Subjective vs. Objective Food Pricing Methods

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 will briefly summarize the differences, advantages, and disadvantages of subjective and objective methods of food pricing in a restaurant setting.

Approaches to Food Pricing

Bill was talking to a friend of his in the restaurant business about opening up his own business. His friend, Bob, told him one of the things that will make or break him is how he goes about pricing his menu. Although Bob didn't have time right then to go over all the specifics, he was able to take a few minutes to point out two major approaches to pricing, along with a brief overview of specific methods in each approach. Let's see how Bob quickly summarizes pricing methods for Bill.

Subjective Food Pricing

The first general approach to food pricing includes subjective methods. A subjective method is one that is ultimately based on factors such as personal opinions, feelings, or experience. Examples include setting the price based on what customers think is reasonable or whatever the management thinks customers are willing to pay. Low prices, even below cost pricing, can be used to draw customers into the restaurant.

The advantage of this method is that it is quick and simple for Bill to implement. The downside is that it is imprecise and fails to account for factors such as the cost of ingredients and overhead. Overhead describes the non-ingredient costs that must be covered on each dish sold, such as labor costs, utilities, rent, and equipment. After all that, the restaurant still needs to charge enough to make a profit. With subjective prices there is a significant risk that menu items could be underpriced.

Objective Food Pricing

What if Bill wants to use a pricing method that is more precise and accounts for measurable information such as his ingredient costs? Objective approaches take into account budgetary factors such as the cost of the food as well as overhead. This is typically accomplished by determining a multiplier and then applying it to the cost of the main ingredient in each item or the calculated ingredient cost of the complete dish. Multipliers are calculated using measurable data, such as overhead costs and desired profit.

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