Article

Menu Engineering Basics: How to Make Your Menu Your Top Salesperson

Imagine you're a salesperson who boards an elevator with an important customer. He turns to you and says, "I'm thinking of purchasing products from your entire line, but I want you to sell me before we get off this elevator. Tell me what makes your products special, why your pricing is reasonable, which products are best suited for me, and the quality of your service."

Where do you start? Talk about pressure! That's a lot of information to analyze and present in a few minutes. You're sizing up the customer's needs. You're running numbers in your head to determine the profitability of each product and the optimal pricing. You want to use language that entices a sale. Your restaurant's menu shares a lot in common with that salesperson.

The average guest spends only about three to four minutes with the menu, so it is important that your menu make a good first impression and directs him to the item you want purchased. This is true, whether you've been in business for a day or for a decade, but it is especially critical for the startup.

If you consider your menu simply a decorative price list, you're grossly underestimating its value. A menu is your most powerful merchandising tool. Everything that makes your restaurant special and profitable flows from the pages of your menu -- your atmosphere, concept, pricing and cost-control strategy, and service ethic. Couple an effective menu with a well-trained service staff that interacts effectively with guests and you've got a winning combination.

Menu Engineering is Not That Complex, but it's a Discipline All the Same

. . . menu engineering is an eye-opening experience, in that many restaurateurs simply have not looked at their menus in this light, and quite frankly, are leaving money on the table. -- Banger Smith

The techniques of menu engineering are not overly complex, as business analytical techniques go. Nevertheless, it is an eye-opening experience, in that many restaurateurs simply have not looked at their menus in this light, and quite frankly, are leaving money on the table. Menu engineering is a discipline, which is probably best led by a consultant, until the operator understands how to approach it. Once applied consistently in the restaurant, though, menu engineering can reap immediate increases in sales and, more importantly, profitability.

In the space of a magazine article, it is impossible to fully teach all the techniques and illustrate every restaurant scenario of menu engineering. But by the end of this article, you should have an appreciation for the importance of menu engineering and what it can do for your business. Through a simple illustration, we'll also show you how it can be applied.

Engineering Your Menu from the Bottom Line Up

Menu engineering is the art and science of how and where to place items on the menu. Where items are placed on the menu can dramatically affect your bottom line. Forget the big financial picture for a moment. Customer to customer, day to day, your business is measured in dimes, nickels and pennies. Ask yourself, what is one penny worth? If you answer "one-hundredth of a dollar," you're looking at it from the wrong end of the microscope. If your restaurant has annual sales of $1.5 million, and you can increase your sales one cent for every dollar spent in your establishment, those pennies are worth $15,000.

One of the first steps in menu engineering is analyzing the mix and gross profit of your menu items. The chart and graph below provide simple but effective illustrations of this process, and how illuminating it can be.

For simplicity, we examine a single category on a menu -- burgers -- during a given period, let's say a month. It is imperative that you keep careful track of item sales and food costs. We could devote entire articles to tracking this information, but for now let's just accept that it's important, and provides you with a powerful and invaluable analytical tool.

In this burger scenario, our data tells us what percentage of sales were attributed to each burger type (i.e., the "mix") and, second, our gross profit on the sale of each item (i.e., "gross profit contribution"). Turn your attention to the chart "Burgers by the Numbers" (below). Here, we see that your most popular item in this category was the Texas burger, and the least popular was the Big D burger. You can see that the average popularity for all items in the burger category was 9.09 percent and average gross profit was $5.60.

But the story doesn't unfold until you plot the information on the graph "The Burger Landscape" (below) using a popular desktop computer spreadsheet program.

Burgers by the Numbers
Category by Mix and Gross Profit Contribution

Aha! Now we can see our burger landscape in more detail, and see where all the items fall in relationship to the "average," both in terms of popularity and profitability. As noted, the Texas burger is the most popular item, but is below average in profitability. Wouldn't it be great if we could sell as many or nearly as many of them and increase the profitability? The Bacon Cheddar and Black Jack exceed the average in popularity and profitability. Still, you would love to boost their sales, without having to increase their cost or cut their prices, at least significantly.

Now that we see "the trees for the forest," do we detect any "dead wood" in this category? Well, you're not selling many of the huge Big D burgers, but you might need to keep this on the menu to please big eaters, and to make the other burgers look like a good value. Remember that menu engineering is an art, and like all art, requires experience and judgment to make the best calls.

The Mushroom and Gorgonzola burgers are below average in popularity and profitability. The Roma burger uses Roma tomatoes that are not used in any other item on the menu, which boosts the inventory cost of this burger. Plus, tomatoes are a relatively perishable item, which could contribute to wasted inventory costs. You need to search your soul to determine whether these low performers (a.k.a. "Dogs") deserve "real estate" on your menu.

