With how the restaurant industry looks right now, from shifting consumer behavior and volatile demand, strategically pricing a menu has never been so complicated, nor so important. It doesn’t help that the costs of running a restaurant are higher than ever. According to an analysis by Buyers Edge Platform, a restaurant supply-chain company in Waltham, MA, restaurants are now spending 38% more just on food costs alone (1). Operators have also been pressured to spend on safety products from masks, sanitizing supplies, Plexiglass dividers and various touchless systems to protect their staff and customers. And while many operators have resorted to raising their menu prices, either by charging a COVID-19 surcharge or charging more for food being delivered than they do for take-out or dining in (2, 3), there is speculation that these costs increases will hurt customer relationships and cause long-term implications (4).
“Generally, if the prices are significantly higher for 30 days or more, restaurants will have to start making decisions,” said Buyers Edge CEO John Davie in an interview with Business Insider (1). Because of the economic impact of the pandemic, consumers will be seeking more value and buying up deals (1). Navigating the balance of loss and profit and figuring out win-win scenarios for both operators and customers is sure to be the key to a restaurant’s future success.
Here are some steps you should take when you price your menu items:
- Take a look at your menu mix (or the menu item detail report) and food cost for each menu item for the last 30 days. Adjust your food costs so that it reflects your target food-cost percentages.
- Talk to your vendors about commodity price trends that impact your menu. Being transparent about your situation can help vendors prepare in advance and offer solutions they think will benefit both sides.
- Determine the pricing elasticity of items. By elasticity, we mean “the responsiveness of demand to a change in price” (5). Commodity items like soda and wings have low elasticity. Unique and signature items tend to have high elasticity. The higher the pricing elasticity the easier it is to raise the price.
- Eliminate the high cost/low selling items from the menu. It’s time to do some menu engineering. Figure out which items are high cost (for example, a brisket) and see if you can substitute or omit the item from the menu. You can do the same for your low selling/ low popularity items.
- Study the market. Shop your competitors and get their menus, then raise prices on items where you are substantially below your competitors. Lower prices where you are not competitive, and work to have pricing parity with your competitors.
- Update your printed and web menu format by highlighting popular low cost and high profit items to shift your product mix and increase profitability. Allie Van Duyne from Toast says that a creative menu design can help strategically suggest and promote more profitable items to guests (6).
The food and operational costs vary by restaurant, so there is no one-size-fits-all solution to pricing your menu. That’s because creating the perception of value in a customer’s eye goes beyond what goes behind the dollar sign. Value isn’t about being the cheapest. It’s a package of both experience and price.
As you begin to make changes and adjust your pricing strategy, try to remember that once the pandemic passes, your customers will return. Here’s what not to do according to McKinsey Research (7): taking advantage of customers, assuming that every demand problem can be solved with pricing, extensive cost-cutting and relying on old price-sensitivity research. Doing these things could help your business in the short-term, but the businesses that are most likely to succeed after the pandemic will be those that do what’s hard. By focusing on long-term value, optimizing their business, and sustaining customer relationships.