Binomial Real Option Pricing for Restaurant Menu Analysis

Abstract

Numerous researchers have proposed methods to improve the profitability of restaurant menus. The profit-analysis techniques that have been proposed generally assess menu items according to popularity as against comparative contribution margin or a similar scheme that theoretically allows managers to apply a portfolio adjustment approach or simply to replace items that are low in profitability. However, none of the analytical models discussed in the literature consider the element of time, which is an essential consideration in planning for menu item replacement. This study uses a real option pricing model to construct time-axis profiles of menu items and to analyze their potential profitability given varying time constraints. The analysis applies a binomial real option pricing model, as applied to actual data, and a real option pricing model was used to compare the advantages and benefits of different menu items. A comparison of the binomial model’s results with those of other menu analysis models found that the time-based model was more effective in determining how to construct a menu portfolio.