Is There a Right Way to Raise Prices?
8 Min Read By MRM Staff
Due to many factors including inflation and supply chain challenges, restaurant owners and operators have been faced with tough choice about raising menu prices. Modern Restaurant Management (MRM) magazine asked restaurant industry insiders for their insights on whether there is an effective way to raise menu prices, any alternative and how can you do so without alienating guests.
Ben Johnston is the Chief Operating Officer of Kapitus
As food prices rise, restaurants should try to stay within their target ratio for food cost to gross food revenue in order to maintain target profits. To do this, restaurants will either need to use lower cost food items or raise menu prices. It is also important to manage labor costs to a target percentage of gross food revenue. One way to lower food costs is to purchase more unprocessed foods, which require additional preparation labor. However, a restaurant must be careful not to replace food with additional staffing expenses that outweigh the savings in food.
As inflation takes hold, restaurant owners are faced with the dilemma of whether to raise prices in order to maintain margin. When considering prices, it is important to know where the competition is priced, what they are offering and how busy they are. If a restaurant is underpricing the market and is busy relative to its peers, it may have room to increase pricing without damaging its customer base. One way to maximize pricing efficiency is to raise standard menu prices but keep specials priced low, offering something of value to the bargain hunters in the customer base. One restaurateur I spoke with reported offering “all you can eat” fish and chips on Fridays, charging $3 extra on a $15 menu item for the “all you can eat” option. This promotion gives the restaurant something interesting to market and it has found that the $3 upsell more than pays for the additional cost of food.
One way to maximize pricing efficiency is to raise standard menu prices but keep specials priced low, offering something of value to the bargain hunters in the customer base.
Another way to introduce price increases is to introduce new elements to the menu. New and exciting items make it harder to discern specific price increases. Consider resizing menu items down, especially if you notice consistent food waste from a specific item. There may be opportunity to cut the size of the portion and the price simultaneously while increasing margin. If certain patrons miss the larger size, provide an option to upsize for a premium.
Alternatives to raising prices include reducing portions, substituting quality to provide a lower-cost item, and updating the menu as the seasons change to offer lower cost items. Some restaurants have also driven profitability by featuring lower cost but higher margin food items through menu placement and attractive pictures.
Rick Camac, Executive Director of Industry Relations at the Institute of Culinary Education
When you have to raise prices (based on inflation, staffing and supply), you must still offer value to the diner (or at least the perception of it). While you can proactively make mention of the fact that prices just have to go up (whether in writing or in person), I feel, to a degree, that may "fall on deaf ears", as has been my experience (as both a consultant and operator).
I would suggest the following strategies:
- Minimize the cost increase by doing the following:
- Purchasing smarter. If you haven't been pricing out your list lately, get some new bids.
- Avoid certain products and substitute with less expensive ones.
- Add more inexpensive items to a composed dish – a little less protein, a bit more greens.
- Shorten the menu, allowing for less waste, less purchasing and less labor.
- Of course, all those strategies will likely not allow you to keep costs the same (chicken, as an example, in some areas, has gone up 30 percent in the last year).
- Certain items have risen more than others. Mix those lesser priced items and lesser costing items into your menu, so that it's not only higher prices they see. Take away an ounce of protein and add a few ounces of carbs.
- Check your competitor's pricing. It's easier to charge more when everyone else is (and they are).
- Be ready with messaging for when a diner points it out. Be honest and transparent (but do not advertise it). Everyone knows prices have gone up, it's not a surprise. They see it when they go to the grocery store or when they go to your competitor. It's reasonable to say "All our costs have gone up. We had no choice. I'm sure you understand". Some will not but most will. Ask them if it's more expensive for them at the grocery store.
- Be reasonable in your increases and stand by your decisions. The alternative is not a good one (losing money and putting your business at risk).
Paul Westra, managing director of restaurant investment research at Capital One
Prioritizing efficiencies to rebalance costs and optimize revenue is critical in today’s environment. Restaurateurs are achieving sizable savings by streamlining and simplifying their menus – cutting items that are low performers, time-consuming to prepare or rely on difficult-to-source ingredients. Another way to shore up margins is working with suppliers and distributors to negotiate better prices and optimize freight routes. Strategies to do more with less and at a faster pace are helping the industry adapt to challenges and emerge stronger than ever.
Restaurants are dealing with inflation, staffing shortages and supply chain issues. What is the best way for them to counter when food costs rise?
Ben Brown, Vice President of Marketing at ConverseNow: Always first try negotiating with your supplier, whether by buying in bulk where you can or doing your due diligence in researching competitors' pricing. From there, substitutions with minimal impact on flavor, quality and guest perception are a natural first choice. Beyond that, change your menu mix to encompass your target margins. This could mean adding and promoting a higher-margin pasta dish to balance out a lower-margin steak. Also look for ways to drive sales and decrease costs outside your menu mix. This could mean training your staff in stronger upsell, or investing in technology that helps your restaurant operate more efficiently.
Gocha Hawkins, Owner and Head Chef at Gocha's Breakfast Bar: When food costs rise, your best bet is either increasing the price of your menu item or remove the menu item until prices decrease.
