Indirect Cost Factors In Menu Pricing

In the discussion - Indirect Cost Factors in Menu Pricing – by David V. Pavesic, Associate Professor, Hotel, Restaurant and Travel Administration at Georgia State University, Associate Professor Pavesic initially states: “Rational pricing methodologies have traditionally employed quantitative factors to mark up food and beverage or food and labor because these costs can be isolated and allocated to specific menu items. There are, however, a number of indirect costs that can influence the price charged because they provide added value to the customer or are affected by supply/demand factors. The author discusses these costs and factors that must be taken into account in pricing decisions. Professor Pavesic offers as a given that menu pricing should cover costs, return a profit, reflect a value for the customer, and in the long run, attract customers and market the establishment. “Prices that are too high will drive customers away, and prices that are too low will sacrifice profit,” Professor Pavesic puts it succinctly. To dovetail with this premise the author provides that although food costs measure markedly into menu pricing, other factors such as equipment utilization, popularity/demand, and marketing are but a few of the parenthetic factors also to be considered. “… there is no single method that can be used to mark up every item on any given restaurant menu. One must employ a combination of methodologies and theories,” says Professor Pavesic. “Therefore, when properly carried out, prices will reflect food cost percentages, individual and/or weighted contribution margins, price points, and desired check averages, as well as factors driven by intuition, competition, and demand.” Additionally, Professor Pavesic wants you to know that value, as opposed to maximizing revenue, should be a primary motivating factor when designing menu pricing. This philosophy does come with certain caveats, and he explains them to you. Generically speaking, Professor Pavesic says, “The market ultimately determines the price one can charge.” But, in fine-tuning that decree he further offers, “Lower prices do not automatically translate into value and bargain in the minds of the customers. Having the lowest prices in your market may not bring customers or profit. “Too often operators engage in price wars through discount promotions and find that profits fall and their image in the marketplace is lowered,” Professor Pavesic warns. In reference to intangibles that influence menu pricing, service is at the top of the list. Ambience, location, amenities, product [i.e. food] presentation, and price elasticity are discussed as well. Be aware of price-value perception; Professor Pavesic explains this concept to you. Professor Pavesic closes with a brief overview of a la carte pricing; its pros and cons.

An examination of the within -product category versus across -product category effects of partially comparative pricing

Partially comparative pricing involves a featured store providing price comparisons in reference to a competitor for some products (comparatively priced products) while omitting such comparisons and providing only its price for other products (non-comparatively priced products). Barone, Manning and Miniard (2004) found that while partially comparative pricing enhanced consumers' price perceptions of comparatively priced products at the featured retailer, it had the opposite effect for non-comparatively priced products (i.e., an inferiority effect). To the contrary, it is argued that a price comparison for one brand in a product category may enhance consumers' price perceptions of the remaining, non-comparatively priced brands within the same product category (i.e., a superiority effect). This research seeks to (a) examine the robustness of partially comparative pricing's effect in an across-product category context compared to a within-product category context and (b) extend the understanding of partially comparative pricing's within-product category effect on non-comparatively priced brands by examining potential moderators of this effect: brand diversity, brand typicality, and the relative expensiveness of the brand receiving the price comparison. The findings of four studies provide evidence to support the presence of a superiority effect in a within-product category context and suggests that the adverse effect of partially comparative pricing in an across-product category context may not be as robust as previously thought. Although the superiority effect was unaffected by brand diversity (i.e., whether the brands emanated from different manufacturers or from a single manufacturer), it was found to be moderated by the typicality of the brand receiving the price comparison as well as the comparison brand's relative expensiveness. Research participants formed more favorable relative price beliefs about the non-comparatively priced brand when the comparatively priced brand was perceived as a more typical member of the product category. Similarly, participants formed more favorable beliefs about the non-comparatively priced brand when the comparison price was assigned to the most expensive brand in the product category rather than the least expensive brand.