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The Price is Right (Right?) When and How to Raise Menu Prices

No business should approach price increases recklessly. This is not something you would have to say to many independent operators, who are often risk-adverse to charging more for their tried-and-true menu items. You can't blame them, particularly if they are competing head-to-head with the chains, who have more pricing latitude due to their economies of scale.

Rising costs and changing market forces are driving inflation. Today, it is rarely a question if you will be increasing your menu prices, but rather when and how.

Today, all concepts -- including the chains -- are struggling with increasing food and labor costs. And if you haven't dined in a mid-scale restaurant lately, you might be a little surprised at the check for even a casual "family-style" experience.

Our editorial team has hammered on the importance of managing your incremental costs and overhead with an accountant's eye. That said, you will have to boost your top line somehow, particularly if guest traffic is still slow.

If it is any consolation, we are amid an inflationary economy and your guests are accustomed to increased prices. It is difficult for a family of four to exit a drive-thru for less than $25. These age-old questions, when to increase prices and by how much, are among the most frequently raised topics raised in the RestaurantOwner.com Discussion Forum. One member, a seasoned operator, astutely offered the following reply to the question "when".

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.

As you can see, the 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 fearful of raising prices. And in an economy in which we are paying more for less, such trepidation is valid. Fear that drives us to inaction is dysfunctional. Fear that drives us to taking a more careful approach is necessary for survival.

How Much Is Enough?

And fear that causes us to throw caution to the wind can be dangerous. Common devil-may-care approaches to price increases include across-the-board hikes, such as adding five- to 10-percent to all menu items. Other indiscriminate methods use "target-margin" pricing; in other words, attempting to maintain a certain gross profit on every item based on the cost.

These pre-determined pricing strategies are easier, but often ineffective. You need to bear in mind, all pricing is market-driven and based on customer perception of value.

Scoping the competition to find out how they are pricing items like yours is one way of determining market value. Your customers are not only paying for food, but for an experience. Delivery and takeout pricing will be more like commodity pricing. On-premises dining would be more like value-added pricing, as discussed below.

Menu engineering can also inform you of your guests' value perception. When categorizing your items, consider menu items that sell well (high in product mix), but have less-than-average gross profit contribution. Operators are often hesitant to increase prices for fear of losing business, and fear even small price increases could reduce the sales volume. That said, you might find they can be this market, and boost gross margins.

KEEP LEARNING…

In any event, you need to evaluate each item on your menu before raising prices. With many operators paring down the size of their menus to lower food costs and kitchen labor, the process might be less onerous.

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 but is also extremely beneficial when deciding how to work them onto your menu.

What does it cost me to produce 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.

KEEP LEARNING…

What is the price range that the guest is willing to pay for this item? As noted, any restaurant owner contemplating a price increase is well-advised to first get up to date on what their competition is charging. A 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.

The guest experience influences the value proposition, which is why a casual restaurant might charge $12 to $14 for an item with a chicken breast center of plate (e.g., chicken parmesan), while a fine-dining venue can sell a similar item for $18 to $20, and it would appear a good value.

In addition, completing a competitor pricing survey (see below) can help you organize competitive data by concept and proximity to your units. It will give you a snapshot of your competitors' pricing, and where you stand in the market.

How to Introduce a Price Increase

Strategies restaurant operators have used to soften the effect of a price increase include:

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 provides new pricing opportunities that are not easily compared with the old menu pricing.

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.

Proceed with Caution (but Proceed Nonetheless)

Do your homework. Cost out your menu. Review your competitors. Do what you can to understand your customers' value perception through menu engineering and other sales analysis.

These will help you recognize when to raise prices. It has always been a necessary skill in the restaurant business, but particularly now. Work smarter, not harder.