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Food Pricing: Reasonable Price Method

Instructor: Tara Schofield

Tara has a PhD in Marketing & Management

Establishing food prices is an important activity that requires research, calculations, and evaluation of the market. The reasonable price method is one way many restaurant managers use to determine prices, although it has many flaws.

What is The Reasonable Price Method?

You are trying to decide what to price your menu items at your restaurant. How do you determine what prices to charge? One of your options is to use the reasonable price method. Essentially you make a best guest to decide what customers will pay and what you need to charge to make a profit. The reasonable price method considers what similar products are available, what people are already willing to pay for similar items, and any factors that may affect what they will pay you for your food. You may have a fancier restaurant and be able to charge a little more.

The reasonable price method is very subjective, based on feelings or guesses. It is often used by people who do not understand food costs, mark up expenses, and how to price menu items based on accounting principles. Many novice or inexperienced restaurant owners use this method to create prices, which may cause them financial challenges if they do not charge enough for their food or overprice their food beyond what the market will bear.

How is The Reasonable Price identified?

Essentially, the reasonable price is an amount your customers will say is fair for the food they are ordering. If you charge too little, they may not value your food enough. If you charge too much, they may feel your prices are too high and not eat at your establishment.

Additional factors also affect what is considered a reasonable price. You may find that an economic downturn requires you to cut the price to get customers to eat at your restaurant. When determining a reasonable price, you must consider a variety of issues include competition, the number of potential diners, the time of day you will be busiest, and economic conditions.

Example

Let's look at a couple of examples. Let's say your restaurant offers chicken quesadillas. In your area, chicken quesadillas normally go for $7 or $8. You could charge $10 but no one will order them. You could charge $5 but that would be much less than people are willing to pay. You decide to charge $7.75. This amount seems reasonable because it is in the range that people are already willing to pay, and the price on the higher end of the scale, allowing you to make a little more money on each quesadilla.

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