Managing a restaurant is more expensive and unpredictable than ever before. Food costs alone have risen 29% for the average restaurant operator over the last four years. Factor in labor costs (up 31%) and other expenses and you’ll understand why restaurant menu prices are on the rise across the country. And don’t forget about the looming threat of massive tariffs. With potential price hikes for all types of goods on the horizon, many operators have reason to wonder if increased menu prices are inevitable.
Raising restaurant menu prices is not a decision to make lightly. Back of House consultant Dan Durkin warns that “one of the most alienating things a small business owner can do is raise their prices.” Furthermore, raising prices strategically requires much more than some basic math and a new set of menus. Forward-thinking restaurateurs must execute a delicate balancing act to keep their margins manageable without upsetting loyal customers or scaring new business away.
In addition to Durkin, we spoke to Hillary Holmes, senior partnership manager for restaurant commerce engine Olo, to learn more about raising prices at restaurants while minimizing the impact to their reputations and day-to-day operations.
Don’t Charge More Until You’re Paying More
As Durkin warns, raising prices is a step operators should only take after they’ve exhausted their other options for managing inflation and rising costs. It’s the cardinal rule of restaurant pricing – don’t ask your customers to pay more unless you’re paying more.
Your suppliers will tell you when to expect the prices of key ingredients to go up. If, for example, they warn you that chicken prices are up 10 percent, you may have a business case. Durkin advises operators to eat small price increases where possible and only pass costs on to the customer when it’s absolutely necessary.
“If you can’t back up the reason for the charge, people will consider it as potentially being dishonest or greedy,” Holmes agrees.
Do Take Decisive, Data-Backed Action
On the other hand, it’s important not to hesitate when rising costs demand changes to your menu. Wait too long to make a decision and you could find yourself struggling to keep the doors open. “You want to always know what's going on with your cost of goods,” says Holmes.
“I like to compare restaurant profits to a $1 bill, so for every dollar, 30 cents goes to food costs, 30 cents goes to labor, 30 cents goes to overhead, and you might profit 10 cents, and that is if you are doing it perfectly – most restaurants are really closer to five cents,” she says.
The smaller the margins, the less room for error and the less time between sink and swim. If you see your food costs increasing beyond that 30 percent, Holmes says you shouldn’t hesitate to reevaluate your menu.
An inventory management solution can help you stay on top of pricing forecasts and build relationships with the right suppliers. Durkin encourages operators to “trawl the supply base to see who’s offering the best price” for kitchen staples.
The procurement module of a solution like MarginEdge or MarketMan will make these side-by-side comparisons as simple as possible. By making some price-conscious purchases, you may be able to avoid passing too many extra costs on to your patrons.
Don’t Raise Restaurant Menu Prices Without an Explanation
“You don’t have to be afraid of incremental price increases – it’s expected now more than ever before,” Holmes says. That said, your best bet is generally to show transparency and let your customers know how prices will change and why. Trying to make major menu changes in secret could backfire, fostering a sense of distrust among your customer base.
Take to social media and explain the situation to your followers or post an update on your website. This example Instagram post shared by Philadelphia’s Middle Child in 2022 includes details on how exactly food and labor expenses have changed over the years. It also details the steps the team at Middle Child took before resorting to price increases. Resetting expectations with customers should encourage them to think twice before raising complaints.
Your team deserves an explanation too. “They need to know you’re not raising prices to pay for a new car,” quips Durkin. As with customers, educate staff on why you’re raising prices and give them the go-ahead to share that reasoning. You want them confidently fielding questions from customers who missed your signage or social media posts.
“It can be as simple as letting [staff] know that it’s safe to say, ‘Yes we did raise prices, and it’s because our cost of goods have risen, and we want to make sure we still have great quality food for our guests,’ ” says Holmes.
Do Make Strategic Menu Changes
Menu management isn’t a guessing game. Your strategy should never amount to throwing out price increases and seeing what sticks. Rather, success comes from assessing concrete data and making informed decisions.
If it becomes too challenging to hit your margins and appease your guests, you’ll likely need to make some recipe adjustments. The goal is to create dishes at prices your customers are willing to pay, which sometimes requires adjusting portion size and eliminating pricier or single-use ingredients.
Tactics can include shaving an ounce or two off a centerpiece protein and supplementing it with a trendy vegetable side. But you might still need to raise prices, particularly for dishes that are popular. Your tried-and-true dishes are often the best starting points for raising prices without losing customers
You may be able to avoid backlash by carefully timing your price increases to coincide with updates to your menu, such as introducing eye-catching new dishes. “People get excited about new offerings, and so it becomes less about the price and more about what’s new on the menu, and that can offset straight sticker shock,” says Holmes.
Don’t Forget to Analyze Sales Data and Customer Feedback
As with inventory management, technology plays a growing role in effective menu engineering. “Any modern POS solution will enable you to look at daily sales reports for specific dishes to analyze the impact of raising restaurant menu prices,” Durkin says.
Take a look at how demand has shifted. It’s possible that customers don’t mind the price change or that dishes you didn’t expect to be hits have grown in popularity.
Smaller operators can consider talking directly to their customers to get their take on recent changes. Durkin advises larger operators to pay close attention to online reviews. If customers are using reviews to complain about price increases they could scare new business away. Responding to a negative customer review with a clear and honest explanation is a great way to reemphasize your commitment to transparency.
Do Schedule a Consultation
The right technology can help you offset rising costs with operational improvements, enhanced inventory control, and more.
Schedule a consultation with Durkin or another Back of House expert for a guided introduction to the solutions that best fit your organization’s needs and goals.
