Applying Differential Pricing in Foodservices

Historically, most restaurateurs have established a single price for the various menu items they sell and then have left the prices alone until the next time the menu was printed. At the time of a menu reprint, individual menu items would be added or removed based on their popularity or cost.

New menu items would be considered and, if added to the menu, their costs would be calculated. Based on these new costs, and using the restaurant’s preferred menu pricing method, the new menu item’s price would be established. Finally, revised menus or menu boards with the updated prices would be created. The point-of-sale (POS) system would be reprogrammed to refl ect the new prices and the updating process would be complete.

Today, signifi cant advances in print, display technology and POS system programming could allow this historical

procedure to change radically. Differential pricing based on guests’ view of value and willingness to pay, however, has been implemented only warily as a revenue optimization strategy in foodservice. This is likely the case because a “ Set them and forget them ” mentality (the inevitable result of cost-based menu pricing) most often results in a “ we only change prices when our costs change ” mentality.

Foodservice RMs must understand their operations and their customers. They must also understand how those customers will react to the application of various revenue optimization techniques. Remember that a cost-based pricing system is simply not as effective as a more sophisticated differential pricing system. You learned that each of the following factors have been used by other industries when developing and implementing differential pricing strategies.

_ Customer characteristic

_ Location

_ Time

_ Quantity

_ Distribution channel

_ Product Version

_ Bundling

_ Payment terms

 

Factors Affecting Value Perceptions in Foodservices

Understanding the factors that affect guest perceptions of value is essential to creating differential pricing programs that will allow you to match your food and beverage prices with your customers’ perceptions of value and their willingness to pay. One important job of RMs in foodservice is to carefully evaluate the revenue enhancement opportunities available to them. The proper application of strategies to optimize revenues will vary based on the individual operation, but should always be based on what you now know about price, value, and the desirability of differential pricing. While each foodservice operation is unique, for many RMs, key factors to be considered for their ability to influence revenue management strategy include:

_ Competition

_ Service levels/ delivery format

_ Guest type

_ Product quality

_ Portion size

_ Ambiance

_ Meal period

_ Location

_ Image

_ Sales mix

 

Questions

1. What are the general concepts of traditional foodservice pricing methods?

2. What are the factors for differential pricing strategies?

3. What are the key factors to be considered to influence revenue management strategy?

Literature:

1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.

2. Segmentation, Revenue Management and Pricing Analytics by Tudor Bodea and Mark Ferguson. First edition by Routledge, 2014. ISBN 0-415-89832-3

3. Pricing Segmentation and Analytics by Tudor Bodea and Mark Ferguson, 2012. (ISBN: 978-1-60649-257-4)

 

Topic 11. Evaluation of Revenue Management Efforts in Food and Beverage Services

11.1. Food and Beverage Revenue Analysis

11.2. Examination of Revenue Sources

11.3. Measurement of Revenue Change

11.4. Evaluation of Revenue-Generating Efficiency

11.5. The Revenue Evaluation Process in Foodservices

 

Food and Beverage Revenue Analysis

The analysis of income generation in food and beverage operations has historically focused on the menu items you will sell to your guests. In such an analysis, the goal is the identification of your operation’s most popular and most profi table menu items. The rationale for such an analysis is quite reasonable. Food and beverage operators should want to know which of their menu items sell best (are the most popular) and which contribute most to their bottom lines (generate the most profi t). Knowing these two characteristics of menu items should guide RMs in the removal of items that are unpopular, unprofi table, or both, as well as toward the increased promotion of more popular and more profi table items.

In your role as an RM, even the most sophisticated menu analysis system will not assist you in addressing such important revenue-related questions as these three:

1. Which of our revenue centers contribute the most to our sales?

2. Are our revenues increasing or decreasing? By how much?

3.How effi ciently are we using our space and our staff as we generate sales?

To find answers to questions such as these, RMs use additional revenue assessment techniques.These supplemental assessment efforts can be grouped into three main activities:

_ Examination of revenue sources

_ Measurement of revenue change

_ Evaluation of revenue generation efficiency

The remainder of this chapter will teach you how to utilize these three important activitiesto better understand how your business can optimize its revenue.