Restaurant Pricing, help me understand....

[Scott Shepherd]

For some reason unknown to me, I pay attention to details and I question things I probably shouldn't. So here's my question(s) for today....

What in the wild world of sports goes on in food pricing?

A couple of examples-

I buy a sausage biscuit for .99 cents. That's a biscuit and sausage- .99 cents. I buy a plain biscuit, it costs me $1.19. How's it cheaper to do less work and sell less product? You didn't have to cook any sausage, you didn't have to assemble it once cooked. Nothing. So apparently more product and more work costs less money. I don't understand.

I buy a 32 oz. Iced Tea for .99 cents. Buy a small Iced Tea, 20oz, it costs me $1.59. So how can a larger cup and more product cost me less? I don't understand.

A national chain is advertising 2 can eat for $14.99. One person can eat the same meal for $7.49. Huh???? 2 times $7.49 is $14.98. So how come it costs extra if we order the exact same thing individually? Sure, it's only a penny, but didn't someone think along the lines that you're pushing a bargain, and the bargain shouldn't cost more than if you bought the items individually? I don't understand.

A local restaurant saw a loss of business, so they raised their prices. Now they are out of business because their parking lots became totally empty once they raised their prices.

Another chain used to have 60-90 minute waits. Place was always packed. They raised their prices 40-60%. Now their parking lot is empty. They said the poor economy had really hurt their business. Huh? Maybe your pricing hurt your business?

I don't understand how people think raising prices gets you more customers.

On the other hand, there are a couple of places that have put specials in place and brought the prices down and those places, that used to be easy to get into, are now packed with people waiting in line.

Very interesting to watch how that business works. It's something I'll probably never understand, which is why I asked these questions.

Anyone got insight into that world?

[Mitchell Andrus]

Anyone got insight into that world?

Don't assume food service professionals with business degrees are making the decisions. Most mom and pop shops are not being run by trained personnel with business backgrounds. Many shouldn't have opened a can of soup let alone a restaurant.

Trying to making sense of an amature's behavior isn't easy and rarely nets worth-while results.

Two of my wife's friends got the idea that they could open and run a restaurant. Before spending nearly $100K in start-up and another $50K in first-year key costs, they were talked into working in the business and for caterers for a while by their husbands so they could learn the ropes. They didn't last a year. Good thing they didn't open a restaurant selling sausage biscuits, huh?

The failure rate for restaurants is thought to be 90% in the first year, it's actually closer to on-par with most other businesses, and opening a franchise only helps the chances for success slightly.

http://www.businessweek.com/smallbiz/content/apr2007/sb20070416_296932.htm
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[Stephen Tashiro]

I don't understand how people think raising prices gets you more customers.


Since you like to think about such things, think about the fact that businesses are not trying to maximize the number of customers, they are trying to maximize profits. So in some cases (although apparently not in the case you mention) it is best to raise prices and decrease customers if this increases profit.

I think that the big retailers tend to set some prices so low that they run out of certain products. From a purely "free market" point of view, they aren't maximizing profits. They could charge a little more and still sell out their stock.

[Dan Blackshear]

Marketing, at least on the Sausage biscuit deal. You see an add for $0.99 sausage biscuit and you think "Great, cheap breakfast!" but you don't want just a sausage biscuit, you need some coffee and maybe some hashbrowns to go with it, now your $0.99 breakfast is $3.75 or more and that coffee and hasbrowns were much cheaper to make than the sausage biscuit.
The cheap stuff gets you in the door so you can add the high profit stuff to it. Of course, they hate me, I order 3 sausage biscuits and just drink the coffee I brought from my house :D

[David Weaver]

I'd guess that the restaurants with questionable moves were probably just trying to figure out how to make enough money to pay their bills, loans, etc.

They probably weren't covering their business costs at lower prices and made a last ditch effort to see if they could get lucky with revenue and make their costs. In those cases, they really have nothing to lose if they know they're going to be out of business, anyway.

[John M Wilson]

What in the wild world of sports goes on in food pricing?

