- Transactional-level data analytics can help set ongoing price increases that customers can stomach and will build average check
- Focus on the customer: Test menu changes before large-scale rollouts
Tips to satisfy customer appetites and wallets
As we noted in part one of this blog series, inflationary times like the one we’re living in create specific challenges for operators and franchisors. Restaurant operators experiencing traffic declines and increasing impacts from inflation need solutions. Below, Revenue Management Solutions (RMS) Senior Vice President of Consulting Services Richard Delvallée shares a few more suggestions to combat inflation — while satisfying your customers’ appetites and wallets.
Conducting a careful POS data analysis can help set ongoing price increases. Examine category sensitivities, item sensitivities and trading relationships. With a thorough understanding of transaction-level data, you can learn more about which specific items customers buy together and which drive transactions and build checks.
Hot tip: Historical POS data should not stop at menu items; it also relates to traffic. What drives existing and incremental customers — a special available only within a loyalty app or a family meal available only for pickup? Don’t settle for anecdotal reports.
Taking price doesn’t mean losing customers
The need to raise prices is inevitable, but it doesn’t have to mean losing customers. To manage price sensitivity while also meeting brand goals, RMS advises clients to avoid across-the-board price increases. Instead, focus on the item level, and increase prices in small increments over an extended period.
In the current dynamic environment, and with inflation a hot topic in the news, you could probably achieve a slightly higher impact within a round of pricing, but do keep in mind how much pricing activity you are “carrying over” from previous rounds. If you took price toward the end of 2021, those increases will continue to impact your 2022 revenue for a while.
A good rule of thumb when taking price in the current environment:
- Back into the desired pricing outcome by spreading its impact over two to four pricing rounds per year.
- Generally, keep increases at or below 1.5%-2% within each round to allow you to quickly react if customers start to trade down or even trade-out.
- Identify “co-purchases,” or items that are often bought together, and avoid pricing both at the same time to avoid “sticker shock.”
If, after raising prices, you find that customers’ behavior remains the same, you may have room for further opportunities. On the other hand, if you raise prices and see significant changes in purchase behavior, you should take a closer look at the data to quickly make any needed corrections.
Most menu engineering efforts succeed due to thorough analysis and testing of any changes BEFORE large-scale implementation. RMS recommends conducting market tests to examine customer reactions and behavior around menu changes and the effect on profitability after a price increase. If overall profitability decreases, operators could hold off on further pricing increases. If profitability holds steady or improves, operators have an opportunity to increase and change pricing in future rounds.
For success, focus on the customer
Ultimately, when it comes to pricing and menu engineering, the most vital factor to evaluate is the customer’s reaction. Menu board changes in both mix and price may cause guests to decrease the frequency of their visits or even pursue alternative options, leading to long-term negative profit impacts. Conversely, focusing on the consumer when making pricing decisions optimizes store profitability as it protects both value perception and transactions while preventing trade-down or brand-switching.
If you’re interested in learning more about menu engineering or pricing strategies that can help your brand succeed even in times of high inflation, RMS is here to help. We remain committed to equipping you with a path forward — informed by data. Contact us today.