Contribution Margin

Pricing Methods

• • Penetration Pricing

  • Price Skimming

  • Competitive Pricing

  • High-Low Pricing

  • Freemium Pricing

  • Value-Based Pricing

  • Cost-Based Pricing

  • Simple Mark-Up

• Contribution Margin

  • Simple Prime Costs

Contribution Margin Pricing Method

This form of pricing considers the non-food costs, required profit, and expected customers. In a product business, this would be non-product based costs, required profit, and expected customers. Take a look at the example below:

• • Non-food Costs - $695,000

  • Required Profit - $74,000

  • Guests Expected to be served - 135,000

  • Food Cost $4.60

Step #1: Determine the average contribution margin required per guest

Non-food costs + Required Profit = Average Contribution Margin per Guest

Number of Expected Guests

$695,000 + $74,000 = $5.70

135,000

Step #2: Determine the base selling price for a menu item

• • BSP = Average Contribution Margin + Food Cost

  • BSP = $5.70 + $4.60

  • BSP = $10.30

The advantage of this method are its ease and practicality when reasonably accurate information is available from the operating budget. It is also practical when the costs associated with serving each guest are basically the same.

A potential disadvantage of this method is that it assumes that each guest should pay the same share of the property's non-food costs and profit requirements.

Think About It: Contribution Margin Pricing

• • What does this pricing method take into account that others do not?

  • Why would an owner want to use this method?

  • What would you need to consider when establishing the Required Profit?

  • What is difficult about using this method?