Raising Prices the Right Way
Fast or slow, increases in food costs tend to be inevitable for everyone: from January 2018 to January 2019, prices for restaurant purchases increased by 2.8 percent, according to the United States Department of Agriculture.
If you’re thinking of raising menu prices, you may come across legitimate concerns regarding how to make the adjustment. First and foremost, how will clients react to a higher bill? And how will new prices impact overall profits? “Raising prices can feel like a daunting exercise, but if timed right and approached correctly, can be quite simple,” says Stewart Maranello, a senior solution consultant at Fourth, an end-to-end hospitality solution, who works with pizza businesses to manage the process of increasing prices.
“Start by determining your goals,” suggests Rom Krupp, founder and CEO of Marketing Vitals, a restaurant marketing business intelligence solution. Do you want to increase prices to compensate for higher operating costs? If so, you’ll want to make sure the price adjustments can cover the new operating costs. Are your goals to increase profit margins, maximize revenue for increased growth, or to surpass last year’s earnings? In these cases, you’ll want to look at past data to evaluate your sales history and patterns in those sales, such as what’s been selling well, what hasn’t been selling as frequently, and where opportunities for price increments can be found.
To gain a sense of your surroundings, research the current prices in your area. “Understanding what local competitors are charging can help to determine if you can raise prices without sacrificing customers,” Maranello says. If you find that nearby places with similar product offerings have higher prices, you might be able to move yours up to align with them.
If you discover local prices are similar to yours, it can be helpful to evaluate your menu items and atmosphere. “If you are positioned as a more premium destination, there can be room to charge a premium,” Maranello says. “Just be careful not to price yourself out of the market.” Small increases that are slightly above competitor prices can help avoid a customer fallout in response to a steep raise.
When implementing new menu prices, review all your pie offerings, other dishes, appetizers, beverages and desserts. Look at some of your previous sales history to spot high volume items. “A small, discreet five- to 10-cent increase on a handful of high-volume dishes could drive a bigger return than a more noticeable increase on lower volume dishes,” Maranello says. So if your large house special stuffed crust is a bestseller and currently sells at $21.95, rounding it up to $22 might bring in more profit than adjusting a low-selling calzone from $14.75 to $15.
A slow-and-steady approach to price increases can also help avoid big jumps and surprises for customers. “A consistent annual marginal increase is easier to accept as opposed to a big increase every five years,” says Aaron Chaitovsky, a partner at Citrin Cooperman who specializes in profitability consulting and analysis for restaurants, among other industries.
There are also ways to provide customers the opportunity to find discounts when raising prices. “If pepperoni pizza is your No. 1 seller, understand which customers are most sensitive to increases,” Krupp explains. The most price-conscious clientele may be your Monday and Tuesday lunch guests. If so, consider offering a lunch special that keeps costs down for those individuals. If you increase the price on pepperoni pizza, you might offer a smaller version of the pie that costs less and is only available for lunch on Mondays and Tuesdays. This will keep price-sensitive customers satisfied. Your client base on Friday and Saturday nights may not be as price sensitive, as they may be coming to your place for a gathering or experience and are more likely to be willing to pay more. If that’s the case, you can sell the pepperoni pizza at the higher price during those times and bring in more profit.
Another option is to group high-margin items together. “Raising the price for pizza slices when bundled with a soda offers additional value to your customer,” says Chaitovsky. It can also increase the sales on the items, resulting in higher profit.
While raising prices may seem like a solution to generate higher revenue, your bottom line won’t move if costs, especially food costs, are not carefully monitored. “Ingredients that are measured and portion-controlled help create consistent final products, while also helping to cut down on waste,” Chaitovsky explains.
You might also decide to keep the same price on an item but adjust the size. “A 16-inch pie versus an 18-ince pie can save a lot on food costs,” Chaitovsky notes. Before making the switch, however, consider your customer base. If clientele would likely back away from the change, it may be better to keep the 18-inch pie and simply increase the price on it.
While there may not be a foolproof way to raise prices, planning for change and making small adjustments can keep customers satisfied and ultimately, boost the bottom line.
Testing, testing, 123: Use a Trial Period
If your restaurant is in a setting with high and low seasons, consider shifting menu prices during the off-peak period, says Stewart Maranello, a senior solution consultant at Fourth, an end-to-end hospitality solution. And if you’re in a location with a steady customer stream, try carving out a few months to test out new prices. Follow these guidelines during the trial period:
- Make the change. Create new menus with the higher prices or rework your current ones to display the new figures.
- Seek feedback. Hand out surveys or ask customers to fill out a form online. Ask them to rate their experience, offer input on prices and provide suggestions for new dishes or choices.
- Evaluate the impact. After the trial period, calculate the total sales, profit and guest numbers. Compare this to your previous low season, or a comparable time period, to spot any changes.
Rachel Hartman is a freelance writer who covers small business, finance and lifestyle topics.