Simple Prime Costs

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

Simple Prime Costs Pricing Method

The Simple Prime Costs Pricing Method uses the most significant costs associated with the business: product costs and labor. The advantages of this method are its focus on both labor and product costs. An obvious disadvantage is the need to assign an equal labor cost to each menu item, even though actual labor costs for items may vary greatly.

The Simple Prime Costs Pricing Method attempts to overcome this problem by developing base selling prices that cover the specific products fair share of labor costs. With this method, managers assign higher mark-ups to products requiring extensive preparation or development (and therefore having higher labor costs); conversely, products not requiring extensive preparation or development have lower labor costs that can be reflected in a lower mark-up.

• • Product cost $3.75

  • Labor costs $210,000 (your salary)

  • Number of expected guests 75,000

  • Desired prime costs percentage 62%

The food cost is the standard cost derived by costing the item's standard costs

Step #1: Determine the labor cost per guest

Labor cost per guest = Labor Costs

Number of Expected Guests

$2.80 = $210,000

75,000

Step 2: Determine the prime costs per guest

Labor cost per guest + Product Cost = Prime Cost per Guest

$2.80 + $3.75 = $6.55

Step 3: Determine the base selling price

Base Selling Price = Prime costs per guest

Desired prime costs percentage

$10.56 = $6.55

.62

The manager would then adjust the base selling price in relations to other factor, such as the property's target markets and its competition.

Think About It: Simple Prime Costs Pricing Method

• • How do you determine the approximate number of guests to your business?

  • How would you calculate labor hours?

  • Why is this method a more complete alternative to the Cost-Based, Simple Mark-up, Contribution Margin, or the Simple Prime Costs methods?

  • What are the drawbacks to this method in comparison to others?