REVENUE MANAGEMENT

APPLICATIONS IN
FOOD AND BEVERAGE INDUSTRY

By:
Chandi Karunarathne
Recommended References

• All students should refer the chapter 10 and chapter 11 of text book
provided by me.
Background
• Revenue in busiest days in a restaurants/ bar
• Impact of service charge on total revenue
• What are the visible strategies to manage the operation?
• Revenue in low occupancy dates……..

• What are the visible strategies to increase revenue in low occupancy dates?
• Foodservice operators apply very different pricing
strategies than do lodging industry RMs.
• Different basis to assign menu prices
• Product cost percentage
• Product cost: plus
• Contribution margin
1. Product cost percentage (pricing method):

• A pricing method that relies on product cost percentage

targets when determining menu prices.
• “Since the percentage of profit runs between 5 percent and
20 percent, any increase in food cost, payroll or other
expense percent will decrease your net profit just that
much.”
• High Cost- High Quality- High Price- High Willingness to Pay-
High Profit
• Cost
• Products (food and beverages)
• Labor
• Other expenses
• Profit
cost of the product and the product cost as a
percentage of revenue
Q: 01

• Assume that the operator has developed a menu item that can be
produced for Rs. 220/- in ingredient costs. With a targeted product
(food) cost percentage for that item of 40 percent, calculate the
selling price.
 Pricing factor/ Multiplier (foodservice):

• A constant number used to help determine foodservice product

menu prices.

PF= 1/Desired Food Cost %

Selling Price= Pricing Factor X Item Food Cost

2. Product Cost: Plus Pricing Method

• A product cost: plus menu pricing system simply

considers an item’s product cost, as well as any
number of additional cost-related factors, when
determining selling price.
• Prime cost: The sum of the product cost and labor
cost required to produce a menu item.
 3. Contribution Margin
• Developed by Boston Consulting Group (BCG)
Contribution margin = Selling price - Product cost
Selling price= Product cost + Desired Contribution Margin

Stars: Menu items with high popularity

and high CM
Plow horses: Menu items with high
popularity and low CM
Puzzles: Menu items with low popularity
and high CM
Dogs: Menu items with low popularity and
low CM
Total Revenue = Selling Price X Number (Volume) Sold

Eg:
A foodservice organization chooses from two
basic option when pricing its products.
APPLYING DIFFERENTIAL PRICING IN
FOOD SERVICES
1. Make the menu prices higher on Friday and
Saturday night

•“Rack” menu price.

2. Offer special menu items for higher price on
Friday and Saturday night
3. Place selected menu items for lower
price on Friday and Saturday night
4. Offer preferred seating at a higher price
How could the yield be improved

• Optimizing table mix (the number and capacities

of various tables) directly impacts an operation’s
ability to maximize table turns.
Group Discussion

How to effectively use differential pricing in

food and beverage operation?
FACTORS AFFECTING VALUE PERCEPTIONS IN
FOODSERVICES
Key factors to be considered for the ability to
influence revenue management strategy
• Competition
• Service levels/ delivery format
• Guest type
• Product quality
• Portion size
• Ambiance
• Meal period
• Location
• Image
• Sales mix
Price Blending

• The process of strategically pricing food and

beverage products with the intent of optimizing
revenue.
• The price blending process addresses the fact that
the listed price of a menu item will directly affect an
item’s popularity and thus the frequency with which
that item will be ordered.
• Menu mix is the overall frequency with which
different items are ordered and it directly affects an
operation’s revenue generation, its resulting
product costs, and ultimately its profitability.
Unblended Vs. Blended Pricing Structure
2. Fawzia Mohamed is the GM and RM of a popular 300-seat family-style Italian
restaurant open only for dinner. Nightly, she calculates a variety of statistics
that help her better understand the revenue-generation abilities of her
operation. Complete the revenue generation report she has developed using
today’s data and then answer the questions that follow.

A. How many guests did Fawzia’s serve on this night?

B. What was Fawzia’s total revenue for the night?
C. What was Fawzia’s check average for the night?
D. What would Fawzia calculate her restaurant’s table turns for the night to be?
E. What revenue management challenge does Fawzia face from 7–8 p.m.?
What would you advise her to do about it?