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Menu Planning: A Systematic Methodology

One methodology was the matrix system, which allowed for basic analysis and groupings of menu items. The Matrix , illustrated below, divided menu items into four basic categories: popular and profitable; popular but not profitable; not popular but profitable; and not popular and not profitable.

The Matrix

This system allows the restauranteur to examine each item's popularity and profit margin. However, it does not scientifically couple these two important indicators to an overall contribution margin/popularity rating. As a result, the technique only provides an overview of the items effectiveness on the menu.

Another significant and still widely accepted method of analyzing menus is based solely on the contribution margin of each menu item. The contribution margin is determined by subtracting the food cost from the menu price. No consideration is given to the popularity of a particular dish. A restaurateur utilizing this method of analysis may eliminate an item contributing only 40 percent to the gross margin for one that contributes 60 percent. On the surface, this may seem reasonable; however, if the first item is five times more popular than the second, the first item would be more productive in terms of overall contribution.

The contribution margin method leaves out the very important aspect of popularity. As a result, menu scoring was developed in the early 1960s. This was the first system which took into consideration both an item's popularity and it's contribution margin. The system was popular and well utilized in the United States, as it was the first system providing restaurateurs the opportunity to weigh one menu's popularity and contribution margin against a second menu. The limitation of this method, however, was that the restaurateur could only cross reference menus as a whole and not specific menu items.

Menu scoring opened the doors for a new methodology called Performance Assurance Rating, which has recently been introduced to Canadian restaurants.

Performance Assurance Rating
Performance Assurance Rating (PAR) is an important method of determining a menu's overall profitability based on the gross margin contribution and popularity mix of each menu item. The PAR results allow the restaurateur to evaluate an item (salmon steak), sub-category (seafood) or category (entree) in order to determine the most profitable mix of menu items.

PAR is a comparative analysis. A single PAR result is of little help in strategic menu planning. However, the comparison of two or more PAR results, whether within a single category or menu as a whole, can provide significant information.

The PAR for an individual item is determined as follows (see menu A):

1. List the menu items in appropriate category (i.e. entrees).
2. Count the number of items sold during the test period.
3. Record the sales price of the subject menu item (e.g. Salmon Steak, $8).
4. Record the item's food cost (e.g. $4).
5. Determine the total dollar sales for each item (e.g. 100 portions x $8).
6. Determine the total food cost per item sold (e.g. 100 portions x $4).
7. Determine the item's gross profit by subtracting food sales from the food cost (e.g. $8 less $4).
8. Determine the gross profit percentage per item by dividing the gross profit by sales (e.g. $4 divided by $8).
9. Determine the contribution margin per meal served by multiplying the item's sales price by the contribution margin per meal ($8 x 50 percent).
10. Insert the total number of customers served in the restaurant in the appropriate columns (e.g. 600).
11. Calculate the percentage of customers ordering a particular item by dividing the sales of that item by the customer count (e.g. 100 divided by 600=16.7 percent).
12. Generate the item's PAR by multiplying the contribution margin by the popularity or percentage of customers eating a particular meal (e.g. $4 x 16.67%=.67).

Historically, a restaurateur would evaluate a menu item by conducting an analysis of either the contribution margin or popularity. The unique aspect of PAR is that it marries both these analytical methods to determine an overall rating. The PAR computations are illustrated in Menus A and B.

(Note: Click on the two links below to view the two menus.)

Menu A

Menu B

Evaluating the Performance Assurance Rating

The PAR results (see column 12 in the examples) are a series of numbers which reflect the menu item's contribution margin and popularity. The results allow for several significant comparisons. By examining the PAR results of Menu A, we can determine which items provide the greatest overall contribution to the bottom line.

Item to Item

The first step in the PAR system is to determine how each item is performing against the others. The higher the PAR, the better the performance. Consider the following items taken from Menu A.
As indicated previously, a menu item's PAR is based on both it's contribution margin and it's popularity. In the first two items, both the chicken and the prime rib had equivalent popularity; however, the prime rib achieved the higher PAR as a result of it's larger contribution margin. In the last two items, the PAR was higher for the sirloin steak as a result the dish's higher popularity, not it's contribution margin.

Section to Section

The second step is to determine in which sections of the menu the most effective contribution resides. Here, the PAR scores are compared for appetizers, entrees, side dishes and deserts. In most instances, the entree section will achieve the best results. However, it is advisable to determine how each section compares. In Menu A, most appetizers are not very popular, as indicated by the number of dishes sold. As a result, the restaurateur should establish a new selection of items for the appetizer section or should focus on more aggressive promotion of these menu items.

Additionally, the restaurateur can compare sub-sections such as meat to seafood. Add the PAR for the three meat dishes and the four seafood dishes in the entree section. Divide them by three and four respectively. Accordingly, the meat entree PAR is .56, while the seafood PAR is .42. The meat entrees are outperforming the seafood.

Item Comparison: Menu to Menu

Once each item is compares and substitutions are made, Menu B is developed and analyzed. The change in appetizers illustrated in Menu B has significantly increased their popularity. The mushroom soup and calamari proved more popular than the onion soup and smoked salmon, while the artichoke hearts had a more limited appeal than the escargot. If a third menu is developed, escargot may be substituted for artichoke hearts to increase the PAR, resulting in still higher profits.

Similar results may be seen when coq au vin replaces roast chicken. As a result of the combined increase in the contribution margin and popularity, the coq au vin of Menu B has strongly outperformed the roast chicken of Menu A. Therefore, the substitution was beneficial. On the other hand, the salmon steak, which was the second highest-ranked entree item on Menu A, did poorly (lowest-ranked entree item) on Menu B. This is a result of the new menu mix.

Category to Category: Menu to Menu

The next step in the analysis is to determine which menu categories are best. The section PAR results illustrate how a particular category (appetizers, entrees, etc.) have performed. When Menu A is compared to Menu B, category analysis can be conducted. In the illustrations presented, Menu A outperformed Menu B in both the appetizers and entree section, but not in the side dish nor desert areas. It is then obvious that the changes implemented in the first two categories were beneficial to the overall performance of the restaurant while the latter changes were not.
A third menu could be developed based on these results, integrating the appetizers and entrees of Menu B and the side dishes and deserts of Menu A to achieve an even higher PAR for each category and the menu as a whole.

Menu to Menu Comparison

In our example, certain menu items out-performed others. In the final analysis, a restaurateur wants to utilize the menu which provides the greatest overall contribution margin. In order to determine which menu is best, simply add the individual PAR results. Compare the total menu PAR of Menu A to the total menu PAR of Menu B.

Menu A's overall PAR is 9.66, while Menu B's is 10.70. This illustrates that Menu B provides a greater overall contribution to profit, based on a refined weighted mix of each item's contribution margin and popularity.
The Performance Assurance Rating is not a substitute for sound management and pricing policies. However, it is a scientific methodology which can be utilized to increase bottom-line profit. Accordingly, this technique should be used as often as possible to maintain the most profitable menu mix.

Reprinted from The Consultant, Spring, 1996 .

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