The previous article examined the elements and components of cost in food and beverage operations. This article explores the relationship between revenue, costs, and profits in agricultural food and beverage contexts.
Pricing is a complex area that often lacks the priority it deserves. The pricing of a product must align with an organization’s objectives, which are typically outlined in its financial, marketing, and catering policies.
For instance, the financial policy may specify the profit target relative to capital invested. The approach to pricing varies not only between major industry sectors but also among organizations within these sectors.
A growth-oriented organization may focus on increasing sales volume by maintaining highly competitive prices, whereas an established organization may prioritize sustaining net profit from a stable sales volume.
Relationship Between Revenue, Costs, and Profits in Agricultural Foodservice
In a foodservice operation tied to agricultural production, a clear relationship exists between the costs of running the operation, the revenue generated, and the profit earned. Foodservice operations involve three cost elements:
1. Food or beverage costs: Often referred to as cost of sales.
2. Labor costs: Includes wages, salaries, staff meals, and uniforms.
3. Overhead costs: Encompasses rent, rates, advertising, and fuel.
There are also two types of profit:
1. Gross profit: Total revenue minus cost of sales.
2. Net profit: Gross profit minus labor and overhead costs.
All cost and profit elements in a foodservice operation are calculated as a percentage of total sales. In many retail operations, the cost of sales is taken as 100 percent, so the gross profit percentage is calculated based on the cost price.
Price, Cost, Value, and Worth in Agricultural Food Products
Price is an element of the meal experience that relates to value and directly impacts profitability. It is flexible and can be adjusted relatively easily, altering value perceptions and potentially profitability.
Although values are assigned to food and beverage products based on customer perceptions of needs they satisfy, achieving those goals depends on the customer’s ability to pay.
This involves more than just having the money. Customers make choices by evaluating the relationship between price, cost, worth, and value:
1. Price: The amount of money required to purchase the product.
2. Cost: Includes the price plus the cost of forgoing other options, transportation, time, potential embarrassment, adhering to expected behavior, and the effort to earn the money to pay the price.
3. Worth: The perceived desirability of a product over another to meet established goals.
4. Value: The personal estimate of a product’s capacity to satisfy goals, balanced against its worth and cost.
Good value in a food and beverage operation occurs when worth is perceived as greater than costs, while poor value results when costs outweigh worth. Prices should be set in relation to the quality and value perception operators aim for customers to have.
A high-priced product may be seen as high quality or a rip-off, while a low-priced product may be viewed as poor quality or good value. Thus, value is determined not only by the cash price but also by the price and other costs relative to perceived worth.
Establishing a price range that customers are willing to pay is good practice. Foodservice operators can also define a price range for offering food, beverages, and other services. The overlap represents the workable range for the operator.
Setting prices within ranges affordable to consumers should consider the market segment and operation type. Market research can identify price ranges for specific groups, such as families traveling on motorways, and for particular menu items.
Research into customer attitudes and behavior toward price reveals that the lowest price is not the sole consideration. The importance of the five meal experience elements varies by experience type, affecting the significance of price.
Pricing Policies in Agricultural Foodservice Operations
Various pricing methods are available to foodservice operators, but a clear pricing policy or objective should always guide decisions. Pricing objectives may include:
1. Sales volume maximization: Aiming for the highest possible sales.
2. Market share gain: Increasing customer numbers relative to the total market and competition.
3. Profit maximization: Achieving the highest possible profit.
4. Market penetration: Moving from zero or low market share to a significant share.
Once a pricing policy is established, the most suitable pricing methods can be selected from available options, often combining various methods.
Read Also: Introduction to Ruminant Animals Production
Pricing Methods for Agricultural Foodservice Operations
Pricing methods vary in appropriateness and sophistication. The main pricing methods for foodservice operations are described below.
1. Cost-Plus Pricing
This is the most common method. The ingredient cost is established—often imprecisely—and the desired profit (gross profit) is added to determine the selling price, ensuring the operator’s required profit for that dish (realized only when sold).
This method’s simplicity is appealing, but it overlooks price sensitivity, demand (price influences demand), and value for money.
It assumes profit can be a fixed percentage of the selling price (often 65–75 percent), ignoring different restaurant types, menu categories, and the fact that each dish or beverage is part of a broader meal experience.
When applied, differentiated percentages are used, so low-cost starters earn proportionately more gross profit than higher-cost main courses.
2. Prime Costing Methods
These methods attempt to include labor costs, and actual cost pricing incorporates fixed and variable costs alongside labor. These costs are set as percentages of the final selling price (e.g., labor at 25 percent, variable costs at 10 percent).
These methods share cost-plus flaws: labor relates to preparation time, not ingredient value; volume or item popularity is ignored, missing economies of scale; and fixed and variable costs should relate to sales volume per dish rather than a fixed percentage.
3. Backward Pricing
This matches costs to a pre-established price for a desired market. This market-driven approach is useful for new product development but struggles to set gross profit, ingredient, and labor costs accurately.
Avoiding percentage-based issues is critical. Identifying what customers are willing to pay and assessing whether the operation can deliver profitably at that price helps avoid unprofitable ventures.
