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Food Pricing: Highest Price Method

Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

In this lesson we define the highest price method of food pricing and look at an example of how this subjective approach is applied in a restaurant setting.

Highest Price Method

Dave's BBQ restaurant has an interesting problem. The business is constantly busy, so much so that there is often a line out the door. When he initially designed his menu, Dave set prices that gave him a good profit margin, but the unexpectedly high demand has caused him to reconsider those prices. The highest price method might be more appropriate in his situation. Let's take a look at how this method works and see how Dave could apply it in his restaurant.

Definition

The surge in demand for Dave's BBQ has Dave thinking he could raise the prices on his menu. The highest price method involves picking the highest price that Dave believes the item can sell for. It is a subjective approach to pricing since it relies on feelings and beliefs about what an item will sell for instead of being a process of data analysis and cost multipliers. This pricing method works off the premise that customers are willing to pay more for an item that has the perception of quality and excellence.

The underlying cost of the ingredients is not as important a factor in the price compared to the value the customer feels he has gained in the purchase. However, if the costs of buying food and operating the restaurant are too high, the restaurant will not make a profit. Cost controls are still a concern, but being able to raise the price to what the market will bear can help absorb changes in the cost of doing business.

Practice

Dave set his original prices on the assumption that if he sold his food for three times what it cost him to buy it, he could make a decent profit. That continues to be true in his case, but clearly with a long line every day he has a product that the customers love. Let's take a look at Dave's brisket plate. It costs him $4 to buy the ingredients for the brisket and the sides (such as beans or french fries). Dave sells the brisket plate for $12. With this margin Dave has been able to offer a clean, fast, and friendly environment with well-seasoned and tasty food while still running a profitable operation. However, it appears the market will tolerate a higher price as customers will pay more to continue purchasing the brisket.

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