I buy a 32 oz. Iced Tea for .99 cents. Buy a small Iced Tea, 20oz, it costs me $1.59. So how can a larger cup and more product cost me less? I don't understand.

Anyone got insight into that world?

As a reformed MBA (Master BS Artist) one of the lessons I learned early on is that cost and price have very little to do with each other.

Price is what you can sell something for. Cost is what you paid for raw materials, labor, and all of the other things that it took for you to make the product.

If you can sell an item for $5.00 that only cost you a nickel to make (pet rocks) then you are making money. But ultimately the customer sets the price, not the seller. Like the guy selling apples for a million each (I only have to sell one & I'm rich!), if customers don't buy enough of your product at a given price, you may have chosen too high of a price. If you sell out, you may have set your price too low. But the customer doesn't care a thing about how much it actually cost you to make your product.

When a business offers different lines, they may do things which are counter-intuitive to you, such as sell some things below cost to get you to buy other things that make up the loss and then some. Or, they might have intense competitive pressures in one line, making them keep their price low, and less pressure in another, allowing them to let the price creep up.

Now, these things are assuming rational business people, which as noted above, is not always the case. The reason why so many folks go out of business in their first year is that they might have excellent knowledge of their field (catering, baking, etc.) and not enough knowledge of how to successfully run a business (advertising, cash flow, management, etc.).

HTH

[glenn bradley]

I can't help you understand but, I can help you like longer. Stop eating at places that sell sausage biscuits for 99 cents!!!

[Jim Finn]

One thing to keep in mind.........the cost of the food is very minor in the overall cost of running a resturant.

[Dave Lehnert]

It's not only restaurant food but everything you buy.
Milk, Pop, Baby formula is most often sold at a loss in a grocery store.

[Scott Shepherd]

I fully understand the economics of selling 100 units at 10 each or selling 50 units at 20 each, which means less staff, less cash outlay for materials, etc. I get that, but just as John said, if your business is packed, then you raise the prices considerably and your customer base drops to a break even point, where you were making a profit, you'd think somewhere, someone would have the smarts to say "hey, pull me graphs of the sales figures. Hummm...looks like our business dropped off in May substantially. What happened in May around here? Wait, isn't that when we introduced the new menus with new price increases? Monday morning, I want new menu's with reduced pricing and I want to buy some advertising to let people know we've lowered our prices."

At least that's what would happen if I were running that place, but apparently that concept escapes some people in that business.

Glenn, I'm fine with the sausage biscuit eating. Sure, it takes years off my life, but it takes years off the end of my life and those are pretty crappy years anyway, so I'll just eat my biscuits :D

[David Freed]

I just realized a couple months ago that adding an egg to your sausage muffin costs costs $2.

Sausage muffin - $.99
Egg muffin with sausage - $2.99

Identical sandwich except for the egg. :confused: I let them keep the egg.

[Jay Jolliffe]

How bout a lobster from the boat will be about $ 5.00 which is about 1 1/2lb. In the super market it's 10 to 12 dollars a pound.

[Scott Shepherd]

I just realized a couple months ago that adding an egg to your sausage muffin costs costs $2.

Sausage muffin - $.99
Egg muffin with sausage - $2.99

Identical sandwich except for the egg. :confused: I let them keep the egg.

There you go David! That's the stuff. Now, let's take it one step further. I'm speculating here, but my guess is if you wanted to "add an egg" to an existing sandwich, it would be about $1.00. So if you ordered the Egg muffin with sausage, you'd pay $2.99. However, if you ordered the Sausage muffin and then upgraded by adding an egg, it would probably be $1.99 :)

Let's get into the combo's now.......

How come it's cheaper for me to order a burger, fries, and a drink than it is for me to just order a burger and a drink? I mean those fries had to cost something. You have to buy them, fry them, package them, and handle them. I'm going to let you skip all that for the same price. Why should I have to pay more for less food?

There's one national chain that you can buy many of the "combo" pieces cheaper if you order them individually. I order the items individually and they always say "Oh, you want the combo", and I say "No, I don't want the combo", and they tell me that I just ordered all the things that make up a combo. I explain that I'm fine with them ringing them up individually. This usually leads to a very confused cashier. However, it's actually cheaper to order them items individually.