4. Rate of Return Pricing
This method sets prices based on forecasted sales and costs, potentially creating a break-even matrix. It guides price ranges but cannot set individual selling prices.
5. Profit-Per-Customer Pricing
This calculates total required profit, allocates it across forecasted demand, and adds an average profit per customer to material or other costs to set selling prices.
It can produce a break-even matrix, but caution is needed as profit depends on demand, which depends on price, creating a cycle. Relating profitability to demand and customer-acceptable price ranges can assess an operation’s viability.
6. Elasticity Pricing
This evaluates market sensitivity to price changes to determine menu prices, assessing how price changes affect demand. Price decreases can increase demand and profitability. Predicting market responses is challenging, but considering elasticity informs pricing decisions.
7. Competition Pricing
This involves copying competitors’ prices. However, competitors’ cost structures may differ, leading to varied profits. This may include discounting, premium promotions, happy hours, special meals, free wine, or children’s toys. These short-term tactics can increase costs and spark fierce price-based competition.
Read Also: Goats Farming Complete Practical Guide
Menu Pricing Strategies in Agricultural Foodservice
1. Departmental Profit Margins
Menu pricing must align with basic policies and departmental profit targets. Each department plays a role in the organization, with distinct profit targets. For example, in a hotel, an à la carte restaurant’s profit target may be lower than a coffee shop’s, as the former may primarily enhance the hotel’s image. The sum of departmental contributions should meet or exceed the establishment’s desired revenue.
2. Differential Profit Margins
Applying a uniform gross profit rate to all menu or beverage items is uncommon, though seen in non-commercial sectors. In these sectors, a uniform rate (e.g., 60 percent) simplifies cost calculations, allowing quick cost assessments (e.g., 40 percent of takings) regardless of sales mix, enabling immediate comparison with material usage.
3. Special Pricing Considerations in Agricultural Foodservice
i. Sales Tax
Depending on the governing authority, sales tax may apply. Customers need clarity on whether displayed or quoted prices include this tax. Caterers must recognize that tax collected for the government must be remitted and excluded from revenue or average spend calculations.
ii. Service Charges
This is an additional charge, a fixed percentage of food and beverage costs, set by management and printed on menus or beverage lists to simplify tipping. Distributed to staff later, often via a points system, it should be treated like sales tax and excluded from revenue or average spend calculations.
iv. Cover Charge
This additional charge covers items like bread rolls and butter not priced on the menu. Implementing it requires caution, as it may aggravate customers. Restaurants may use it to discourage certain clients or those purchasing only low-priced items.
Menu Pricing Applications in Agricultural Foodservice
The pricing method depends on the industry sector, required profit or subsidy, and basic policies. Price is a valuable selling tool and aids in achieving desired sales volume.
1. Development of Pricing in Agricultural Foodservice
- Desired return on capital or level of subsidy given
- Basic policies: financial, marketing, catering
- Overall budget
- Basic overall gross profit percentage
- Individual departmental budget
- Individual departmental gross profit percentage
- Individual departmental differential profit margins
- Special pricing considerations (e.g., sales tax, cover charge, service charge, minimum charge, happy hour, special promotions, bargain breaks)
2. Table d’Hôte Menus
This restricted menu offers a small range of courses with limited choices within each, at a fixed price. The price may be uniform for any three courses or vary by main course.
Pricing should account for departmental profit and differential margins, using forecasted guest sales to set an average price. This average may be rounded to attract customers or increased when offered alongside an à la carte menu to balance price differentiation.
3. Banqueting Menus
This specific table d’hôte menu offers no customer choice. Beyond food and often liquor, additional items like band meals, toastmaster services, microphone hire, or special menu printing are priced separately. Banquet pricing often includes flexibility, with managers offering extras at no cost to secure business during slow periods or specific gaps.
4. À la Carte Menus
This larger menu offers more courses and choices per course, with each item individually priced. Pricing accounts for departmental profit and differential margins per course, using standard recipes. Potential sales mix within each course is considered to achieve the desired profit margin.
Pricing of Beverages in Agricultural Foodservice
Beverage pricing mirrors food pricing. First, set departmental profit targets and gross profit percentages, followed by differential profit margins based on achievable sales mix, varying by operation type and sales breakdown detail.
House brand beverages typically yield higher gross profit due to supplier discounts. Pricing is more precise for beverages, as minimal processing occurs; drinks are purchased by bottle (e.g., beer, wine) or specific measures (e.g., 6-out from a 26⅔ fl oz whisky bottle). Drink mixing, like food, follows standard recipes specific to the establishment.
Pricing differs across food and beverage operations, requiring the ability to relate operational costs to revenue and profit. Product pricing must meet organizational objectives. Foodservice operations have three cost elements: food and beverage costs, labor, and overheads.
Price, the amount required to purchase a product, is set based on desired quality and value perceptions. Pricing methods include cost-plus, prime costing, backward pricing, rate of return, profit-per-customer, elasticity, and competition pricing. Special considerations include sales tax, service charges, and cover charges.
Do you have any questions, suggestions, or contributions? If so, please feel free to use the comment box below to share your thoughts. We also encourage you to kindly share this information with others who might benefit from it. Since we can’t reach everyone at once, we truly appreciate your help in spreading the word. Thank you so much for your support and for sharing!