The other question you need to answer is how to transform average or good performers into your "Superstars." You increase the popularity of an item by increasing its perceived value. Sometimes, but not always, this means lowering the price, or just giving it a sexier name. You can also give it better placement on the menu (more about this later). You increase profitability of an item by reducing its cost, or by increasing its price.

Pricing is perhaps the most complex aspect of menu engineering. Here's one caveat: Always change prices in small increments, unless it is clear that the item is grossly undervalued or overvalued (this situation should not happen if you are astute to your competition, and are allowing for sufficient profit margin from the get-go).

If you studied microeconomics in school you remember the economic term "price elasticity of demand," which, among other things, helps us understand how much you can increase the price of an item until people stop buying it and purchase a "substitute" product or service, or go without. As common sense would tell you, for nearly all products, the quantity sold will decrease as the price is increased; however, some products are less elastic (or price-sensitive) than others. Most restaurant items are relatively "inelastic," i.e. there is a narrow price range that people will pay for any given item. Even slight price increases will cause significant drop in the quantity sold. If you stray outside this range, the consumer will purchase a substitute (order the taco salad rather than the burger), patronize your competitor, or eat at home.

To make a plain hamburger a more elastic item, we need to add value, i.e. a sexier name, an interesting sauce, a better advertising campaign, or a special concept or theme. By serving the same burger with ham and pineapple on top and naming it after a rock star, you might be able to increase its price with minimal "erosion" (decrease) of sales. And in fact, in some cases it might be worthwhile to increase prices, and risk some "erosion" of sales, as long as the total profit increases. But you need to do so incrementally. Again, think pennies.

Without belaboring the subject further, I suppose you could hire a marketing consulting firm to find your optimal price points. Or you can be cautious and methodical in making price adjustments. That means listening to your guests and servers, tracking the sales mix and profitability, and employing common sense and experience.

Hopefully, you can see the variables involved, and the decisions to be made. The bottom line: By adjusting certain variables (cost, pricing, menu placement, presentation, and promotion) you can start gaining pennies (and nickels, dimes and quarters) on each item. It adds up.

This is the foundation of menu engineering. If football is a game of inches, creating a winning menu and succeeding in the restaurant business, is a game of cents.

Menu Categories by Performance

Keeping in mind the above burger illustration, you will find four basic categories into which every menu item will fall. If you are a brand-new startup restaurateur, you may be developing a menu from scratch, and you might have to use a certain amount of "gut instinct" and "what if" scenarios. Soon you will have enough experience and data to make educated decisions about menu changes using menu-engineering techniques.

The first category includes menu items that have a high gross profit contribution and high product mix. These items have maximum menu power, and depending upon your menu, these items should command the best real estate on the menu. The more we can influence the mix toward these items, the more profitable the operation will be. The bacon cheddar burger in our earlier analysis arguably falls in this category.

These items should receive the best placement on the menu and the most sales emphasis by your servers. Be careful about making significant changes to these items, in presentation or price, based on the "if it ain't broke, don't fix it" rule. If possible, try to find ways to reduce the food cost of these items, to increase your profit margin.

The second category includes menu items that sell well (high in product mix) but have less-than-average gross profit contribution. These items are often loss leaders but you've got to have them. The Texas burger is an example of this category. Typically, these items are very price-sensitive; thus, you might find that even small price increases could reduce the sales volume. Again, finding ways to reduce the cost of these items could push them closer to "star" status.

Third, we have menu items that have greater-than-average gross profit, but lower-than-average popularity. Sometimes, these items act as "image makers" and provide a largely psychological benefit to the guest. Typically, these are the more expensive items on the menu. Too many of these items can have a negative effect on the menu and they should be candidates for elimination, repackaging, repricing or replacement. Think of the Big D burger, which is so large you eat it with a knife and fork, but few people order it.

In this case, you might want to lower the price incrementally, to gauge its price sensitivity. If you can build significant sales volume, and maintain a healthy profit margin, you might find yourself with a winner.

In any situation in which you try to build popularity and/or profit, carefully track the sales of items that are already good to top performers. You need to look for signs of "cannibalization," i.e., the reformulated product is "eating" sales away from one or more existing high performers. This is not necessarily a bad thing, if the net effect is a greater combined profit; however, you want to avoid a situation in which your customers are switching to an item with a lower profit margin.

Finally, are there menu items that have lower-than-average popularity and produce a lower-than-average contribution to gross profit? These items are also candidates for elimination, repackaging, repricing or replacing. If you choose to keep an item in this category, you should know the reason. Often, these items are important to a particular market segment (like kids meals) and should stay on the menu to help you remain competitive.

You need to consider replacing or eliminating these items, unless you have a compelling reason to keep them, as discussed below.

Bigger Isn't Always Better

When you stroll down the aisles of a typical supermarket or watch television for more than a few minutes, you are slammed with the seemingly infinite choices of food available to the U.S. consumer. That's why it's tempting to offer a supermarket of choices on your menu. Slow down. The number of menu items on the menu is critical to cost and quality control. Vary it enough to interest the guest, but limit choices to maintain control.