Let's go back to our 32 oz. Iced Tea. It's $1.00. If I want that drink with my combo, then I have to order the medium combo. Well, the cost of the drink in the medium combo defaults to a soft drink. So now we're at a $1.89 drink. So now I'm paying $1.89 for a drink that you will sell me for $1.00 by itself? So if I order the items by themselves, it'll be less expensive.

[Pat Germain]

I've never owned a restaurant. But my family is in the business. Things to consider:

- If a sausage biscuit is a very popular item, a restaurant might make up a whole bunch of them ahead of time and be able to sell most of them before they expire. If they don't sell nearly as many plain biscuits, they're going to charge you for the inconvenience of preparing one or the overhead of throwing a bunch of them out every hour.

- Soda pop is only pennies per glass wholesale. This is why they can give endless refills after they charge you a 200% markup

- Many restaurants make little or nothing on a standard meal. However, drinks, desserts and appetizers bring HUGE profits. This is why many of the new "Two can eat for $20.00" offers include appetizers or desserts. And this is they offer discounts for two people or two meals. They know almost everyone is going to order a drink. If they sell two drinks, that's profit.

- Alcoholic beverages offer even more profit. That's why even the most poorly run bar can stay in business. If a moderate number of people sit down and order drinks, the dough rolls in.

- My great uncle opened a restaurant in Los Angeles County back in the 1960's. (The North Woods Inn) It's still in business. His son now runs it. One of the restaurant's secrets is it has a huge waiting area with a full bar. While they're waiting for a table, people sit down and order a few drinks. Cha-ching!

- Lobsters off the boat are cheap. But a restaurant must keep lobsters alive in a salt water tank. That's a lot of overhead. So, we the diners pay for it. If we live far from the source, those lobsters have to be flown inside large coolers. More overhead, higher price.

- So why is lobster in a restaurant right on the ocean typically so expensive? Well, waterfront property is expensive. And people will pay more to dine at a restaurant with a water view. High property overhead + water view = higher prices.

[Glenn Vaughn]

My office used to be st one of the Community Colleges I support. The culinary program had a small restaurant were I would eat lunch. They had a chicken salad sandwich for about $5.00 - bread, chicken salad, lettuce and tomato. The also had chicken salad on the menu as a salad for &2.50 - it came with a lettuce and tomato garnish. An order of taost was $0.75. I could either order the sandwich or, for 75 cents less, order the salad and a side of toast. After I ordered the salad and a side of toast a few times, I was told I could not order them both at the same time. They were still on the menu, just not available to me. Needless to say that ended lunch there for me.

[Neal Clayton]

My office used to be st one of the Community Colleges I support. The culinary program had a small restaurant were I would eat lunch. They had a chicken salad sandwich for about $5.00 - bread, chicken salad, lettuce and tomato. The also had chicken salad on the menu as a salad for &2.50 - it came with a lettuce and tomato garnish. An order of taost was $0.75. I could either order the sandwich or, for 75 cents less, order the salad and a side of toast. After I ordered the salad and a side of toast a few times, I was told I could not order them both at the same time. They were still on the menu, just not available to me. Needless to say that ended lunch there for me.

having worked in hotels and restaurants when i was in school back in new orleans, you learned the lesson that most restaurant owners and innkeepers learn very quickly...there are some customers you don't want.

if 5 people come in and sift through the menu for the cheapest thing they can get, you probably made 30 bucks.

if 2 people come in and order an appetizer along with their drinks which preferably includes alcohol, you already made the 30 bucks, not even counting their meals. that's lesson number two, drinkers (and smokers for the states that still have those in restaurants) are the good customers, because they sit there for awhile. they pay for the liquor, then they pay for the appetizer, then they pay for the meal, then they want their coffee and cigarette and by that time you can pitch them on some dessert. that's why the menu has in bold "automatic gratuity of 20 (or 25 or whatever) percent on parties of 5 or more". anyone who would read that and object to it or leave because of it is weeded out with minimal hassle.

