Should you get the guacamole on your burrito? A price analysis of your favorite foods
Matt Hawkins
21028

As others have pointed out, straight markup percentages are probably not the best metric to use for this type of analysis — even though gross margins are typically employed when setting menu prices. The premise is that both versions of the menu item are a choice at the same establishment, but let’s think of it in a slightly different way.

Suppose a restaurant has viable/profitable pricing set for the standard version of their dishes. They are covering their overhead and making a viable profit. Now suppose they decide to use more upscale ingredients, an average of $2 or so per menu item. Does that mean that they should make more profit? Since their overhead is fixed relative to the cost of the ingredients, even if they maintain the same percentage margins, their net profit is going to increase. Is that fair to their customers? Perhaps not.

Presumably the patrons were paying a fair price for their efforts, but now they are being asked to spend more money so that the proprietor(s) can earn more profit. They get higher quality food to eat, but at the new price points other restaurants may offer a better value for similar quality.

In your examples, the deluxe burrito seems to be the best value for the consumer. The incremental cost of the upscale ingredients is $2.25 but the markup is only $2. Unless the standard burrito already has a high profit margin (perhaps likely), it should be priced a bit higher. Although the percent markup on the deluxe burger is a bit better than the standard, in my book it is the worst value. For an additional $5 you get a little over a $1 in ingredient upgrades.

Of course there must be some quality floor. It may be possible to downgrade the ingredients and make the burger a better value, but the quality may not be acceptable and sales would suffer. In this scenario I am starting from the assumption that the standard menu is selling well; a shift to high end ingredients (and somewhat higher menu costs) does not reduce the number of patrons nor the amount of food they buy; and no additional labor is required to prepare the upscale versions. Although it is debatable, I feel they are reasonable assumptions for modest upgrades and price increases. A boost in ingredient quality with only corresponding cost increases may even result in more traffic through the door.

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