“Money makes the world go ‘round.”
Gone are the days of bartering goods and services for more goods and services. Here to stay is the methodology of exchanging money for goods and services. While we all know this to be true, the hospitality industry continues to focus its energy on the archaic idea that cost percent should be used to price menu items versus actual dollars. I believe Liza Minnelli was right when she said that “money does make the world go ‘round.” So, if that holds true, why do we continue the outdated practice of pricing our menu items with percentages?
As industry veterans, we’ve been trained throughout our careers to uphold certain standards, more specifically (here’s looking at you corporate restaurants) cost percent. The ambiguous ‘They’ have decided that, for whatever reason, 25% — 30% food cost, 33% wine cost, or whatever arbitrary number you’ve come across is what you need to be successful. I encourage us all to let go of this ideal and discover that while cost percents are a great tool to measure and maintain within a healthy range, we’re missing the growth potential that comes from measuring success based on profit dollars.
Here’s an example:
You own a simple sports bar that focuses on beer as a main beverage offering, pricing your menu based on a 30% cost goal for beer.
Domestic beer by the can typically costs $1 to obtain. With a 30% beverage cost formula, you sell your generic domestic beer for $3 (we rounded down for efficiency). With each sale, $2 in profit per can is yours to bank at the end of the day. Not a bad, but could it be better?
What if you purchased a premium craft beer (the one you want that fits your concept) at $3 a can? With the 30% beverage cost formula, you would have to sell it at $10 per can, which in this case is too expensive for your concept. Instead, you decide to sell it at $7.00 per can, bringing you to a 43% beverage cost and $4.00 in profit per can. By breaking the cost-percent industry standard, we have now doubled our profit dollars with a single can of beer.
You may argue that you’ll sell more of the domestic than the craft. I’ll counter this by referencing the practice of selling a bottle of wine versus trying to sell four glasses. With the bottle sale, I’ve locked my customer into paying that set dollar amount versus crossing my fingers and hoping I’ll sell four glasses all day. In my experience, this doesn’t usually happen. In this example case, my sale of one can of craft beer is the same profit dollar equivalent as two domestic beer can sales.
So now I ask, if you can only sell your customer one can of beer, which can would you choose: the generic domestic or the premium craft?
Still skeptical? I challenge you to run the numbers. Take a moment to truly analyze your business and make sure your gut agrees with the facts. Of course, there will always be exceptions, but I implore you to explore the idea that cost percents are not the end-all-be-all and discover the satisfaction of making more money by focusing on profit dollars.