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In general, the term menu engineering is used within the hospitality industry (specifically in the context of restaurants), but can be applied to any industry that displays a list of product or service offerings for consumer choice. Typically the goal with menu engineering is to maximize a firm's profitability by subconsciously encouraging customers to buy what you want them to buy, and discouraging purchase of items you don't want them to buy.
Fields of study which contribute most to menu engineering include:
Perception and attention--Visual perception is inextricably linked to how customers read a menu. Most menus are presented visually (though many restaurants verbally list daily specials), and the majority of menu engineering recommendations focus on how to increase attention by strategically arranging menu categories within the pages of the menu, and item placement within a menu category. This strategic placement of categories and items is referred to as the theory of sweet spots.
The reasoning being sweet spots stem from the classical effect in psychology known as the serial position effect (also known as the rules of recency and primacy). The thought is, customers are most likely to remember the first and last things they see on a menu--hence, sweet spots on a menu should be where the customers look first and last. To date, there is no empirical evidence on the efficacy of the sweet spots on menus.
Customer perception of items offered on a menu can also be affected by subtle textual manipulations. For example, descriptive labeling of item names may produce positive effects, leading to higher customer satisfaction, and higher perceived product value. Similarly, the presence of dollar signs or other potential monetary cues may cause guests to spend less.
The primary goal of menu engineering is to encourage purchase of targeted items, presumably the most profitable items, and to discourage purchase of the least profitable items. To that end, firms must first calculate the cost of each item listed on the menu. This costing exercise should extend to all items listed on the menu, and should reflect all costs incurred to produce and serve. Optimally item costs should include: food cost (including wasted product and product loss), incremental labor (e.g., cost in in-house butchering, pastry production, or prep), condiments and packaging. Only incremental costs and efforts should be included in the item cost.
The two criteria for determining which menu items should be featured on a menu have been food cost percentage and gross profit. Food cost percentage is calculated by dividing the cost of the menu item ingredients, including surrounding dish items, e.g., salad, bread and butter, condiments, etc. by the menu price. Gross profit is calculated by subtracting the menu cost as previously defined, from the menu price. Advocates of menu engineering believe that gross profit trumps food cost so they tend to identify menu items with the highest gross profit, items like steaks and seafood, as the items to promote.
The downside of this exclusive approach is that items that are high in gross profit are typically the highest priced items on the menu and they typically are on the high end of the food cost percentage scale. This approach works fine in price inelastic markets like country clubs and fine dining white table cloth restaurants. However, in highly competitive markets, which most restaurants reside, think Applebee's, Chili's, Olive Garden, price points are particularly critical in building customer counts. In addition, food cost cannot be ignored completely. If food cost increases, total costs must increase enough to lower the overall fixed cost percentage or the bottom line will not improve. This is not a recommended strategy for neighborhood restaurant with average checks under $15.
Those who believe that a low food cost percentage is more important than gross profit will promote the items with the lowest food cost percentage. Unfortunately, these items are typically the lowest priced items on the menu, e.g., chicken, pasta, soups. Promoting only low food cost items will likely result in lowering your average check and unless the restaurant attracts more customers, overall sales will not be optimized.
Low food cost and high gross profit are not mutually exclusive attributes of a menu item. A second approach called cost-margin analysis identifies items that are both low in food cost and return a higher than average gross profit. These items referred to as primes. This analysis works well for restaurants in highly competitive markets where customers are price-sensitive.
There is really no single method of analysis that can be used across the board on all menu items. If a menu item is a "commodity" like hamburgers, chicken tenders, fajitas, and other items found on the majority of restaurant menus, prices tend to be more moderate. If a menu item is a "specialty" and unique to a particular restaurant, and demand is high, prices can be higher than average because technically the restaurant has a "monopoly" on that item and until competitors copy them and put it on their menus, higher prices can be charged.However, no restaurant can sustain a competitive uniqueness or price advantage over their competition in the long run. Eventually competitors will try to match them.
Using menu engineering in restaurants or menu items where price inelasticity is present is recommended and cost-margin in casual neighborhood restaurants and on menu items where price points are critical in building and keeping customers should be considered. Remember, the customer determines the best price to charge, not the restaurant operator. Customers do not care about your costs; they care about what you charge.
After an item's cost and price have been determined, analysis and evaluation of an item's profitability is based on the item's contribution margin. The contribution margin is calculated as the menu price minus the cost. Menu engineering then focuses on maximizing the contribution margin of each guest's order. Recipe costing should be updated (at least the ingredient cost portion) whenever the menu is reprinted or whenever items are re-engineered. Some simplified calculations of contribution margin include only food costs.
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