Menu engineering re-engineered: Accounting for menu item substitutes in pricing and menu placement decisions

Menu engineering is a popular technique deployed by restaurant operators to assess menu item popularity and profitability, and guide key decisions including menu item pricing, sell strategies, and menu design. While traditional menu engineering models have been criticized for their underlying assumption of menu item interdependency, there has been little focus in the literature on addressing this shortcoming. In this paper, we address one type of interdependency, menu item substitution. We propose a holistic 5-stage approach to menu item pricing and menu placement that leverages own- and cross-pricing elasticity data to account for within-category substitutes. We present a field experiment, using two years of data from 48 outlets within a U.S. steakhouse restaurant chain, to demonstrate how this approach can be applied in a restaurant setting. We also provide empirical support for the positive net revenue effects of menu item pricing, and menu placement, decisions that account for within-category substitutes.