1. Contribution Margin= Menu price – food cost. If a menu item’s contribution margin is greater than the average contribution margin for the entire menu, it receives a rating of “H” indicating that it has an above average contribution margin.
Example - Sum of CMs = $30 # of items on menu = 10 Avg. CM= 30/10 = $3
If a menu item had a contribution margin of $4.00 it would receive a “H.”
If a menu item had a contribution margin of $2.00 it would receive a “L.”
2. Demand = Number of items sold of a particular menu item/total number of menu items sold. If a menu item’s percentage of sales is greater than the average sales percentage for the entire menu, it receives a rating of “H” indicating that particular item has a higher sales percentage than the demand mix.
Example – If there are 10 items on the menu, the demand mix would equal 1/10 X .70= .7 or 7%.
Any menu item with a sales percentage equal to or greater than 7% would receive a rating of “H.”
Any item with a sales percentage less than 7% would receive a rating of “L.”
Note about the .70 (i.e., 70%): This is also known as the ‘hurdle’ rate. This essentially says ‘an item is acceptable if it is 70% of the average sales per item.’
Menu Classification System. All menu items can be classified into four types:
1. Winners = HH. (Items which are both profitable and popular)
2. Plow Horses = HL (Items which are high in popularity but low in profit)
3. Puzzles = LH (Items are low in popularity but high in profit)
4. Losers = LL (Items are both low in popularity and profit)