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When to Raise Prices and How to Do It

When to Raise Prices and How to Do It

by Joe Erickson

Most restaurant operators shudder at the thought of raising menu prices -- especially in uncertain economic times and the age of rampant discounting by the chains. On one hand, they worry that increasing prices may scare customers away. On the other hand, failing to do so may mean they'll have to shutter their doors. It's this classic "Catch-22" scenario that restaurant operators are faced with time and time again.

Unfortunately, there is no easy one-fits-all solution to this nagging dilemma. The only certainty is ever-rising costs will eventually force you to increase your menu prices. The good news is you're not alone; your competitors face the same thing. Another silver lining: Most of the dining public is accustomed to increased prices. They've seen rising prices at the gas pump, the grocery store and at other restaurants. (If they want a $1 "value meal" or "kids eat free on Tuesdays," well, they know where they can go for that.)

It's never easy to know the right time to take the leap. It is also no surprise that this is one of the most frequent topics of conversation in the RestaurantOwner.com Discussion Forum. One longtime member had an interesting response to the question, "When should I raise menu prices?"

Her reply:
  1. When costs have gone up and if you don't raise your prices, you won't be able to survive.
  2. When you know wholesale prices or fixed costs are going to go up soon.
  3. When you are so busy, you have a line out the door most nights.
  4. If you think the market can bear it.
You'll see her first two reasons are cost-driven responses while the last two are market-driven. Most operators can easily identify cost-driven reasons as a strong argument for a price increase. But when it comes to recognizing when market conditions can bear an increase, most operators are clueless, and hence, fearful of raising prices.

How Much Is Enough?

Even when it becomes obvious a price increase is necessary, there are still questions of how much is too much and how to introduce the increase. Let's first discuss the issue of "how much" of an increase is appropriate.
start quote. . Many operators make the mistake of setting prices according to a predetermined formula without giving due consideration to market conditions. The reality is that all pricing is customer-driven....end quote
It's not uncommon to hear a restaurant operator say they need to raise prices across the board by 5percent to 10 percent or more to get back to profitability. Others suggest setting prices according to a predetermined cost target.

When I hear these types of statements I want to scream, "Whoa, stop, wait a minute!" Many operators make the mistake of setting prices according to a predetermined formula without giving due consideration to market conditions. The reality is that all pricing is customer-driven. Customers make buying decisions based on a combination of appeal and value perception and each customer has their own limits for both. They don't care what your formula is -- they only care if it's worth what you are asking. The optimum price point you should be seeking is the price your guests are "willing" to pay for what you offer. Cost is a secondary consideration that should be used to either tweak the price or, in the event the cost is too high, consider dropping or changing the menu item.

Before setting prices, each menu item should be evaluated individually.

  1. What does it cost me to make this item?
  2. What is the price range that the guest is willing to pay for this item?
  3. What factors about my restaurant influence my guests' value perception of this item?
Getting the answers to these questions is an important first step to not only deciding on new prices, it's also extremely beneficial when deciding how to work them onto your menu.

What does it cost me to make this item? Costing out your menu is a laborious task, but you must know your menu cost before you can make intelligent decisions about how to price it. For more information, see "Measurable Improvement: A Three-Phase Approach to Increasing Profits With Food Cost Control Systems," RS&G Archives.

What is the price range that the guest is willing to pay for this item? One common characteristic among successful restaurant operators is that they are well-informed about their market. They know what their competitors charge and they have a good sense of what customers are willing to pay for certain dishes. Any restaurant owner contemplating a price increase is well-advised to first get up to date on what their competition is charging. The competitor pricing survey form (see chart below) is a useful tool for staying informed about your competition. It can be used for tracking food or beverage price ranges within the marketplace, providing a valuable reference when making pricing decisions.

