Food Pricing: Intuitive Price Method

Instructor: Ian Lord

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

For the restaurant owner who is willing to take risks or who wants to avoid lots of calculations, the intuitive price method offers a technique for planning the prices of menu items. In this lesson, we will see how this works in a practical setting.

Intuitive Price Method

Restaurant managers with price setting authority have a multitude of ways to determine how to decide on what menu items should sell for. Sometimes that decision comes down to a subjective opinion instead of the results of a detailed analysis. If the restaurant has the financial flexibility to wait and see how customers respond to changes in price, an intuitive pricing method can help a restaurant generate profits. Let's take a look at this price method and review some examples of how it is applied.

Definition

The intuitive price method involves picking a price through guessing what price customers will pay for the menu item. If the item doesn't sell at the original price, the price can then be changed to something else until customers start to order the item in enough quantities for it to be worth offering the item. It is ultimately a process of trial and error. Because the price is determined based on personal opinions, hunches, and expectations unsupported by concrete data, it is considered a subjective pricing approach. It differs significantly from other pricing methods because of this reliance on intuition instead of verifiable information.

Practice

Let's say Jerry's Burger Joint decides to launch a new selection of burgers using meat sourced from local farms where the cattle are pasture raised and grass fed. Jerry believes that that his customers will be enthusiastic about buying a gourmet line of burgers that supports the local economy more than a giant corporation based hundreds of miles away. Although the meat doesn't cost him significantly more to purchase because of his volume of business, he thinks he can charge a premium for the new burgers. Jerry is going to make an assumption about what the appropriate price is based on a hunch that customers are willing to pay more for ingredients that appeal to their emotions. Of course, if he is wrong about his guess, he still has room to make adjustments. It's also possible that the business will want to further adjust the price to see if sales remain consistent but with a higher profit margin.

An additional factor to consider when selecting the price is whether or not the chosen price will result in a profit. Since this method doesn't calculate the cost of ingredients, if the price is too low, the item will wind up losing the restaurant money every time it is ordered. However, there is the possibility that customers will order other items too that will result in the business making money on the total receipt.

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