market.
At best, the above methods can be useful in evaluating performance, or act as basic guides in pricing. They are, however, not useful in appraising investments.
Other Methods: Markups: Assigning some amount of the profit to particular item. Difference between cost and sale price. Some establishments assign less profit (up to 20%)with the expectation of high volume sales for that item and the profits will be substantial for that day. Example: Cake s on New Year day Markups is an identification of the organization policy with regard to customer service and sale volume
Markup =Gross profit%
Factor method: cost X pricing factor
Prime cost method: cost + labour cost
Actual cost method: actual food cost + actual labour cost + other variable cost + fixed cost + profit
Menu engineering: Computer supported management information system for pricing. Helps in establishing food labels
Food label: Identification of the items which are actually Contributing Margin (CM) for the profit of the each item by the way of contributing to the total profit Star: Item with high demand and high contribution margin Plow horse: Item with high demand and low contribution margin Puzzle: Item with low demand and high contribution margin Dog: Item with low demand and low contribution margin
Pricing by odd cents : Price ending with odd numbers
Pricing by ounce: Pricing is based on the weight
Two tire system: Costing the basic menu at particular cost and other items separately
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