Brands in the food services industry have been losing margins because of the increasing cost of labor, transportation, and food, as well as COVID reduced traffic, which is why pricing is more relevant than ever. Many large, multi-unit restaurant brands procrastinate on pricing out of fear that an increase will be detrimental. This mindset creates a state of inaction, which is a mistake because pricing is actually the biggest lever in terms of maximizing a brand’s profitability, as the author explains. Craig Singleton is Director of Restaurant Strategy at Iris Pricing Solutions. He can be reached at firstname.lastname@example.org.
The Pricing Advisor, May 2022
Spring is here and it’s the ideal time to re-evaluate menus and reconsider pricing. Producing new menu items or switching to a seasonal menu necessitates a consideration of the current pricing structure. Many large, multi-unit restaurant brands procrastinate on pricing out of fear that an increase will be detrimental. This mindset creates a state of inaction, which is a mistake because pricing is actually the biggest lever in terms of maximizing a brand’s profitability. In terms of raising EBITDA, pricing is a much stronger lever than marketing and the other areas a brand typically leans on for bottom-line growth. That’s because these initiatives have costs associated with them while optimizing pricing does not. It costs nothing to increase prices, which is why it is the least expensive way to increase margins.
Inaction is Dangerous
Brands in the food services industry have been losing margins because of the increasing cost of labor, transportation, and food, as well as COVID reduced traffic, which is why pricing is more relevant than ever. What’s more, the industry is now competing against meal kit services and convenient home replacement meals (HMR) sold at grocery stores. 2020 marked the first time since 2008 that consumers spent less than half of their food budget on away-from-home eating.
The result of these pressures is that most multi-unit restaurants have raised menu prices. The question is, have they done so strategically? Ritch Allison, the CEO of Domino’s Pizza, said they predict their food basket costs to increase 10% this year, four times the pace of a typical year (source: CNBC). Allison said Domino’s Pizza plans to “tailor its promotions to avoid sticker shock for consumers and maintain profit margins.” It is critical for restaurants to measure promotional effectiveness to see if promotions are actually increasing sales and encouraging customers to buy more or falling flat.
Frances Allen, Checkers & Rally’s CEO, told CNBC that “drive-thru chains raised prices by 6% this summer and hiked them an additional 6% at the start of the new year.” According to Allen, Checkers & Rally’s will use higher-quality ingredients to justify the increase. “We’re going to charge people more money, but they’re getting a better-quality product,” Allen explained.
How Much Should You Raise Prices?
The reality is that most restaurants are now in a position where strategically increasing prices is critical. Do so carefully! Rely on qualitative and quantitative research and data analysis in order to make qualified pricing decisions that will yield results and overcome your team’s concerns about increasing prices. Here are the top questions to consider now:
Value drivers: What menu items are most valued by your customers?
Elasticity: Which menu items should be targeted, and by how much?
Tiering: Should prices change by location or geographical area?
Competitive intelligence: Do you know where your competitors are on price?
Promotional effectiveness: Have you examined your limited-time offers (LTOs) and promotions to ensure they are as profitable as you think they are?
Effective pricing teams within these organizations use predictive pricing models tailored to enable menu pricing optimization (MPO), as well as extensive qualitative research to develop a pricing road map that takes into consideration the cost of supplies and labor, what competitors are charging, and what customers think. With this information, they can identify where they are actually positioned in the market.
Pricers can use this data to identify the holes in their existing pricing strategy in order to identify revenue streams and capture larger margins. By examining the features of the brand, the key benefits, and current value drivers, restaurant organizations harnessing pricing strategy and research can how and when to move in order to maximize growth.
Experience a New Level of Competitive Intelligence
The fact is that most multi-unit restaurants can’t say for certain that they’ve priced items competitively. The first step to addressing this challenge is to understand where the brand is positioned within the marketplace from a pricing perspective. Only then can you be sure your customers will react positively to a price increase. In the past, competitive intelligence was done manually, which is a very slow and isolated process that provides a poor return on time. Instead, companies with pricing power conduct competitive analysis that involves web scraping – reviewing a competitor’s website of all pricing and breaking that information down and sorting it to provide insight on comparable menu items. Based on this information, brands can benchmark accordingly, which allows the restaurant to confidently set a price point knowing that the new prices are competitive against other restaurants in the same space. This type of solid pricing strategy consistently adds 1 –3% in bottom-line growth that is repeatable year after year.
A lot should go into your pricing, and with surgical precision, you can identify which menu items will yield the greatest return from a price adjustment. You can also answer whether location and menu item tiering would be beneficial options, and what value drivers are most important to your customers. Rather than raising prices based on guesses around rising costs, or worse, not increasing prices out of fear, take the initiative to learn more about how to successfully adjust your menu prices this spring.
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