same reason that hotels want the business travelers. the company is paying for their meals so they don't care what the food costs. they don't have screaming kids running around the pool, they don't break stuff. they don't call for extra pillows and blankets to stuff the 4th kid into the one room, if there's another person they slap down the company credit card and pay for the second room. they sleep, shower, and leave.

and on the original question, that's why a la carte costs more. if a person orders an entree that comes with a choice of soup and vegetable and wants a second vegetable instead of the soup without any mention of the price, that's fine, they'll accommodate that. if a person wants to scour the menu with a pencil and calculator to find out how cheap they can get in and out they're simply not wanted.

you were probably wound up being a lesson for the culinary school in how to price the menu to weed out people like yourself.

that's also why most restaurants fail. people open a restaurant without any regard for price and competition. they set their prices too low to get people in the door, and then discover after a few months that they traded their jobs for new jobs with longer hours for less money. then when they raise the prices the people who only came in because the place was cheap disappear. they either needed to be cheaper than everyone else with worse food, or more expensive than everyone else with better food. there is no happy medium in between. mcdonald's makes money. jacket and tie required makes money. applebees is a born loser for everyone but the corporate office collecting those franchise fees.

there's a perfect example here. simple sandwich joint, i go there a few times a month. there's nothing more elaborate on the menu than a hamburger steak. the burgers are basically a home made hamburger, and that's their primary menu item. only difference in them and the mcdonald's/wendy's/burger king that surrounds them is their burger fries and a drink costs about 12.50, and theirs doesn't come in pre-frozen on a truck.

they've been there for about 30 years selling those 13 dollar hamburgers, and are doing just fine. they do a miniscule amount of volume compared to the fast food places around them, but mcdonald's is making 50 cents on the 5 dollar burger combo, the local sandwich shop is making 7-8 bucks on theirs. so the net is about the same, only difference is the local place isn't working as hard for it.

[Scott Shepherd]

you were probably wound up being a lesson for the culinary school in how to price the menu to weed out people like yourself.

Sorry, but that's such a cop out. He didn't create the menu. What he was seeing and experiencing is the same thing I'm talking about. Poor pricing models make us feel like we're being ripped off. If you have 3 items on your menu and they total $10.00, but you sell the same thing in some "package" and it costs me a different amount, then YOU have made me feel like you are dishonest. That's not my fault, that's YOUR fault. Had you paid attention to your JOB and priced things correctly, then I wouldn't feel like you were ripping me off.

I actually think it's against the law. I do not believe you can sell 2 people the exact same thing and charge them different amounts when the price is posted. If I order a hamburger, fries, and a drink, it's not my responsibility to ring it up correctly. If I order that and it's $6.00, but you order the same thing as a combo, and it's $5.50, then you have just sold the exact same items for a different amount, which I do believe to be illegal.

A solution would be to have the cash register software immediately package things to where they were the most economical. Then everyone would always be charged the same.

But it's not the customers fault this stuff happens, it's the restaurants fault.

As a side note, drove by Lonestar Steakhouse last night to notice the signs ripped off the building, doors shut. Bye Bye Lonestar. I guess raising the prices didn't work for them either. They raised the prices, people stopped coming (used to be packed all the time), and when people stop coming to the restaurant, it's only a matter of time. Topeka's Steakhouse is next on my list. Can't be long now for them. Parking lot is empty all the time.

[Matt Meiser]

Lots of Lonestars are closing. I was shocked that they reopened the one closest to us. It was closed all summer after having the roof ripped off by a tornado. I figured they'd just close, but it looks like they took the opportunity to do some remolding and reopened a couple weeks ago.

I think sit-down chains aren't doing well because people are realizing that they are paying a lot of money for garbage. Some of the fast-casual places actually offer better food for less money. Take Mexican for example. Places like Chipotle and Qdoba offer fresh made to order food for less than places like now-out-of-business Chi-Chi's, Rio Bravo, etc. I ate at a Tumbleweed a few weeks ago while on a work trip -- belch! Or you can go to just about any local mexican place and get good food for less.

