What it takes to turn your food passion into a successful business
The Business of Food (3 of 4) is the third in a four-part series of articles focused on exploring what it takes to turn a passion into a successful and profitable business. In this article I cover, Value Proposition and Pricing, Know Your Customer, Average Spend & Frequency of Visitation, and Eating Experience.
Value Proposition and Pricing
People who work with me, hear me passionately vocalize this at least 10 times a day. It is not about price; it is about the value proposition. Do not focus on price to lure customers. Do not enter price wars. I have come across endless amounts of data to back this statement. Compete on experience not price. Compete on maximizing the value proposition. Know your positioning in the market, which will define your price bracket. I tackle this subject in more depth in the Experience Economy article.
For actual pricing, I use a two-way approach, top down and bottom up. I will start with the latter.
The Bottom Up Approach
This one is straightforward and pertains to your recipe costs. Needless to say, for this to be accurate, you need to begin with accurate recipes. To do so, I recommend you pay attention to the minor details I have found over the years can cause issues with inaccurate recipes and variances.
Yield: make sure you factor and measure batch sizes and recipe output / yield accurately. You need to incorporate adjustments such as weight loss because of cooking shrinkage, waste, leftovers and weight gains because of things like the addition of water.
Trimmings: Measure cutting trimmings and waste in order to precisely deduce the cost of ingredients.
Packaging: This is becoming more and more relevant these days, and I would suggest you have a clear idea on your packaging costs for delivery sales.
Once you complete your recipe and calculate your cost per serving / dish, you then assign your target cost ratio to it in order to come up with the bottom up proposed pricing of your plate.
If we assume you are targeting a food cost of 32% and your recipe cost turns out to be $4, then your proposed selling price using this method comes up to $12.5.
$4 / 32% = $12.5
Top Down Approach
This to me has more weight than the one above in the sense that it takes into consideration the market, both supply and demand. What your competition is charging for similar items and what your consumers will pay for them.
Often you will not find the exact menu items to compare, but you could find the closest ones to use as a benchmark. Sometimes, where possible, I do a price comparison per 100g. This means I would order the food from the identified competitors and weigh the key ingredients and do a comparison chart per 100g. This eliminates the variances in portion sizes.
The top down approach gives you an indication on how much your customers will pay for the specific dish you had in mind. You can create the circumstances for you to be successful as long as your value proposition is higher than your direct competition and your pricing is close to theirs.
The best approach, in my opinion, is a dual one. You use the top down method to get an idea of where you need to be in the market and the bottom up to get an understanding on any recipe tweaks you need to do in order to compete at that price point and be profitable.
In the example given above, if you do a top down study and find out that the market is charging 10 for a comparable item, then you need to ask yourself a few questions:
- Am I ok with a cost of 40% on this item?
- Will the market accept a higher price point? Am I giving enough added value to justify this increase?
- Is there anything I can do to tweak and alter my recipe to reduce my cost?
Know Your Customer
You have various considerations these days while creating a menu and restaurant concept. Besides the personal expression, there are the various customer considerations to take into account such as:
- Meat philosophy and approach
- Plant based approach
- Health consciousness
- Functional food
- Theatrical food experiences
- Technique based approach to cooking
- Current food trends
It is crucial to decipher trends from fads. The noise of fads versus trends becomes overwhelming and can be blurry thanks to social media and the fact that half the world population are now foodies. Often, I get an understanding of trends from industries that are not linked to ours directly. You can also get a feel of what is happening by looking at how people shop for food (their groceries).
You also need to know the type of customer you are catering to. Is it a:
- Desitinational leisure customer, or
- Business district convenience type of customer
Their requirements are different and therefore what they value and place importance on during their dining experience varies.
Finally, you can ask yourself the following questions:
- Are you a family friendly restaurant or not?
- Are groups your target audience?
- Will you be positioned as a romantic couple’s destination?
- Do you want people to use your restaurant as a remote office?
Be aware that nothing is static and that the market evolves with time and so should you. Be certain that nothing is cast in stone and often you might think you will cater to a certain category of clients prior to opening a new venue and, for some reason, you attract a different clientele. Also, the market is always shifting and changing and what is relevant today could be obsolete tomorrow. Be ready to adapt and evolve and take inspiration from how nature does that with its seasons. You need to do the same with your business.
Average Spend and Frequency of Visitation
While coming up with a menu you want to visualize frequency of visitation. How many visits per week, month, year do you want your customers to come? Do you want them to order what they love the most and stick to it or try something new upon every visit?
Too often, I see operators focusing all their attention on average spend per person. While I believe this is a very sound tactic and should be carefully observed, tracked, analyzed and where possible increased, it should not be the only metric. Frequency of visitation is as important (in most cases).
Here is what I mean by this:
John is someone that comes to your restaurant once a month. He spends $80 per visit. This means John spends on average $960 per year. (80 per visit x 12 visits per year).
Amie is someone who comes on a weekly basis. Her average order is $60. This means Amie spends on average 3,120$ in your restaurant per year. (60 per visit x 52 visits per year).
If Amie’s order is not heavily discounted and you have almost similar contribution margins (profits) from both her and John, then Amie is a far more valuable customer for your business.
Of course, this is a generic example and frequency of visitation varies greatly depending on whether you are a destination focus or convenience type of restaurant. Back to what I started this series of articles with, know who you are cooking for, know your customers, and cook your heart out for them. Be smart in how you conceive your menu and how often you update it. By doing so, you ensure your customers frequent you more often.
What are you serving the food in? How many plates on a table? How big are your tables? In today’s environment, this “eating experience” is also connected with “how instagramable” is your food and how picture friendly it is? As mentioned earlier in this series of articles, know who you are cooking for. Don’t go over the top with your presentations and components on the plate just for the picture, or the “foodie” who will blog about your food. Make sure you cook to those who will frequent your venue multiple times and be your loyal guests. With that said, you want to both wow these guests and make it a memorable and pleasant eating experience. How you present your food and what you serve your food in plays a big part in that.
Yes, the initial impression is important and people eat with their eyes first (and these days eat with their phone cameras first), but the actual eating experience during the meal is as important. This also has a ripple effect on your entire operation. The number of plates on a table is directly linked to:
- Required number of employees to serve a single table
- Table size
- Storage space for the tableware
- Washing facilities and allocated space
- Dispatch area and space in the kitchen
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