From food to gasoline, packaging to labor, restaurant costs are climbing, shrinking margins from tight to razor-tight. Raising menu prices is now an inevitable part of doing business. But while that solution might seem obvious, how to execute isn’t always as clear.
Unfortunately, price raises are never as simple as tacking on a dollar or two to every menu item. There are menu mixes to consider, and your loyal fans, too. Here lay the balancing act of retaining customers while getting the returns needed to stay afloat.
So what’s the best way to go about it? We break down what to consider when changing what you charge.
Don’t: Wait to raise prices when it’s needed.
Watch the market, assess your margins, and adapt prices accordingly – that’s always been good business protocol. But with inflation and today’s supply chain challenges, it now needs to be part of your monthly, if not weekly, routine.
“You want to always know what's going on with your cost of goods,” says Hillary Holmes, operator in residence and strategic partnerships manager for POS solution SpotOn. “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.”
The smaller the margins, the less room for error, and time between sink or swim. If you see your food costs increasing beyond that 30%, don’t hesitate in re-evaluating your menu.
Don’t: Blindly raise menu prices across the board.
Menu management isn’t a game of darts. No part of the strategy involves throwing out a few price spikes and seeing what sticks. Rather, success comes from assessing concrete data – data that should already be available at your fingertips, i.e., your menu mix.
“You want to make a quadrant so that you’re looking at what's popular and profitable versus not profitable and not popular,” says Holmes. “Anything that’s a double no – not profitable and not popular – is coming off the menu.”
From there, it’s about assessing those middle zone items. For dishes that are popular but not particularly profitable, or profitable but not really popular, what tweaks can you make to move them towards the profitable and popular quadrant? This might include shaving an ounce or two off a centerpiece protein and supplementing with a trendy vegetable side. But it could also mean raising prices, particularly for dishes that are popular. Your tried-and-true dishes are often the best starting points for raising prices without losing customers.
“Customers are becoming more understanding of the impact of the economy on the food they’re eating, and if something’s the most popular item and you slightly raise the price, you’re not likely to see much attrition from that,” says Josh Sharkey, founder and CEO of recipe software company Meez.
Do: Keep a close eye on sales per item after a price increase.
Raise the price of an item too high, and sales could drop in a way that negates any benefit. On the other hand, if you aren’t seeing much change in your customers’ ordering behavior, this could indicate there’s room for additional future increases. Pay close attention to the numbers, and you can make the necessary next steps.
“If you start to get too much blowback from guests, it might be a great time to talk to guests. ‘If you think $15 is too much for a burger, what would you pay?’,” says Holmes. “Asking staff to get their feedback can help you review if you need to make a second go to find a price that’s right for your community.”
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 customer base is willing to bear, which sometimes requires adjusting portion size and eliminating pricier or single-use ingredients.
Do: Be transparent with customers about why prices are rising.
It’s a saying for a reason: honesty is the best policy. If a guest questions the price, be transparent about the changes. Trying to hide price hikes often backfires, creating a feeling of mistrust among customers.
“You don’t have to be afraid of incremental price increases – it’s expected now more than ever before,” says Holmes.
This doesn’t necessarily mean you need to make a public announcement. But that’s not a bad option. An increasing number of operators are leveraging social media to communicate the reality of why prices have to go up in order to survive. Take for example this post by Philadelphia’s Middle Child, directly comparing the differences in ingredient prices between 2019 and 2022. The post also mentions the increase in labor, as well as other strategies they’ve already attempted to lower costs, like adjusting portion sizes.
This type of explanation allows you to give customers a better understanding of the challenges you’re facing. And for some customers, even if only a few, it might be the key to warding off complaints.
Don’t: Add a surcharge to the check without a clearly attached explanation.
Planning to add a surcharge in lieu of raising individual menu prices? You must inform guests upfront.
“If you can’t back up the reason for the charge, people will consider it as potentially being dishonest or greedy,” says Holmes.
You also risk legal action against you. Take it from Chicago-based restaurant group Lettuce Entertain You, which is being sued by a man who said he was not told about a 3% surcharge before ordering.
From a customer relations standpoint, it’s better to not only ensure the surcharge is visible, but also spell-out its intended uses. Include a brief description on the check, table card, or poster by the register. (Or, like Founding Farmers, make a whole website page devoted to it.) Again, this clues customers into the actual challenges you’re facing, whether it’s the fact that you’re paying employees more, your chicken costs increased 70%, your packaging prices doubled, or all of the above. Direct reminders make those news reports people are seeing real.
Do: Prepare front of house staff with talking points.
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, social media posts, or other explanatory memos you’re already pushing out.
“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: Time your price increases roll-outs strategically.
If you need to raise prices, you shouldn’t delay. But if you can tie it into a menu rollout, that’s ideal.
“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.
When possible, also time price roll-outs for a weekday to give staff time to get comfortable with the changes before busier weekend shifts arrive.
Grace Dickinson is a reporter at Back of House. Send tips or inquiries to email@example.com.
[Photo courtesy cottonbro]