What factors about my restaurant influence my guests' value perception of this item? You can go to just about any restaurant and find a menu item featuring a boneless chicken breast. While sauces, accompaniments and preparation methods may vary, the basic cost of the chicken breast is probably about the same.
start quote. .Whether your restaurant uses a printed menu or prices are displayed on a menu board or sign,the positioning and price relative to other items on the menu will have a huge influence on your product sales mix -- thus cost percentages and profit. ..end quote
So how is it that a family-style restaurant might charge $8 to $10 while a fine dining venue can get $14 to $18? Flavor profile and presentation notwithstanding, many other factors, such as service style, atmosphere, location and reputation, heavily influence value perception. A price range of $14 to $18 can seem a real bargain when visiting a fine dining restaurant with a much higher check average and elegant atmosphere.

Customer perception -- how your guests observe and evaluate your restaurant -- goes far beyond simple value perception. Experienced operators know that price is generally secondary in the customer's decision of whether they will patronize an establishment. Cleanliness, customer service, music and lighting, accessibility, uniqueness of menu, crowd buzz and other aspects are typically more important than just the price. But each of these factors does influence the price-value perception and must be taken into consideration when deciding which end of the price range spectrum your restaurant should be.

In addition to completing a competitor pricing survey mentioned earlier, completing competitor reviews (see sample form below) of your competition can help you identify the important characteristics and features that the public uses to determine whether they will choose to frequent a particular restaurant. It will give you a basis to determine what you're doing well and where your competition may be beating you and capturing a bigger slice of your market.

How to Introduce a Price Increase

The last element to consider when settling on the selling price of a menu item is in how the item is presented. Whether your restaurant uses a printed menu or prices are displayed on a menu board or sign, the positioning and price relative to other items on the menu will have a huge influence on your product sales mix -- thus cost percentages and profit. The art and science of how, where and why a menu item is listed is called menu engineering. Mark Laux, contributor to this magazine's Menu Makeover department, often demonstrates the correlation between profitability and popularity within the menu matrix, as he illustrates the techniques and strategies for revamping his client's menus.

The basic premise of the menu matrix is to categorize each menu item into one of the following categories:

• Higher-than-average profit -- Higher-than-average sales.
• Higher-than-average profit -- Lower-than-average sales.
• Lower-than-average profit -- Higher-than-average sales.
• Lower-than-average profit -- Lower-than-average sales

Before settling on the final menu price of an item, analyze the sales history of the item and where that item falls within the matrix. As demonstrated in Menu Makeover, the placement on the menu -- in addition to the price -- will eventually determine the success or failure of your price increase.

Since you will most likely be printing new menus anyway, now is the perfect time to incorporate menu engineering into your menu design. While menu design may not disguise price increases, it may help to avoid the appearance of an across-the-board increase.

In addition to the menu engineering technique, here are some other strategies restaurant operators have used to soften the effect of a price increase:

Repackage the menu item. One strategy for avoiding "sticker shock" pricing is to change the way entrees and sides are offered. For instance, adding, changing or eliminating a salad or side order for certain menucategories provides new pricing opportunities that are not easily compared with the old menu pricing.

Retain off-menu offerings. Sometimes it's difficult to part with some of the menu items that have declined in popularity, but are still favored by a few loyal patrons. Instead of keeping them on the new menu, simply move them to your off-menu list. When longtime guests complain, have your staff explain that it is still available but by request only. The great thing about an off-menu list is that you can change the price without reprinting the menu.

Introduce new items. Perhaps the most effective strategy for masking price increases is to periodically change your menu. When you do, introduce new or seasonal items to go along with the cornerstone menu items for which you are known. It's not uncommon for some restaurants to change their menu two or three times a year.

Increase your specials offering. One way to test the appeal of a new menu item proposal is to offer it as a special periodically. Don't fall into the trap of simply discounting an existing item on your menu as the daily special; instead, allow the creativity of your chef or kitchen staff help you discover new menu opportunities. Specials can be conveyed to the guest in a variety of ways, including verbal presentation, chalkboard or specials menu board, or even a separate printed menu that changes daily.

Taking the Leap

In discussions about the fear of raising prices, with restaurant owners who have recently raised their prices, I've learned the overwhelming response is "just do it." Additionally, most will tell you not to wait too long to do it.