[Pat Germain]

I actually think it's against the law. I do not believe you can sell 2 people the exact same thing and charge them different amounts when the price is posted. If I order a hamburger, fries, and a drink, it's not my responsibility to ring it up correctly. If I order that and it's $6.00, but you order the same thing as a combo, and it's $5.50, then you have just sold the exact same items for a different amount, which I do believe to be illegal.

It's not at all illegal, Scott. It would be illegal if I owned a restaurant, I got together with other restaurants and we decided to fix our prices at an agreed-upon rate. Otherwise, if I want to charge you $6.00 for a hamburger only and $5.50 for the same burger with fries and a drink, that's perfectly legal.

The only other situation I know of where pricing can be illegal is if, for example, my $8.00 hamburger suddenly jumped to $18.00 because a hurricane just blew through town and food is scarce.

Incentive pricing is becoming very common. The Walt Disney Company are masters at it. If you want to buy a one-day ticket for one Disney park at the gate, it's almost $100 a person. But if you want a two day ticket, it's much less than another $100. By the time you buy a six day ticket, you can add another day for literally $5.00. It's intended to keep you and your family at the Disney Parks and not at local competitors like Universal Studios. And while you're at the park, Disney can charge you $15.00 for a burger, fries and a drink because it's a major hassle to leave the park and drive to McDonald's for cheaper chow. It's not illegal. It's good business.

[Joe Leigh]

The only other situation I know of where pricing can be illegal is if, for example, my $8.00 hamburger suddenly jumped to $18.00 because a hurricane just blew through town and food is scarce.



Not so sure about that.....there are many beverage (soda) machines I know of in the southwest that change their pricing automatically as the outdoor temperature rises.

[David Weaver]

Sorry, but that's such a cop out. He didn't create the menu. What he was seeing and experiencing is the same thing I'm talking about.

His story is a good example of a very stupid manager.

Neal makes a lot of good points, though, and chief among them is don't open a restaurant if you want to get rich. There's a very slim chance that it could happen and after a decade of your life slips away in 7 day workweeks, you might get to a point that you can pay other people to do the work and sit on your duff, but there's a much better chance you'll be bankrupt before you finish servicing your initial debt.

I still think the price increases are because people had debt and they were just doing the "wish in one hand and ___ in the other" and hoping the wish hand would fill up first knowing they were going out of business regardless.

[Scott Shepherd]

It's not at all illegal, Scott. It would be illegal if I owned a restaurant, I got together with other restaurants and we decided to fix our prices at an agreed-upon rate. Otherwise, if I want to charge you $6.00 for a hamburger only and $5.50 for the same burger with fries and a drink, that's perfectly legal.



Pat, you can charge me what you want, true, however, you can't post pricing for the same objects and then charge me a price different than you posted.

If the price wasn't posted or on a dry erase board, true, However, once it's posted, you are obligated under the law to accept that.

If you are driving along and a gas station sign says "$2.40" for a gallon and you pull up to the pump and it says "$2.65" on the pump, by law (at least in our state), they have to sell it to you for $2.40 a gallon. You can't deviate from the posted price and by selling me the same food you sell someone else for a price that's different than posted, I think I'd have a case.

[Pat Germain]

^^ Oh, I see your point, Scott. I agree prices should be posted and charged equally among customers.

[Matt Meiser]

Almost everywhere you look there are deals that you can get by buying a combination. Buy a box of 100 screws and you'll save over buying 100 individual screws. Buy a closet organizer kit and you'll pay way less than buying the parts. Buy a jumbo size package of toilet paper and you'll pay less than 4 rolls. The list could go on and on...

[greg lindsey]

I couldn't help but to throw my .02 in. A big fast food chain sells cheeseburgers for 1.99 and a hamburger for 1.50 with .20 to add cheese. So when I order a hamburger with cheese( just to drive'em crazy:p) they always try to sell me on the cheeseburger, .29 is a savings when you eat as many hamburgers w/ cheese:D as I do.