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    How restaurant prices work

    We're heading off to Worcester tonight, somewhere I've never been, to break the journey from Lancashire to Devon. I started looking at places we could go out to eat tonight. Four in the city centre took my fancy - Singapore (Cantonese), Chung Ying (Vietnamese), Cote (French) and Miller and Carter (the Steakhouse). What struck me was the similarity of the prices on the menus, despite the variety of cuisines. In each, a starter and main will cost around £20-25, and it got me thinking. Do restaurants set their prices on the basis that they know local people are willing to spend that much to eat out, or do they start with the price and then create their menu based on what they know they can fit within it?

    #2
    Originally posted by Rogin the Armchair fan View Post
    Do restaurants set their prices on the basis that they know local people are willing to spend that much to eat out,
    Not just restaurants, this is literally how all pricing works. You set your prices at the level at which people are prepared to pay.

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      #3
      Interesting though - to me at least - that the commodity being priced here is "a meal out". So it doesn't seem to matter if we're talking about a portion of moules frites, a rump steak and chips, or a Cantonese set menu, everything costs £20-25. It seems it must be the portion sizes that adjust to fit the price, rather than pricing the meals based on their ingredients, which by their nature you'd expect to result in quite a variety of prices.

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        #4
        Would you be adjusting portion sizes though? A restaurant serving pasta doubtless not fresh made will still charge 20-25 for the privilege of say linguine in a basic tomato sauce/garlic and oil/something similarly cheap as fuck. And they won't be giving you way more of a plateful than someone ordering veal Marsala.

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          #5
          Originally posted by Lang Spoon View Post
          Would you be adjusting portion sizes though? A restaurant serving pasta doubtless not fresh made will still charge 20-25 for the privilege of say linguine in a basic tomato sauce/garlic and oil/something similarly cheap as fuck. And they won't be giving you way more of a plateful than someone ordering veal Marsala.
          Exactly. What is being bought as you suggest Rogin, is a meal out, with all that this entails. The cost of the ingredients has almost nothing to do with it. Even when you go to an Indian and you see a different price between say a chicken jalfrezi and an vegetarian jalfrezi, that difference is not really about the cost of the ingredients, but rather a customer expectation that you pay slightly more for meat.

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            #6
            Pricing points are always way above what ingredients cost because really you are paying for the luxury of parking your arse in a comfy space that's heated and lit for you and having people bring you stuff so you don't have to get up. The cost of the ingredients is probably one of the lowest influences on price except for a few rarer items.

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              #7
              Not the attitude of my work canteen when complaining about small portion sizes...
              [in that case it isn't cost as such as they underestimating the amount of ingredients they needed... but they ain't going to admit to that!]

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                #8
                Respectfully, ad hoc is way off on this one.

                Restaurant prices are based on a rather complicated factoring of three things; food costs, labour costs and fixed / overhead costs.

                And margins in the business are notoriously thin, so being too far out on any of the three will mean you go broke.

                What's referred to above is food mix or menu mix; the idea that some of your items (steaks, ribs) will have a higher food cost and lower margins and some (pasta mainly) will have lower costs and generous margins. But it has to, in a swings and roundabouts way, work out around an average number you've pinpointed as profitable.

                But yes, restaurants in a similar area will have similar prices for a variety of reasons. One of them being so that they don't give away the farm on one hand and don't price themselves out of the market on the other. But mainly it's down to food, labour and fixed costs being similar within a town.

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                  #9
                  If that is how restaurants price things (which may well be as I'm certainly no expert), then they are pretty much the only industry that does. The first rule of Cost/Price/Breakeven for Dummies is that you price at what the market will pay. (And if that gives you the margin you want/can live with, then you go ahead and do it)

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                    #10
                    Three things about that come to mind quickly; the first is that there isn't really a mechanism to determine what people are willing to pay for a dinner out. You could concievably do a market survey, but there are so many flexible factors (ambience, service level, perceived quality, 'gourmet' perception) that you wouldn't learn much.

                    The second is that many industries have no replacement factor, but restaurants do. You pay what you pay for lumber or a plumber because there is no 'other way'. If restaurants seem too expensive, you'll just cook for yourself. People know the cost of goods sold and can do the math. If there's a poor value equation, they'll opt for the replacement.

