2010 March: Raising Prices

Raising menu prices remains an inevitable part of the restaurant landscape, a particularly difficult decision to make at any time, but specifically when paired against the backdrop of a stumbling economy. As the market shifts, operators are forced to respond to changing conditions, such as rising food and labor costs, lower traffic counts, and slimmer profits.

“Money has wings when it’s going off the bottom line,” reminds operator Steve Abo, who oversees 18 Abo’s Pizza locations in Colorado.

As operators exhaust portioning and purchasing alterations, the two other operational areas that contribute most to profit margin, many face the decision of either changing product, a move that will most certainly irk customers, or raising prices.

Working to keep their business afloat amid profit and sales erosion, operators have dedicated increased attention to menu prices. Often apologetic for raising prices, operators mustn’t be so gun-shy.

“The biggest mistake operators make is not raising prices. You can’t outrun costs with sales,” says Joe Perrino of Chicago’s Home Run Inn.

By blending data with an understanding of product and perception, operators can better make pricing decisions that retain customers and contribute to a healthy bottom line.

In business, there’s a romantic quality to relying on instincts. Gut reactions can be dead on, but safety looms in a scientific approach. Kevin Moll, head of Denver-based National Restaurant Consultants, suggests an analytical, numbers-based approach that requires work, but provides clear direction.

A thorough menu analysis should include the production cost of each menu item (the cost to produce a dish), a determination of each item’s profitability (sales price minus the cost of production), and a report on the sales mix (how specific items are selling).

“You want to get to a point where any price change is legitimate, well thought out, and part of a larger strategy,” Moll says.

A firm grasp of healthy margins has carried Home Run Inn, a family-owned operation, to success in its eight restaurants and frozen line.

“We have a tight reign on the margins we have to hit, and do what’s necessary to maintain that balance, which includes raising prices,” Perrino says.

Matt Loney, president of Stevi B’s Pizza Buffet, which oversees 30 locations across seven states, says panic should never drive price changes. The faith Loney holds in Stevi B’s price points, supported by accurate data and confidence in the restaurant’s offerings, thwarts consumer discontent.

“If you believe in the product you’re providing and the pricing strategy is rooted in facts, then you have a price you can stick by,” Loney says.

Central to the price debate is product positioning; operators must have a solid grasp of their menu mix and local competition. Prior to making any price changes, operators should study customer ordering data, noting popular items and profit margins.

“Not all menu items generate the same level of profit. Know what’s selling and redesign the menu with that in mind,” Moll advises, adding that many operators minimize price changes on entrees more likely to grab attention and institute a more aggressive pricing strategy on sides and drinks.

And never should operators overlook the competition. Either by price or quality, pizzerias must differentiate themselves and understand that a $5 pizza carries different expectations than a $20 pie.

“It’s okay to identify yourself as a premium product, so long as you’re prepared for those premium expectations,” says Ron Santibanez of California-based Profit Line Consulting. “Operators can’t lose sight of who they are in the marketplace, which feeds directly into pricing strategy.”

Make no mistake: pricing and perception are tied together. Managing that perception with well executed alterations to the environment, menu, or value proposition can minimize consumer discontent.

In conjunction with a recent price increase, for instance, Stevi B’s altered its stores’ physical make up with new menu boards, fresh paint, new arcade games, and enhanced lighting, thereby improving the customer experience and mitigating its price hike. A new menu layout, meanwhile, remains one of the best strategies to veil price increases.

“If the menu, the most important real estate inside the restaurant, is redesigned properly and with appropriate prices, then everything will fi t together,” Moll assures.

Operators can also offer a combo price or family pack to gain value perception.

“Consumers have money, but need to see a value proposition. The bundled format is the best way to show that,” Moll says.

In implementing price changes, Abo utilizes the “same number” concept, which is entirely about perception. Consumers identify a clear price distinction between $2.19 and $2.49. There is, however, no difference between $2.49 and $2.59; both are equated with $2.50.

“That extra 10 cents doesn’t mean much to the customer, but it means a lot to us 1,000 times over,” Abo says.

When food costs fall, Home Run Inn maintains its price points, though the Chicago eatery does offer deeper discounts and heavier promotions to generate a positive value perception.

“You can’t go up and down with your menu prices, so this is a way to hold the line and provide something extra customers appreciate,” Perrino says.

Silence or Sharing? Communicating price changes to customers

Common thought holds that a subtle posted note explaining a price increase does much to placate customers and spark empathy, if not loyalty. Not so, say operators and experts alike.

“You’re apologizing for something you don’t need to apologize for,” says consultant Ron Santibanez.

Matt Loney, president of Stevi B’s Pizza Buffet, says experience tells him customers dislike operators blaming a price increase on another factor, such as rising labor or commodity costs. They understand that selective price increases must happen.

“If you’re going to say anything, it might be: ‘We held our prices as long as we could, but eventually had to make a change.’ People appreciate that more than excuses,” Loney says.

Ultimately, operators should maintain confidence in their product, and their level of service.

“People on the other side of the counter don’t care too much about your problems. They just want a good pizza at a fair price, so bite the bullet and move on,” says Steve Abo, who oversees 18 Abo’s Pizza locations.

Chicago-based writer Daniel P. Smith has covered business issues and best practices for a variety of trade publications, newspapers, and magazines.