Izzy Kharasch of Hospitality Works: To be successful and continue to run their business, restaurants must raise prices. They can be strategic and only raise prices on the items that continue to rise rather than doing wholesale menu increases. The can also determine to try to lower some operational costs so they don’t have to raise prices too high.
Stef Scrivens, Chief Operating Officer, Tablz: Restaurants have historically absorbed short-term fluctuations in pricing because raising menu prices is such a difficult ordeal, and it tends to balance out in the long term. The past 2.5 years have culminated in a roller coaster of fluctuation for the restaurant industry, a market that is already very hard to make money in.
Dynamic pricing has existed in other industries for years, and dynamically pricing food would be allowing the menu prices to change–both rise and fall–with the cost of food, which is not ideal as it's raising the menu prices and results in deterring guests from dining out. However, when dynamically pricing the real estate in a restaurant's dining room, you have a base value, which is the premium to pick your seat; and the dynamic value, which is the demand for a specific seating time, resulting in a win-win for both the guest, and the restaurant.
Ursula Siker, Chef, Baker, and Account Executive for meez! : The two immediately obvious options are: Raise prices or begin purchasing cheaper/lower quality and hope no one will notice. When your reputation is based on your food, the latter often feels like a non-starter. The third option is to re-engineer your menu to be more profitable.
Creating systems to minimize waste through strong organization and ordering systems, as well as streamlining training to cut down on labor costs all can help a restaurants higher food cost percentage.
This can be a great opportunity to think about new ways to cross utilize component recipes that go well in other dishes, using more interesting ingredients that are not as commoditized as well as creating innovative ways to use simpler ingredients (yes, an onion can be A LOT more than an onion if you treat it that way:). Often, looking to other costs in the business can help alleviate a higher food cost. Creating systems to minimize waste through strong organization and ordering systems, as well as streamlining training to cut down on labor costs all can help a restaurants higher food cost percentage.
How can they best raise prices without alienating guests?
Ben Brown: Open communication is vital when change is imminent that may impact guest satisfaction. Add a note to your menu that explains why prices have risen. Note the importance that food quality and adequately compensated staff play in your business, and that you've exhausted all other options. Most guests respect this kind of transparency. For your valued loyalists, be sure that service staff communicate these changes proactively and directly. Try to minimize the number of times you raise your prices, as one larger spike will be better received than multiple smaller price increases.
Gocha Hawkins: I recommend making small increases or increase the items with the most margin room to increase without making a huge difference. Another way is to create a seasonal menu with slightly higher prices. When you do this, you are offering some items at a higher price but for a limited time. When you do this, you can gauge how it affects your customers.
Izzy Kharasch: The restaurateur needs to be careful not to raise the prices too high or too quickly. Doing that is a shock to the guest and that is when price increases are very noticeable. Monitor the price of product and increase at the same time.
Stef Scrivens: I think it's really important to educate guests that restaurant margins are incredibly slim without the added squeeze of inflation, and that owners don't want to raise prices unless they have to. There also needs to be a creative approach, and the best way to get creative is by employing great tech. There are a lot of amazing new solutions coming to market. We created Tablz to allow restaurants the flexibility to create an added revenue stream without alienating guests.
Ursula Siker: Should a restaurant come to the decision they must raise prices, it should be done intentionally and transparently. Intentionally meaning there is data backing which items go up and why (has the central ingredient maintained a higher cost for months? Is the market showing these prices for similar items across the board? Is the labor behind creating your most elaborate dish a factor? Are there any dishes you can manage to keep at the same price?). Printing menus is expensive. Make these choices cautiously, with research. Transparency meaning your guests are a part of the process. Creating language to explain a planned increase prior to release is crucial in gaining trust, as well as providing the raw costs and pertinent data behind this decision. Pulling the curtain back allows your guests to feel respected as intelligent and logical people, who have been given the choice to continue to support a business that values its food quality and employees. Avoid a blindside at all costs!
Is there a formula that works, a messaging?
Ben Brown: Every restaurant is different, with a unique customer base, so there's no set formula to follow. That said, your approach should always put your guests first. Preserve your food quality, portion sizes and guest experience, because that will affect your long-term business health far more than price changes due to rising food costs.
Preserve your food quality, portion sizes and guest experience, because that will affect your long-term business health far more than price changes due to rising food costs.
Gocha Hawkins: When messaging, let people know that things are out of our control. Since COVID, the world has been understanding of the price increases because of supply shortages. When addressing the customers, something like “Due to unforeseen challenges in the supply change we may not be able to accommodate all items as stated on the menu with or without notice. We appreciate your understanding” should suffice.
Izzy Kharasch: As mentioned, trying to control other operational costs so that menu pricing does not need to go up. Some/many restaurants are turning around the credit card fee and having the guest pay and that helps the restaurant from raising prices another three to four percent. I don’t believe the restaurant should put anything on the menu or communicate that they have just raised prices, this only makes for a negative guest experience.
Ursula Siker: Anything you do will garner you both champions and critics. However, open communication and transparency of costs is an integral first step. Stick to data and stats, offer concrete examples (i.e. butter was x amount on this date and is x amount now). Acknowledge your guests choice to choose your restaurant and show appreciation for their anticipated understanding. Above all else, protect your team and equip them with as much financial literacy as you can so they can provide guests with confident knowledge of price increases and reasons why. After all, they're the ones who will hear about it the most.