Food Pricing: Simple & Specific Prime Cost Methods

Instructor: Allison Moore

Allie teaches college business and culinary management courses. She has a master's degree in business administration.

This lesson covers how to set menu prices using two different objective pricing methods: the simple prime cost method and the specific prime cost method. Formulas and example calculations are provided for each method.

Pricing Strategies: Subjective vs. Objective

Restaurants can set their menu prices using a variety of methods and strategies. Some methods are subjective, such as basing prices on what seems reasonable or what other operations are charging for similar items. Objective pricing methods are based off of real operational data regarding food and labor costs, and allow for more accurate pricing of menu items.

Two objective pricing methods that can be used to help set menu prices are the simple prime cost method and the specific prime cost method.

Simple Prime Cost Method

As a reminder, the prime costs in a restaurant operation are all food and beverage costs combined with the cost of labor. The prime cost target range in the restaurant industry is around 60-65%. This means that roughly two thirds of total operating costs can be attributed to food, beverage, and labor costs. As a percentage of sales, it means that it costs a restaurant about $0.65 in ingredients and labor to produce every $1.00 worth of finished goods sold to customers.

For this example, we will use the operating data from The Four Bean Bistro to set menu prices for two items. Let's suppose the bistro's current operating prime cost is 60%.

The first step in the simple prime cost method is to determine the average labor cost per guest. This can be found by taking the labor cost of the operation and dividing it by the expected number of guests over a given time period.

The Four Bean Bistro's labor costs amounted to $4,000 for the month of March, and the expected number of guests for the month of April is 2,000 patrons.

Labor Costs Number of Patrons Labor Costs Per Guest
$4,000 2,000 $4,000 / 2,000 = $2.00

This means that on average, it takes $2.00 worth of labor to serve each guest.

The next step is to determine the prime cost per item, which is done by taking the labor cost per guest and adding in the food cost for a particular menu item.

Suppose the executive chef at The Four Bean Bistro has just developed a new spring menu, and she is working on setting the appropriate prices for two new menu items, a sweet pea risotto and a spring vegetable soup.

The bistro has determined the total ingredient cost per portion for the risotto is $4.00, and the total ingredient cost per portion for the soup is $1.00. This is the menu item food cost.

Menu Item Average Labor Cost Menu Item Food Cost Per Portion Prime Cost Per Item
Risotto $2.00 $4.00 $2.00 + $4.00 = $6.00 prime cost per item
Soup $2.00 $1.00 $2.00 + $1.00 = $3.00 prime cost per item

The final step is to determine the selling price for each item. This is found by taking the prime cost per item and dividing it by the target prime cost percentage (60% in this example).

Menu Item Prime Cost Per Item Target Prime Cost Percentage Selling Price
Risotto $6.00 0.60 $6.00/0.60 = $10.00 selling price
Soup $3.00 0.60 $3.00/0.60 = $5.00 selling price

This means that in order for the bistro to hit its 60% prime cost target, it must sell the risotto for at least $10.00 and the soup for at least $5.00.

Specific Prime Cost Method

The Four Bean Bistro wants their sweet pea risotto to be of the highest possible quality. They decide to use freshly shelled peas from a local farm as opposed to buying frozen peas that have already been shelled. This requires an employee to hand-shell a large amount of peas each day, adding an additional hour of prep time. The bistro's soup uses pre-shelled, frozen peas, which cost $1.00 less per pound than the fresh peas from the local farm.

The amount of actual cooking involved in the production of these two items also varies greatly. The soup requires a prep cook to chop a few vegetables and pour everything into a pot of stock. The soup can then be left to simmer, requiring only an occasional stir. This single pot of soup is enough to cover all soup orders for the entire day. The risotto, on the other hand, is made-to-order and can only be produced one serving at a time. It requires a skilled cook to constantly stir and attend to the dish in order to achieve the proper texture.

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