At RMS, we field a lot of questions from our clients. In the past 12-15 months, our clients have had new concerns, brought forward by reduced menus, an increasing number of digital channels, labor shortages and supply chain issues. But no matter the environment, one question remains constant — and that’s pricing.
Our people are experts at many things — forecasting, analysis, menu engineering, linking social behaviors to consumer purchases — but pricing is the bedrock of what we do. For more than 25 years, RMS has been optimizing pricing, menu design and financial health for the biggest and most recognizable restaurant brands in the world.
So when one of our clients suggested a Q&A session focused on price, RMS asked Chief Operating Officer, Mark Kuperman, to weigh in. With that in mind, read along for answers to some of your top questions about restaurant pricing.
Q: How much price should a brand take?
A: Let’s first establish where not to take price. It’s important to be tactical and that means no across-the-board price increases. As for how much price to take, as a best practice, RMS recommends small increments — take small bites on price — rather than larger increases on any specific item.
Next, consider the timeframe in which you would make pricing changes. Instead of making many changes in one round, plan for incremental changes over an extended period — we recommend a time frame of 12-18 months. We’ve found this approach to be much more effective for meeting the goals of the brand, while also managing price sensitivity.
You’ll also want to look at the order of magnitude. Inflation factors like food and changes in labor costs are skyrocketing, but as you’re planning price changes against those, acknowledge that it’s difficult to cover costs all at once.
RMS typically recommends multiple pricing rounds throughout the year. Many brands take anywhere between two to four pricing rounds. Within each round, RMS doesn’t recommend a price increase greater than 1.5% – 2%. Anything beyond that will raise awareness from the customer, with potential negative effects to traffic or average check.
We did find, in our recent survey, that the majority of consumers believe that safety precautions, increased minimum wage and cost of food justify price increases. Baby Boomers were the most sympathetic — 70% believe increased food costs justify price increases; while Gen Z was least sympathetic, at just 41%.
Q: What data can be examined to find the sweet spot for price increases?
A: The easy answer is: it’s complicated. Many factors should go into effective decisions, starting with historical performance. First, look across the brand to understand which locations have the most opportunity for price. Next, analyze your data at an item level. Look within your menu to understand if there are certain items where customers are more likely to respond negatively to price changes in comparison than others. Finally, we recommend analyzing the competition, particularly as it relates to commodity products, such as hamburgers or 9’ cheese pizzas that can be easily compared between brands.
Ultimately, when it comes to price, the most important factor to evaluate is your customer’s reaction. If after raising prices you find that customers’ behavior remains the same, that indicates there’s room for further opportunities. On the other hand, if you raise prices and begin to see significant changes in purchase behavior, you should take a hard look at the data and quickly understand what corrections you need to make.
Q: What do restaurants need to consider when creating an effective pricing strategy?
A: It’s easy to think about pricing strategies in a vacuum. But as brands create a pricing strategy, it’s important to also look at strategies being implemented in other departments as well, for example, marketing, finance and operations. While a pricing strategy typically begins with the menu and your POS data, it also informs how tactics can be executed across the organization.
We’re often asked, ‘What is the most effective way to set pricing targets?’ The advice we give to clients is to calculate the total costs in dollars and then translate that into a percentage. Although brands are effective at calculating costs, they typically encounter challenges when translating costs into a percentage increase that is spread throughout the period.
It’s also important to note that pricing strategy does not mean just raising menu prices. The most effective pricing strategy is the one that impacts customer behavior, resulting in purchasing decisions that 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.
Q: What factors should restaurants consider when taking price?
A: When restaurants consider taking price, three external factors come to mind: (1) competition — how much, the magnitude of price, and frequency of price changes; (2) inflation as it relates to both restaurants and grocery stores; and (3) labor cost changes.
We then focus on customer behavior and traffic: How are customers responding to price changes and menu changes? While there are different metrics you can examine, we focus on changes in average check and total spend at each visit.
When it comes to traffic, you need to understand if the tactics and strategies you have in place are driving a higher frequency of existing customers, or are you driving incremental customers? Understanding both customer behavior and what’s driving traffic have a significant impact on how much price you ultimately need to take.