By doing the homework of costing out your menu, reviewing your competitors, understanding your customers' value perception and re-engineering your menu in a fashion that will improve profitability, you'll be better-equipped to recognize not only when to raise prices, but how to do it as necessary as part of your regular business operations.

-- Restaurant Startup & Growth

Menu Engineering

For more information on menu engineering and pricing, read Menu Makeover, a regular feature of this magazine. For an example of a past installment, go to www.rsgmag.com/public/318.cfm. Additional articles can be found in this magazine's archives at RestaurantOwner.com, including:

• Menu Engineering Basics: How to Make Your Menu Your Top Salesperson
• Operational Concerns of Menu Makeovers
• How Low Can You Go? Winning the Menu Pricing Game
• 10 Menu Mistakes That May Be Costing You Plenty … and How to Avoid Them

Restaurant Operators Weigh In On Raising Prices

In a recent RestaurantOwner.com Discussion Forum thread, one member posted a question about raising menu prices. Here's what a few of his fellow RestaurantOwner.com members had to say:

q Original thread posting: I just bought into a small, corner bar/restaurant and the menu is 6 years old and severely underpriced. Beer is even priced at 40%, some menu items are as much as 60% cost. I am in the process of creating a new menu and need to price it right, without getting any kickback from the regulars. Any suggestions?

Reply: Try and add new items so it disguises the price increases. In other words don't just reprint the existing menu with new prices.

Reply: No matter what you end up doing, if you raise prices you will get a few complaints -- but that doesn't necessarily mean you will lose any customers. However, to lessen the sticker shock, one method might be to make changes in two stages since this appears to be equally as much of a bar as it is a restaurant. The first would be to change your food menu -- and consider the exclusion of beer and wine prices when you print the new menu. Leave the beer and wine prices intact when you roll out the new food menu (just don't put them in print). Wait a few weeks for the dust to settle and then begin to increment beer and wine as needed (if still needed).

q When you do the food menu I strongly suggest doing a menu engineering analysis to identify items that can be dropped vs. items that are higher profit that can be placed in more prominent positions on the menu with the hope of increasing their sales. There is nothing wrong with having a 60% cost menu item if the sales of that item is a high-profit contribution in terms of dollars. Also, think about creating a few new menu items or adding a twist to some existing so as to give more of the appearance of a new menu vs. simply being viewed as a price increase.

Reply: We waited too long to raise prices and it got to the point where it was do or die. We added new items to the menu, removed dogs and kept the same look of the current menu. We raised prices significantly on most items and kept some items the same price. No one said a word. No one. Not only that, we didn't seem to lose any business because of the increase, which really surprised me. I think because the menu looks the same, people didn't notice the price increases.

Our next step is to engineer our menu and give it a new look. I have a feeling that even though we will not be raising prices, we will get backlash. It will be interesting to see what happens.

Reply: Don't let fear of how some may react hold you hostage. Price your menu appropriately for your area and costs. Like [the poster above], I waited far too long to make the changes we needed to run a profitable business and nearly had to shut the doors.

q When I increased prices and reduced the overall size of the menu there were a few complaints and I did lose a few regulars but now I can buy a better-quality product, have more staff available and have the time to train properly. I started a Rewards Club and a Birthday Club; both are growing slowly but steadily. I am seeing the rewards in the bottom line after just a few months. I regularly comp a coffee or ice cream treats to the regulars who stuck with us -- in the end the cost of a few free coffees a week is significantly less than selling every coffee underpriced. I also comp the "squeaky wheels" just as often with a free drink, a coupon for a free "xxx" on the next visit. If you have someone who loves to talk, take advantage of the advertising by putting a positive spin on what they have to say (even if they drive you batty in the process!).

Reply: Just do it. Be open and honest with customers and let them know that it was either fix the prices or not have a bar. I am a firm believer in getting them on your side. I let people know that I am raising prices to cover rent increase, payroll increase, and food costs, etc.

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