- Joined
- Sep 5, 2013
- Location
- Auckland...
Hi there
SIL and daughter just opening a regular B&M restaurant and I will be helping with periodic BBQ events, a weekly special and the like. Such a learning curve! Anyway, we were having a separate discussion on how to price premium meats, namely organic anything, but particularly chicken and pork.
So, you guys and gals running outfits, what do think about the following line of logic?
Food cost example with premium product - problem being, how to supply premium but not price yourself out of the market.
Proposed solution: don't increase margin on same sales, increase # of sales (this is a B&M location, not vending which it isn't really logical to apply this method to) ...
Note: Pricing, costs, serving size, etc will be quite different to what you are used to - understand that - the discussion is really about the approach to pricing, it is a question of proportionalty.
1. Product cost: Whole hog $/kg
Organic pork 12.00kg
Regular pork 6.00kg (free-range pork about 6.50/kg)
2. Using rule of 3 x cost is retail price (not saying we will be doing this, but for this discussion, a method that is applied to all approaches)
3. Say we get three sandwiches from a kilo of raw pork
4. Sandwich extras are (say) $1 (bun, rubs, dressing, coleslaw)
A. Retail price using 3x cost rule ...
Organic pork sandwich: [1/3 x 12.00 + 1.00] x 3 = $15.00
Regular pork sandwich: [1/3 x 6.00 + 1.00] x 3 = $9.00
B. Now, looking at the contribution, that is the absolute $'s we make (vs the relative % we make)
Organic pork sandwich selling at $15.00: $15.00 - [1/3 x 12.00 + 1.00] = $10.00 To make $100 we need to sell 10
Regular pork sandwich selling at $9.00: $9.00 - [1/3 x 6.00 + 1.00] = $6.00 To make $100 we need to sell 17
............the problem here that we have to overcome the reluctance to fork out an extra $6 over the normal price.
C. But if we decide that we make the same absolute $ on the premium offering as we do on the regular offering...
Organic pork sandwich: [1/3 x 6.00 + 1.00] x 3 + [6 - 1/3 x 12] = $11.00
Regular pork sandwich: [1/3 x 6.00 + 1.00] x 3 = $9.00
.... then the price gap is much smaller ...
This shows our gross margin is $6 on a $9 regular pork sandwich and $6 on an $11 organic pork sandwich.
So, the logical approach would seem, for us to sell an organic product for $11 vs regular at $9 ... the difference is not great price-wise. We feel that the attraction to many people of organic meat will cause the # sales to be at least the same, though in all probability it will be higher, at which point we start getting better unit sales (can't improve margin) - and provided the existing infrastructure (goods, chattels, staff) remain the same with the extra quantity, then we are doing good. It may be a hard case to prove, but anecdotal may the best we can do .... Also, the downside is the requirement for larger working capital, but since that is only the cost of funding for a few days the incremental difference in cost, I haven't factored that in here.
Thoughts?
TIA
PS: Interestingly there is no true, certified organic pork in New Zealand, as the outfits doing it are too small to be able to afford the certification, or if they are large enough, on the wholesale margins pork is getting, they cannot afford to import organic-grown feed supplement (NZ has no substantial locally-grown organic feed!).
SIL and daughter just opening a regular B&M restaurant and I will be helping with periodic BBQ events, a weekly special and the like. Such a learning curve! Anyway, we were having a separate discussion on how to price premium meats, namely organic anything, but particularly chicken and pork.
So, you guys and gals running outfits, what do think about the following line of logic?
Food cost example with premium product - problem being, how to supply premium but not price yourself out of the market.
Proposed solution: don't increase margin on same sales, increase # of sales (this is a B&M location, not vending which it isn't really logical to apply this method to) ...
Note: Pricing, costs, serving size, etc will be quite different to what you are used to - understand that - the discussion is really about the approach to pricing, it is a question of proportionalty.
1. Product cost: Whole hog $/kg
Organic pork 12.00kg
Regular pork 6.00kg (free-range pork about 6.50/kg)
2. Using rule of 3 x cost is retail price (not saying we will be doing this, but for this discussion, a method that is applied to all approaches)
3. Say we get three sandwiches from a kilo of raw pork
4. Sandwich extras are (say) $1 (bun, rubs, dressing, coleslaw)
A. Retail price using 3x cost rule ...
Organic pork sandwich: [1/3 x 12.00 + 1.00] x 3 = $15.00
Regular pork sandwich: [1/3 x 6.00 + 1.00] x 3 = $9.00
B. Now, looking at the contribution, that is the absolute $'s we make (vs the relative % we make)
Organic pork sandwich selling at $15.00: $15.00 - [1/3 x 12.00 + 1.00] = $10.00 To make $100 we need to sell 10
Regular pork sandwich selling at $9.00: $9.00 - [1/3 x 6.00 + 1.00] = $6.00 To make $100 we need to sell 17
............the problem here that we have to overcome the reluctance to fork out an extra $6 over the normal price.
C. But if we decide that we make the same absolute $ on the premium offering as we do on the regular offering...
Organic pork sandwich: [1/3 x 6.00 + 1.00] x 3 + [6 - 1/3 x 12] = $11.00
Regular pork sandwich: [1/3 x 6.00 + 1.00] x 3 = $9.00
.... then the price gap is much smaller ...
This shows our gross margin is $6 on a $9 regular pork sandwich and $6 on an $11 organic pork sandwich.
So, the logical approach would seem, for us to sell an organic product for $11 vs regular at $9 ... the difference is not great price-wise. We feel that the attraction to many people of organic meat will cause the # sales to be at least the same, though in all probability it will be higher, at which point we start getting better unit sales (can't improve margin) - and provided the existing infrastructure (goods, chattels, staff) remain the same with the extra quantity, then we are doing good. It may be a hard case to prove, but anecdotal may the best we can do .... Also, the downside is the requirement for larger working capital, but since that is only the cost of funding for a few days the incremental difference in cost, I haven't factored that in here.
Thoughts?
TIA
PS: Interestingly there is no true, certified organic pork in New Zealand, as the outfits doing it are too small to be able to afford the certification, or if they are large enough, on the wholesale margins pork is getting, they cannot afford to import organic-grown feed supplement (NZ has no substantial locally-grown organic feed!).