At RMS, we help thousands of restaurants mine mountains of sales data to uncover actionable insights. Throughout the process, we get hundreds of questions. In 2021, the question we heard most often was “How much price can I take?”
The answer isn’t simple.
“Taking price” is a process we believe should be highly tailored — one size doesn’t fit all. But some learnings can be applied across the board. Here are five foolproof ways to avoid serving up sticker shock, courtesy of RMS COO Mark Kuperman.
1. To decide how much price to take, start with how NOT to take price.
When we observe the industry as a whole, we typically see a mix of three types of thinking on price:
- The historical approach. For example, “Every year we take 2% in March.”
- The carry-over rule. For example, “We take price on all categories except check builders like sides.”
- The arbitrary limits. “We don’t increase prices on certain items over $x amount.”
Within the past 5-6 years, some brands also introduced differentiated strategies for “higher wage” markets. With this approach, brands put a lot of focus on (and spent time) watching competitors’ prices — i.e., “We need to be priced 5-10% below X, on par with X, or a certain % above X.”
Then there are brands that set systemwide pricing recommendations based on data from corporate-owned stores only or a small sample of stores.
Finally, many pricing actions tend to be reactionary: “The cost of eggs increased; I’m increasing all my breakfast items,” rather than proactive: “I know over the next two years, the minimum wage is expected to increase. How can I break down the impact needed during this time?”
That’s how NOT to take price.
Instead, we recommend focusing on the item level — no across-the-board price increases — and increasing in small increments over an extended period. RMS has found this approach to be much more effective for meeting brand goals while also managing price sensitivity.
A good rule of thumb:
- Spread the pricing impact you want to achieve over two to four pricing rounds per year.
- Generally, RMS recommends keeping increases at or below 1.5%-2% within each round.
- In the current dynamic environment and with inflation being 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 activity (i.e. If you took price towards the end of 2021, this will continue to impact your 2022 revenue for a while).
2. Make strategic menu changes to optimize ROI.
It’s important to note that a comprehensive and sound pricing strategy is more than raising menu prices. Raising menu prices does not make a pricing strategy. Instead, the most effective pricing strategy is the one that impacts customer behavior to maximize ROI.
Effective “price increases” might also include adding and deleting menu items, as well as menu engineering (for instance, bundling or rearranging the menu) to influence purchasing behavior. For example, where you place add-on item suggestions within a menu can determine their success — or avoidance.
In groundbreaking research RMS conducted with the University of South Florida’s Center for Marketing and Sales Innovation, we found that when reading an online menu, respondents are least likely to respond to suggestive selling in the final stages of the sale. Yet this is when most brands upsell.
We conducted the study to inform our restaurant brand clients as they analyze menus to maximize ROI, a practice we recommend be done consistently, with changes implemented 2-4 times per year.
3. Be aware of events that can prompt a price increase.
Besides voluntary, planned changes, external factors can drive change. We see these three the most often:
- Competition. A competitor raises (or lowers) prices.
- Inflation. National increases in food away from home (FAFH) or food at home (FAH) prices.
- Labor cost changes.
In the current environment, inflation and increases in costs of goods and labor are forcing the hands of many operators. We haven’t seen inflation this high in many years, and the pressures won’t let up anytime soon. For the reasons outlined above, RMS still recommends an incremental approach.
4. Know your items before you take price on them
We often see brands take price increases across categories based on subjective measures, such as a cost-plus approach, customer feedback (usually complaints) and customer surveys.
By contrast, RMS recommends and uses a data-driven approach, analyzing the following:
- Historical data by restaurant location, down to the item level. A certain specialty beverage or dessert might perform great in the South, but what about the Northeast? Look broad but also granular. What performs well in a particular region, state, city or even location could vary wildly.
Historical data should not stop at menu items; it also relates to traffic. What drove 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.
- Competition, but not in an arbitrary manner. RMS analyzes competitor pricing at the item level, particularly in the most sensitive areas — commodity products. Whether they know it or not, customers have a benchmark for value as it relates to French fries or a small pizza. Brands have more leeway on specialty products. If they market these products appropriately (enticing visuals, premium ingredients, seasonal special), consumers are more likely to accept — and pay — a higher price.
- Customer reaction and behavior. At RMS, we also conduct market tests to help brands examine customer reaction and behavior toward menu changes if time allows. We analyze purchase behavior and its effect on profitability after a price increase. If overall profitability decreased, then we recommend holding off on further pricing increases. If profitability held steady or improved, operators have an opportunity to increase/change pricing in future pricing rounds.
- Average check and total spend. While there are many different metrics you can examine, RMS sees changes in average check and total spend at each visit as most critical. In December, when we compared 2021 traffic and sales to 2019, we found that for quick-service restaurants, the average check was up 21% compared to the same period in 2019, and sales saw an increase of 5%. That’s a marked increase over the past two years. The pandemic is responsible, of course. Operators are raising prices to manage increasing costs, and guests continue to order for larger groups. Like many dining behaviors initiated during the stay-at-home orders, ordering for a family or household is now a habit likely to continue.
5. Upend the value equation in 2022.
Unfortunately, it appears that inflation will continue into 2022. Our most recent Revenue Stream episode focused on consumer insights that RMS believes can help restaurants prepare for 2022. During the episode, RMS consulting services director Matt Parker suggested that it’s likely that wages won’t track with inflation. This leaves customers having to make decisions about how they spend their discretionary income.
Enter the value equation. While RMS pricing best practices remain constant, the value equation for consumers changes. Off-premise will continue to drive traffic throughout the next year, particularly drive-thru and takeout.
As a result, operators need to ensure that off-premise customers are seeing value in each transaction. For example, in our recent survey, we found that 60% of respondents worried about the accuracy of the food they receive when ordering delivery. So, if you’re a fast-casual/casual or fine dining restaurant, are you considering how to-go orders are managed? Customers still want to enjoy restaurant meals; many just want to enjoy them at home. To keep them coming back, value and experience must be present in the drive-thru lane and takeout handoff.
RMS is committed to bringing you insights and guidance throughout this year. For tips on restaurant pricing and more information on industry topics, subscribe to our monthly newsletter. As always, we will continue conducting consumer surveys and industry reports, as well as gathering the top minds within the industry on episodes of our Revenue Stream video series. Visit our website to see more insights, or reach out to learn more about how leveraging your data can generate a plan for profit.