How to determine when it’s time to boost menu prices| Restaurant Operations

In one part of a two-part series, we take a look at making the decision to raise prices and how to do so without losing the customer base.

This is part one of a two-part series focused on when and if restaurants should raise prices.

There’s no doubt about it — dining out is getting more expensive, and restaurants are seeing already-tight profits shrink to razor-thin margins. Supply chains and rising food and labor costs have been plaging the restaurant industry since the onset of the pandemic, and there doesn’t seem to be an end in sight.

“We’ve got all these areas in which costs are heading upward, and that means a restaurateur needs to be able to pass those costs on to their guests,” Lise Wilson, vice president of Retail Strategy, a retail experience company, said in a phone interview.

Menu prices increased 6.8% between February 2021 and February 2022, the largest 12-month increase since 1981, according to the Bureau of Labor Statistics.

“Rising food prices are driven by a number of macro-economic factors including higher energy prices, which make it more expensive to produce and transport food, and supply chain disruptions, which make it less reliable to import food and ship long distances,” Ben Johnston, COO of Kapitus, a finance company that provides growth capital to small businesses, said in an email interview. “To the restaurateur, this means purveyors are charging more and are less dependable. Many restaurants are routinely seeing food deliveries that arrive missing critical items or that arrive with replacement items that vary widely in quality and price. As a result, restaurants are often forced. shop locally in order to replace missing items.Shopping at higher cost local stores for smaller quantities consumes critical employee time and drives up the overall cost of food to the restaurant.”

Making the decision

So how do you know if you should increase your menu prices?

Mohit Agrawal, manager at Simon-Kucher & Partners Dubai, a global consulting firm specializing in strategy, marketing, pricing and sales, said in an email interview that pricing is a reflection of the product’s brand, quality and competitiveness and the customer’s demand and willingness to pay.

“It is important that companies are periodically assessing these factors to identify price increase opportunities and achieve their true profit potential,” he said. “Of course, it is also critical to understand the market price sensitivity to have clear transparency on the expected volume and revenue outcome of the price increase.”

The type of restaurant also makes a difference. Margins are different for QSRs and fast casuals than they are for full-service and fine dining where waitstaff is needed, causing a shift in labor costs.

“Restaurants generally try to keep their food costs to a target percentage of gross revenue charged to the customer, excluding alcohol,” Johnston said. “Food cost targets are to be lower for QSR restaurants, higher for fast casual and higher still for fine establishments as the check size per customer increases dining.”

Agrawal said pricing is a reflection of the product’s brand, quality and competitiveness and the customer’s demand and willingness to pay.

“It is important that companies are periodically assessing these factors to identify price increase opportunities and achieve their true profit potential,” he said. “Of course, it is also critical to understand the market price sensitivity to have clear transparency on the expected volume and revenue outcome of the price increase.”

Matthew Lukosavich, strategy director, restaurant division for Vericast, a marketing solutions company, said in a phone interview that his advice is to follow the market and economy. With inflation between 7% and 8%, restaurants should be following those trends and raising their prices accordingly. Consumers are becoming more aware of price increases, “but at the same time, they understand there’s price increases everywhere.”

Restaurants should understand how they’re making money because profits margins are razor thin at the restaurant level, Lukosavich said.

“Food-cost targets are likely to be lower for QSR restaurants, higher for fast casual and higher still for fine establishments as the check size per customer increases,” Johnston said.

And watching what competitors are doing can be tricky. Taking a step back and looking at a restaurant’s value message compared to your competitor’s pricing can help a brand decide if it should raise prices in line with similar concepts. When a company starts to focus on price, “you tend to lose for multiple reasons.” Lukosavich said, adding quality, service and speed might be reduced.

“If a direct competitor is not raising prices, our recommendation to that brand is to understand what that value message is,” Lukosavich said. Is it a value message quality? Is it service? Is it the experience that customer will have when they’re either off-premise or on-premise? Then you should raise your prices accordingly, but don’t make your decision based on price. Understand that equation of your brands as it relates to the consumer.”

Best practices

Agrawal said competitive benchmarking is only one level to assess whether or not prices should be raised in line with competitors.

“Companies with high value differentiation and brand loyalty have been seen to lead the price increase in their markets without hurting their competitiveness and customer base,” he said. “Hence it is essential that companies assess product segments where they have a clear value differentiation and lead the price increase in the market in those segments.”

There are best practices to raising prices so it doesn’t hit customers’ wallets hard.

Lukosavich said transparency is imperative, as consumers are aware that everything costs more.

Consumers are looking for honesty and a sense of security in current times and are looking at restaurants and retailers to fill those needs, Wilson said. Trustworthiness has lingered after the pandemic as consumers build a sense of gratitude toward brands that made them feel safe, and they’re willing to pay more for those.

“The best way for price increases is to launch new menus and/or products,” said Agrawal. “This allows the company to focus the communication on something positive, while rolling out the price change.”

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