Posted on August 19, 2024 

Operating a restaurant is an undertaking that demands the understanding of financial and operational principles, a broad category referred to as Revenue Management. Where does revenue management begin? Of course, it starts with the menu and how we manage our menu prices. Many operators start with a targeted food cost, the simplest method, and base pricing only on some multiple of the cost of the food per cover. We call that the “Factor Method” of pricing. But how about a similar calculation, adding our average payroll cost per cover and that multiple to our food cost computation? We call this process the “Prime Cost Method” of pricing, and it’s a better reflection of the prices we need to charge, as well as a gauge of how well we manage our two biggest expenses, cost of goods sold and payroll costs. And we can dig deeper!

But does it not make sense to consider other factors, such as Elasticity of Demand, Perception of Value, Direct and Indirect Competition, as well as Profit Targets? Of course it does.

All this we will manage when we talk about cost behavior as it relates to menu pricing. We need to: 

· Understand the basic principles of pricing, pricing psychology, and margin analysis.

· Understand the calculations needed to conduct pricing and margin analysis.

· Understand the decision process that emerges from margin analysis.

· Understand how we learn from the data we derive from these exercises to increase 

       our average margin and profitability.

Understanding profit margin is essential for sustainability and growth. These strategic insights provide the framework for profitability and equip you to make data-driven decisions that spell the difference between success and stagnation.

Stephen Lipinski Consulting can guide you through every aspect of restaurant management, and the first step is yours to take. Text me at 607-280-2340 to schedule a no-fee, 30-minute conversation.