Food-Service-Manual-for-Health-Care-Institutions

• Competitors and their prices for similar products
• Profit objective as specified in the department marketing plan
Pricing Methods
Approaches to menu pricing vary, and no one method predominates. Accurate records are
needed, such as items’ sales records, standardized recipes, standardized portions, and cost history.
There are seven quantitative methods, six of which are as follows:
• The factor system, also called mark-up system
• The prime cost factor
• The actual pricing method, or all costs plus profit
• The overhead-contribution system
• The gross profit system
• The base price method
Each method has its advantages and disadvantages. Generally, methods that account for
more variables, such as different categories of costs, also require more precise information.
The remaining or seventh method focuses on the costs to produce specific menu items. In
the factor method, the targeted food cost percentage of the operation is divided into 100 to
determine a factor; thus, for a food cost percentage of 35 percent, the factor would be 2.86
(rounded). The menu price is then determined by multiplying the raw food cost by the factor
Raw food cost × Factor = Menu price
In this example, if the raw food cost for a menu item is $1.03, the menu price would be calculated
based on the following formula:
$1.03 × 2.86 = $2.95
The remaining cost-based methods work in a similar manner but take into consideration
other areas of costs such as labor, variable costs, fixed costs, and profit. Although this is an
advantage over the factor method, extensive cost records must be maintained, and computergenerated
data may be necessary to support these systems.
The prime cost factor considers raw food and direct labor costs. The direct labor cost is
the only cost that involves production; it does not include other costs, profits, or any other perceived
valued. The actual pricing method includes all costs plus a required profit to determine
selling price. Included are raw food cost, labor cost, variable cost, fixed cost, and profit. The
overhead-contribution system is a modification of the actual pricing method. The menu price
would be the actual cost of food, actual labor cost, other variable costs, and fixed cost and
profit. The advantage of this method is that it contains all costs and the direct profit in the selling
price of the menu item. The gross profit method is designed to determine a specific amount
of money that should be made from each customer—that is, every customer should pay a specific
amount to cover nonfood costs and profit. For example, taking the menu price of an item,
the item cost is subtracted, and the difference is the gross profit. With the base price method,
menu items are priced at a certain level to satisfy the market and then worked backward to
determine the amount to spend on raw ingredients. Computers are now being used to determine
this cost. This pricing method is rarely used in health care institutions.
Other Pricing Considerations
Other pricing considerations need to be evaluated. An item sold for $1.00 sounds more expensive
than one sold for 99¢. Therefore, odd-cents pricing appears to be a bargain. Odd pricing
Menu Planning
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