                    Third, which falls out of the second, margins in restaurants are notoriously thin. That's because they have to remain sensibly priced to stay busy. Not just on Friday and Saturday night, but 5 or 6 days a week for years on end. And it's very hard to do, which is why restaurants are one of the sectors with the highest rates of failure.

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                      #11
                      WOM is right here. At least in proper restaurants.

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                        #12
                        Restaurant meal prices are mostly priced too low for running a business, which creates a false expectation across the industry, which means that the price the market will pay is often below profitability.

                        But in the case of restaurants which are profitable, I think they know what customers are willing to pay for certain dishes and then cut corners on portion size on ingredient quality to match that expectation. And for most people in most mid-market restaurants in Britain outside of London, that number is going be to 8-15 quid for a starter, and 14 to 25 quid for a main.

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                          #13
                          Isn't it drink that restaurants rely on for profit?

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                            #14
                            Originally posted by WOM View Post
                            Three things about that come to mind quickly; the first is that there isn't really a mechanism to determine what people are willing to pay for a dinner out. You could concievably do a market survey, but there are so many flexible factors (ambience, service level, perceived quality, 'gourmet' perception) that you wouldn't learn much.
                            I don;' see how this is only true for restaurants. This seems to be true for more or less every kind of product/service. I'm not saying that "determining what the market will pay" is easy or there is some obvious method to come by the answer - because there isn't.

                            The second is that many industries have no replacement factor, but restaurants do. You pay what you pay for lumber or a plumber because there is no 'other way'. If restaurants seem too expensive, you'll just cook for yourself. People know the cost of goods sold and can do the math. If there's a poor value equation, they'll opt for the replacement.
                            Fair enough, that is different from most sectors.

                            Third, which falls out of the second, margins in restaurants are notoriously thin. That's because they have to remain sensibly priced to stay busy. Not just on Friday and Saturday night, but 5 or 6 days a week for years on end. And it's very hard to do, which is why restaurants are one of the sectors with the highest rates of failure.
                            Again, this is true across a range of sectors.

                            Like I said, I am certainly no expert, but the idea that it is primarily cost based is, at the very least, very surprising to me. And this sentence, sounds (genuinely) to be what i;m suggesting anyway:
                            What's referred to above is food mix or menu mix; the idea that some of your items (steaks, ribs) will have a higher food cost and lower margins and some (pasta mainly) will have lower costs and generous margins. But it has to, in a swings and roundabouts way, work out around an average number you've pinpointed as profitable.
                            There's a load of talk this week about a new restaurant in London run by a bloke called "Salt Bae", in which prices are fucking astronomical. This is not based on cost. It's based on what the market will apparently pay.

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                              #15
                              Drinks are certainly more profitable, but mostly it is sheer volume.

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                                #16
                                Originally posted by San Bernardhinault View Post
                                But in the case of restaurants which are profitable, I think they know what customers are willing to pay for certain dishes and then cut corners on portion size on ingredient quality to match that expectation.
                                I'd call that an unnecessarily jaundiced view. Restaurants that are around forever - and especially franchise operators of all price points - have strong systems in place. Things like portion control, stock rotation, scheduling methods, load forecasting, etc. These things all contribute to profitability.

                                The idea of cheaping out on ingredients is almost a non-starter. All ingredients are fundamentally cheap.

                                Mom and pop shops may have wonderful food, but if they're constantly losing money through small holes in the bucket, they'll go out of business.

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                                  #17
                                  If I remember Salt Bae right, his thing is steak. There is a reason that a lot of high-end and celeb chefs have been opening steak houses. That appears to be one of the places the market is willing to pay way over the odds. Someone will pay a lot of money for a good steak, and while the raw ingredient of the steak is expensive, generally it’s fairly easy to prepare, doesn’t require a lot of prep time, doesn’t have a lot of additional ingredients, can be fully cooked to order rather than needing to be part cooked in advance leading to wastage when not ordered. That’s one of the few places that become actually profitable.

