Restaurant Briefing: Raising Menu Prices

Promote Your Business Restaurant Industry By American Express January 14, 2015

Increasing menu prices is something restaurateurs attempt to avoid, but with the rising costs of doing business, more are faced with the prospect. Like most, Richard Coraine, Senior Managing Partner – Business Development and Consulting, Union Square Hospitality Group, hq New York, NY, believes in raising prices only when absolutely necessary – when increased costs threaten to reduce profitability. “There’s really no better or worse time to raise prices – and there’s no easy formula that fits all operators,” says Joe Erickson, VP, RestaurantOwner.com. “The only certainty is that continually increasing operating costs will eventually force restaurants to raise menu prices. The silver lining is that most of the dining public is accustomed to price increases because they see them in other parts of their lives.” Higher prices may be a reality for consumers, but it’s still important to proceed with caution and a plan. Some advice:

“Menu pricing is an art, not a science,” says Gregg Rapp, Menu Engineer. “I don’t believe there is a magic formula.” Joe agrees, adding that many operators make the mistake of setting prices according to a predetermined formula without giving due consideration to their operating environments. A formula can be used as a guideline, he adds, but “the reality is that all pricing is customer driven, based on the combination of the appeal and value perception to each customer.” He says that customers don’t care how you calculate the prices on your menu; they only care if they believe your menu items are worth what you are asking. “The optimum price point you should be seeking is the price your guests are willing to pay for what you offer.” Joe adds that experienced operators know price is not the only factor in a customer’s decision whether to patronize an establishment. He says that things such as cleanliness, customer service, music and lighting, location, uniqueness of menu, and crowd buzz typically play a more important role in dining decisions than price alone. “But each of these factors does influence the price/value perception and must be taken into consideration when determining a pricing strategy, especially when raising prices.”

When it comes to raising prices, both Gregg and Joe believe that doing so across-the-board is the lazy way out. “Operators should increase prices item by item, and the place to start is with those that are higher than average in both profit and sales,” Gregg advises. “Typically, if you increase prices for these items you won’t see a drop in sales, as they are not usually price sensitive.” He cautions that, regardless of how popular a dish may be, there is a price point that will turn customers away. “If you raise the prices on items that are lower in profit and have higher-than-average sales, guests will likely leave and hunt for them down the street.” For Richard, the ultimate litmus test for price increases is sales. “Keep a close eye on sales numbers. If you have fewer sales of an item when the price has gone up, then there’s price sensitivity. There’s a perceived value of what people think something should cost at your restaurant and you need to stay within that. Monitoring responses to price increases will help you find the ‘sweet spot’ and it’s part of the art of menu pricing.”

In order to be armed with accurate information before changing prices, Joe says it’s important to cost out each item on the menu (calculating the total cost ingredients in every dish). He adds that when raising prices it’s key to stay within the price range of your menu’s structure. “You need to know the cause and effect of everything as you change prices on your menu, including their relationship to other menu items. You don’t want to have some priced so high that they become isolated.” In contemplating price increases, Joe and Richard both recommend checking out what your competitors are charging. That said, Richard adds that he doesn’t advocate raising prices just because a competitor’s are higher. “I’m not a follower, we have to do what’s right for our restaurants.”

Joe advises that one of the most effective strategies to mitigate the impact of price increases is to periodically change the menu, rotating in new dishes. “I’m a big believer that restaurants should change menus and, as a result, menu pricing several times a year.” Richard says, “We are always looking to add new items to our menus anyway – that’s what keeps our restaurants vital. We’ve also found that specials are a decent way to test price sensitivity and viability of new dishes.”