Pricing: factors and methods
Price depends on cost, customers, competition and aims. The methods are cost-plus, factor, rate of return, subsidy and discount pricing.
Factors affecting pricing
- Cost: food, labour and overheads set the floor.
- Aim of the unit: profit (restaurant), break-even (hostel mess) or welfare (noon meal, hospital).
- Customers: their ability and willingness to pay (students versus business travellers).
- Competition: prices of similar outlets nearby.
- Type of establishment, location and ambience: a hotel coffee shop charges more than a college canteen.
- Style of service: self-service costs less than table service.
- Portion size, quality and perceived value; brand reputation.
- Season and time: festival demand, happy hours, weekday lunch offers.
- Government policy: taxes added as per current rules, subsidies and controlled prices in institutions.
- Changes in raw material prices, such as onion or tomato price swings.
Pricing methods
| Method | How the price is set | Suits |
|---|---|---|
| Cost-plus | Total cost per unit + a fixed percentage of that cost as profit | Outdoor catering, institutional contracts, new items |
| Factor (multiplier) | Food cost × pricing factor, where factor = 100 ÷ target food cost % | Restaurants and cafes pricing a menu quickly |
| Rate of return | Price set so that profit gives a target return on the money invested | New outlets and businesses with large investment |
| Subsidy | Price kept below cost; an employer, government or trust pays the difference | Industrial canteens, hostel messes, hospital patients, public canteens |
| Discount | Price lowered for a group, time or volume to raise sales | Student offers, happy hours, combo meals, bulk and party orders, app coupons |
Cost-plus and factor pricing
(a) A mini-meal has a total cost of ₹60. Price it at 25% markup on cost. (b) A restaurant wants a food cost of 40%. Price a masala dosa whose food cost is ₹24.
- (a) Markup = 60 × 25 ÷ 100 = ₹15; price = 60 + 15 = ₹75
- (b) Pricing factor = 100 ÷ 40 = 2.5
- Price = 24 × 2.5 = ₹60
- Check: food cost % = 24 ÷ 60 × 100 = 40%
Mini-meal ₹75; masala dosa ₹60.
Rate of return pricing
A new canteen needs an investment of ₹10,00,000. The owner wants an 18% return a year. Expected annual cost is ₹36,00,000 for 60,000 meals. Find the price per meal.
- Required profit = 10,00,000 × 18 ÷ 100 = ₹1,80,000 a year
- Sales needed = 36,00,000 + 1,80,000 = ₹37,80,000
- Price per meal = 37,80,000 ÷ 60,000 = ₹63
- Check: cost per meal = 36,00,000 ÷ 60,000 = ₹60; profit ₹3 × 60,000 = ₹1,80,000
₹63 per meal gives the 18% return, if 60,000 meals are sold.
Subsidy and discount pricing
(a) An industrial canteen meal costs ₹60. The company pays 60% of the cost. What does a worker pay? (b) A restaurant thali sells at ₹120 with a variable cost of ₹70. It gives students 10% off. How many discounted thalis earn the same contribution as 100 thalis at full price?
- (a) Worker pays 40% = 60 × 40 ÷ 100 = ₹24; the company pays ₹36 per meal
- (b) Full-price contribution = 120 − 70 = ₹50; for 100 thalis = ₹5,000
- Discounted price = 120 − 12 = ₹108; contribution = 108 − 70 = ₹38
- Thalis needed = 5,000 ÷ 38 = 131.6, rounded up to 132 (132 × 38 = ₹5,016)
(a) ₹24 per meal. (b) 132 discounted thalis, about 32% more sales, are needed to match 100 at full price.
In a subsidised canteen the price is a welfare decision: the employer's share lets workers eat a balanced meal they could not otherwise afford. In a restaurant, the factor method keeps food cost in line while menus change with market prices.
2 marks: “What is the factor method of pricing?” Price = food cost × pricing factor, where the factor = 100 ÷ desired food cost %; e.g. a 40% target gives a factor of 2.5.
5 marks: “A sandwich has a food cost of ₹20 and the target food cost is 33⅓%. Find the selling price.” Factor = 100 ÷ 33⅓ = 3; price = 20 × 3 = ₹60; check: 20 ÷ 60 = 33⅓%.
10 marks: “Explain the factors affecting pricing and the methods of pricing in a food service establishment.” List 8-10 factors; explain cost-plus, factor, rate of return, subsidy and discount methods with a worked line each; mention other methods (competition-based, psychological); conclude.
Five methods: C-F-R-S-D = Cost-plus, Factor, Rate of return, Subsidy, Discount: 'Cooks Feed Rice, Sambar, Dosa'.