                                  It was always interesting that the Heston Blumenthal or Gordon Ramsey 3-star restaurants where the cost is genuinely astronomical were apparently often loss making. The amount of front and back of house staff needed to get it right was through the roof. These people only really make a profit when they use the fame from their best restaurants to get on TV or sell books or get products into Waitrose or open restaurants like steak houses or open second-tier restaurants where there’s a serious economy of scale.

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                                    #18
                                    Originally posted by ad hoc View Post
                                    This is not based on cost. It's based on what the market will apparently pay.
                                    I think I have to learn more about what you mean when you say 'based on what the market will pay'. All prices are, in some manner, based on what the market will pay. But that's not the same as set based on what the market will pay.

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                                      #19
                                      Jamie Oliver's restaurants are an example of how a famous chef's name isn't enough to get people to page top whack for mediocre food.

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                                        #20
                                        Originally posted by ad hoc View Post
                                        I don;' see how this is only true for restaurants. This seems to be true for more or less every kind of product/service. I'm not saying that "determining what the market will pay" is easy or there is some obvious method to come by the answer - because there isn't.
                                        Wait...I'm not saying that it's only true for restaurants. I was arguing your theory that Business 101 was that all businesses charge what people are willing to pay. As if they establish a price point and work backward. My contention is that they typically establish cost and work forward. At least that's how it was done when I was a restaurant manager and a catering manager at a golf course / wedding facility.

                                        Costco also uses this method to astoundingly great success. They mark up every item in the shop by 15%. That's it. They negotiate their best cost and then mark it up by 15% across the board. That, plus the membership fee, is the whole deal. It's brilliant and it works.


                                        Marketing perception sidebar; when we had a catering menu for weddings and tournaments, we had chicken at $22.95, prime rib at $24.95 and steak at $28.95. We mostly sold prime rib. But we had a theory that the price jump from prime rib to steak was too great, so we slotted in fish at $26.95. Nobody ever orders the fish, but as soon as we introduced that price step, we started selling the steak option like mad. It was purely psychological.

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                                          #21
                                          Salt Bae's schtick is highly Instagramable content, which is also the case for his prices



                                          London makes sense for him, just as Dubai and Vegas do

                                          The proliferation of steak houses has more to do with business entertainment trends and expectations among those who handle reimbursements. Even our relatively sophisticated staff were more comfortable with a four figure tab from Peter Luger than the same total from Eleven Madison Park.
                                          Last edited by ursus arctos; 30-09-2021, 12:45.

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                                            #22
                                            Restaurants that compete with similar restaurants need to keep an eye out for what the competition charges and what it offers. That's why you'll find that the minute a franchise moves in next to a private restaurant with a similar theme, the latter almost invariably lose.

                                            But some restaurants get by without having to worry about overpricing because they have a unique selling proposition. In London, I worked in a restaurant that offered traditional English food according to Mrs Beeton's book. No other restaurant in London had that at the time. The restaurant could write its own prices. They were intelligent enough to be reasonable, and to offer a good range of prices to satisfy both low-end and high-end customers. In the end it went under after something like 25 years, but for a while it was a cult eatery (personally, I thought much of the food was horrible. Steak & Kidney Pudding! Urgh.)

                                            A restaurant near where I live has a perfect location: at the beach with a perfect view of Table Mountain and an ideal sunset-watching position. For years it was hugely successful even though the food was mediocre. The kind where they use processed cheddar instead of mozzarella, and served an absurd version of Chicken Saltimbocca at proper Veal Saltimbocca prices. But as long as the food wasn't distressingly bad, the people filled the place daily, happy to pay premium for the ambience. More than that, they fooled themselves into thinking that the food at that place was desirable.

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                                              #23
                                              All very true.

                                              The "market" works differently in very dense restaurant environments, in part because the consumer decision is less likely to be "let's go out" but rather "lets go for sushi (etc.)"

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                                                #24
                                                Can I put in a word both for steak and kidney pudding and for fish?

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                                                  #25
                                                  Sorry, when I mentioned fish above, that was on a catering menu. While one might order fish, you'd never order a room full of fish at a tournament, banquet or wedding. Or pork, for that matter. Chicken and the 'mainstream' beefs are your only two realistic options.

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