Many restaurateurs make the mistake of trying to be all things to all people. On any given menu, 20-30 percent of the menu offerings typically produce 70 percent to 80 percent of the popularity. Theoretically, that means you might be able to dump half your items and still maintain 80 percent of your sales. Now in practice, some of those less popular items are necessary to carry your concept, please your spouse, and/or cater to smaller, but important customer groups (e.g. children, vegetarians, folks on low-fat diets). The important thing is to understand the trade-offs, and have a strategic reason for every item on your menu, not just to take up space.

Establish early what you do well, and what you want to be known for, and then do it. Size of the menu will depend upon the concept, market, operational capabilities, as well as quality and profit goals. A general rule of thumb: the more items on the menu, the higher the food cost. If, in your circumstances, you feel the need for an "extensive" menu, then make sure you design the menu with a limited inventory, and have strong "cross-utilization," or use the same ingredients across several menu items.

In the February issue, we discussed the term "speed scratch" products. These are pre-made ingredients that are nearly ready to serve, other than final, but often signature, touches. For example, you may have several variations for duck that are based on marinated breasts. By purchasing "speed scratch" pre-made duck breasts, you can create signature items with sauces and seasonings, and offer several variations on the menu, without a significant increase in inventory.

Choose Your Categories Carefully

How you categorize your menu can affect how the guest perceives value and variety. Most restaurants address the value and variety problem by adding items to the menu, but this can lead to higher food costs, lower gross profits, higher labor costs, wasted inventory and a diluted concept and image.

As it sounds, categorization is simply the process of subdividing the menu into smaller, more specific categories. Done well, a properly categorized menu creates a perception of variety. It also can help certain diners find what they want sooner. As you have probably noticed, men do not take as long as women to decide what they want to order. Women tend to read menus, while men tend to scan. Categorization makes either reading style more effective at bringing items to the guest's attention.

For all diners, categorization shortens the order decision time. A "postcard style" is the quickest format to read. Essentially, you break up the menu in postcard-sized spaces, for each category. Instead of being overwhelmed by a running list of menu items, the guest can compartmentalize the decision by turning his or her attention to each "postcard." Categorizing helps guests find what they want; leading to a quicker decision and ultimately a quicker table turn.

Categorization is a way to merchandize items that you want to sell. With desktop publishing software and affordable instant printing, you can reinvent your menus on a regular basis to promote certain items, driven by inventory levels and profitability.

It is critical that you identify all categories on the menu. Place a minimum of three to four categories, with a maximum of six items within a category. Any less and you lose variety/value in the category (and on the menu) -- any more and the guests have to read too much. Place high-profit categories in the prime merchandising areas on the menu -- the top right-hand portion of the column or postcard. This is the first place our eyes are drawn to when looking at a page.

Menu Economics

As noted, one of the most important and vital steps in preparing your new menu is "menu costing." Every menu item on the menu should have a "recipe cost." This is the foundation of menu development, and ultimately, your profitability. This will also be a key factor in determining your overall pricing strategy. It is important to note that menu item costing is an ongoing process that should be performed at least quarterly. The old adage "fail to plan, plan to fail" comes to mind here. Unfortunately, the majority of restaurants that I come into contact with do not have accurate and up-to-date food costing of their menu, limiting their profit potential and viability. Without menu costing, we could not have accomplished our above analysis of hamburgers.

Look at the chart "Gross Profit Principle of Pricing". It provides an illustration of the simple but effective way to analyze cost and profitability. Which of these items would you most like to sell? The 9-ounce filet reaps the highest profit contribution, and is the item you want to do the best job promoting and placing on the menu.

Develop a Pricing Strategy

Again, entire books have been devoted to the subject of pricing. There are a number of different methods (strategies) to pricing. In a future issue, we'll cover pricing in more detail. For now, what is important is that you have a pricing strategy.

Among the factors that must be taken into account when pricing your menu is concept, food cost, gross profit, the market, location, economic climate, personnel (kitchen and front of the house), competition (direct and indirect) and value (as perceived by the guest.) Focus on the following: Menu item value is critical, and one that is sometimes hard to define, since there are many factors that lead to value. Don't be afraid to ask guests and employees alike what they would pay (or sell) for a particular menu item. Not long ago, a fast-food restaurant introduced a "$6 burger," which they sold for less than $4. This is a blunt but effective illustration of what you are trying to achieve in creating the perception of value.

Develop Your Top Salesperson to be Your Smartest and Hardest Worker

Track and analyze your sales and profitability. Get to know your market and customer base. Treat the pricing, promotion, and placement of every item on your menu as if your business depends on it, because it does.

Just don't consider it a grind. Consider it a way to get control of your sales and bottom line. Consider it developing your top salesperson -- your menu.