Question

Vine Dining is considering the introduction of degustations on a once-a-month basis. Sophie is currently considering pricing options for this venture. All food and beverages are included in the price. The average degustation includes eight courses served over four hours with wines selected to match the dishes. It is estimated that each degustation will require five hours for service staff (six waiting staff at $18.95 per hour) and eight hours for kitchen staff (five staff at $21.00 per hour). In addition to the usual variable cost per person for normal service ($16.50), an additional $5.50 in food costs per person and $250 for all wines per degustation. No other costs are expected to change.

1. First, outline the pricing approaches that could be used by Vine Dining for pricing the per person rate for a degustation.

2. Next, Sophie has a target mark-up rate of 53% on total cost, and price her degustations at $150 per person. Can she meet this target? Use target pricing and showing your calculations

3. Calculate the following

a. Selling price per person with a mark-up of 53% on total cost

b. Total sales revenue per degustation based on the selling price calculate in a.

4. Write a short report on bringing together your recommendations regarding the degustations.

Answer 1

1. The two most important pricing approaches that can be used in this scenario are:

Cost Plus Pricing: In which we decide to price the product based upon the cost incurred and the desired markup.

Value based pricing: In this approach, we price the product at a price which customer is willing to pay i.e. the value customer finds in the offering.

2. Total revenue = 150*8 = 1200

Total cost = (18.95*5 + 21*8) + (16.5+5.5)*8 + 250

= 688.75

So, markup = (1200-688.75)/688.75 = 74.23% which is higher than the required markup hence she has met her target.

3. b. Total revenue with markup if 53% = 688.75*(1+0.53)

= 1053.79

a. Per person = 1053.79/8 = 131.73

4. The degustation has been priced at a rate higher than the desired markup margins. But if the customers are seeing value in the offering, then the price should be kept intact and the profits should be earned. However, if the company doesn't able to sustain the customer base and see churn, then it can reduce the prices since it is earning a sufficient margin more than the required markup.