Your prices must be consistent with your concept. If you're planning to be a high-end wedding caterer but your prices are competitive with the catering department of the local grocery store, then you haven't priced yourself correctly. Your prices must accurately reflect the level of quality and service you're going to offer.
In business, there are two main pricing strategies:
Being the low-cost producer
Providing differentiated goods and services
Low-cost producers are able to provide consumers with the lowest prices for goods. They make their money by being extremely efficient, selling high quantities of products at a relatively low margin. For example, Wal-Mart is a low-cost producer. It is not feasible for caterers to be low-cost producers, simply because one caterer cannot provide the volume of service necessary to discount prices as deeply as a low-cost producer does. Caterers follow the second pricing strategy, providing unique goods and services.
Differentiated Pricing Strategy
You need to charge prices that reflect the ingredient quality and level of sophistication of your offerings. Being the lowest-cost caterer in your area will only spell disaster. Larger, more efficient caterers will drive you out of business by matching or beating your prices, and setting low prices will cut into your profit. These two factors will make your business venture very short-lived.
Your best option is to follow a differentiated pricing strategy. This method of pricing is as much of an art as it is a science. While you must be sure to cover all your costs and include a profit, how much you charge for your products depends on many factors. Prices for differentiated products are signals to potential customers. If your prices are high, some customers will aspire to use you, others will be unable to afford you, and another customer segment will be your main target, since you'll be right in their price range.
Catering, like most food businesses, is a business of pennies; if you don't price your products and services correctly, you won't be profitable.
Differentiated service providers like caterers must choose where in the competitive price range they'll be. It's safest to be in the middle of the range. A good rule of thumb for pricing your menu and service is to be about 10 percent above the average competition in your area.
Location is a prime factor in pricing. You must consider the local cost of living, competitive prices, what you're offering, and who you're targeting. In general, caterers located in large urban areas, where the cost of living is higher, will charge more than caterers located in places with a lower cost of living.
Variations in Prices
Depending on the caterer, a similar meal can have a wide price range across the country. Three differently positioned caterers in three different cities, for instance, can serve a similar three-course dinner of salad, grilled salmon, and dessert. The prices they charge can vary tremendously depending on the type of the event, the event venue, the city or town, and the type of caterer.
Caterer A, a middle-of-the-road caterer in Rapid City, South Dakota, serving a seated dinner at a museum might charge $25 a person without wine for salad, grilled salmon, and dessert.
Caterer B, a premium caterer in Cleveland, Ohio, might charge $80 a person for a similar meal. The table settings might be fancier, the side dishes might be more elegant and might include more expensive ingredients like shiitake mushrooms and fingerling potatoes, and the desserts might be more elaborate, but the meal would be essentially the same. Some wine might be included in this price, but not enough to account for the price difference.
Caterer C, a high-end Manhattan caterer serving a similar meal at a seated black-tie charity event at a small New York City museum, could charge $140 per person. While this price would include the cost of alcoholic beverages, wild Pacific salmon, heirloom vegetables, and a Valrhona chocolate tart for dessert, the higher food costs don't by themselves account for vast price difference from the South Dakota and Ohio caterers.
Caterer C can command such a high price because of the level of service it offers, because of its stellar client list and reputation, and because of the high cost of living in New York City. The cost of living in Cleveland is much higher than in South Dakota, and the cost of living in New York City is nearly double the cost of living in Rapid City. This means that the cost of transportation, rent, supplies, and labor are highest in New York City, and that translates to higher catering prices.
The Rise of the $40 Entrée
As restaurant prices increase and menu pricing breaks new barriers, catering prices will follow the trend. In 2006, restaurants around the country broke the $39 entrée barrier and started to charge $40 and over for main courses. Steak and lobster have long been among the most expensive dishes, but pasta and fish dishes in urban markets around the country are starting to command $40 price tags at upscale restaurants and even national chains.
Offering more expensive price points with your menus will raise your total revenue. If you offer a client a choice between menus priced at $150, $130, and $115 per person, for example, the $130 menu looks cheap next to the $150 menu and makes it much more attractive.
The fact that casual upscale restaurants are charging these prices signals that catering prices will continue to go higher. As long as chefs continue to experiment with their menus to serve items no one else has and use organic and heirloom produce, farm-raised meats, and wild fish from high-quality purveyors, meal prices will climb. As long as your service is commensurate with the higher prices you're charging for food, your customers will pay them.
Both Ends of the Spectrum
If you're going to be a price leader and charge higher prices than your competition, you must offer food and service that is truly extraordinary. Being at the lower end of the price range forces you to compete on price.
Catering is a service business, and you need to price yourself accordingly. You're creating an ambiance; you're providing entertainment and using your creativity to design an event. What you offer is a unique product, not a commodity, so your prices must reflect that.
If you're premium priced, everything about your company must signal premium quality. From your name, logo, menu layout, and staff attire, all must consistently signal that you're a premium provider.
You don't want to price yourself too high, or you'll scare away potential customers. Similarly, you don't want to price yourself too low, so that you're way below what the market will bear. There are two methods you can use to price your services: top-down and bottom-up.