How the Pareto Principle Simplifies Menu Pricing

Mar 05 2014

Cost of Goods Sold Restaurant Management Menu Pricing

Menu Pricing and How the Pareto Principle Simplifies It

Restaurants are businesses.  Like any other business, they depend on a delicate three-way balance between cost, quality, and price.  Unfortunately, pricing out menu items is a tedious task, one that many restaurant managers are willing to skimp on.

This is a problem, but it doesn’t have to be. Using the Pareto Principle, you can cut down the time spent on menu pricing while still maintaining an acceptable level of accuracy. How? The answer lies in the principle.

What is the Pareto Principle?

At the turn of the last century, Italian economist Vilfredo Pareto noticed that 80% of his country’s land belonged to 20% of his fellow Italians.  This observation held true in multiple scenarios.  Today, it’s often applied to sales (80% of your sales comes from 20% of your customers) and efficiency (20% of your effort accomplishes 80% of your tasks).  It can also be applied to menu items, in two ways:

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  • 80% of your sales come from 20% of your menu items
  • 20% of your ingredients are responsible for 80% of your costs

Putting the Pareto Principle to Work in Menu Pricing

First of all, let go of a familiar menu pricing concept. You don’t actually need to know the cost of every single ingredient in a dish to come up with an acceptably accurate cost. Why? Because many ingredients are used so sparingly (and bought in such a massive quantity) that they don’t really make a difference in cost. So, concentrate your efforts on the ingredients that matter:  the most expensive and the most volatile (the ingredients whose prices fluctuate frequently).

For menu pricing purposes, your recipes really only need 3 or 4 main ingredients. The rest – seasonings, garnishes, condiments – won’t really matter because they rarely cost much per portion. Now, all you need to do is use these selected main ingredients to figure the cost and price per menu item.

And that’s where it really becomes interesting.  Not only are you saving money by finally doing your menu cost analysis, you’re actually saving time in the process.  (If you’re really pressed for time, make the Pareto Principle work for you one more way:  analyze the 20% of your menu items that generate the 80% of your sales.  And then vow to do better next time.)

Click here to learn more about Recipe Costing using Ctuit RADAR

Rob D'Ambrosia

Rob D'Ambrosia

After recognizing that restaurant operators needed to leverage technology to serve their Business Intelligence requirements, Rob founded Ctuit Software in January 2000. From casual to fine dining concepts, Rob has experienced the full spectrum of front and back of house positions. He has installed POS systems and consulted for small and medium restaurant chains. Rob’s technology background is equally extensive having worked hands-on with computer systems and authoring both hospitality and IP telephony business applications.