Though raising prices from the start is tempting, try these more effective solutions instead
More and more municipalities around the U.S. are raising the minimum wage: In all, 19 states raised the minimum wage last year, with some of the largest increases in the states of Arizona, Washington, and Massachusetts. And more increases are on the way, as cities, counties, and states react to growing political pressure around the country.
How should full-service restaurant owner/operators deal with this situation? For starters, it’s important to pay your staff at a competitive rate, so you will retain highly motivated workers—a key to customer satisfaction and loyalty. Then, as you determine what those pay rates should look like, devise a plan for covering the related costs in a way that keeps your customers at the heart of everything you are doing and won’t drive them off to your competitors.
The temptation can be to raise menu prices across the board, thinking your customer demand is so strong that such a price increase won’t have an impact on your business. But a more well-thought-out approach comes from a deeper understanding of your customers and what they are willing to pay for each item.
With this in mind, here are six tips for full-service restaurant owners/operators who are figuring out how to cover address higher labor costs:
1. Use Transactional Data to Understand Customers
This will give you important insights into your customers’ behavior, which can change by location, day, and time. Know what items sell together and how demand changes in different locations and timeframes. Then, use a combination of pricing and non-pricing tactics to attract new customers while retaining your loyal patrons. The ultimate goal is to be able to increase prices without hurting customer traffic.
2. Consider Each Location Individually
After understanding customer behavior in your locations, evaluate each location on its own— considering whatever factors hurt or help its performance—and develop a local pricing strategy. For larger restaurant operators, the next step may be to think about common characteristics among locations. This will allow you to make the same menu changes for a group of restaurants where you can expect similar results. This approach can help in managing the logistics of price changes in a larger organization.
3. Don’t Create Sticker Shock
Building margin should be a long-term exercise. By raising prices more thoughtfully and selectively, you can avoid changing a significant number of prices at the same time. If you know what customers are willing to pay for each item—a function of understanding their behavior through transactional data—you will be able to pick and choose certain items for price increases that keep your customers in mind as you make decisions.
4. Think Beyond Price Increases
Avoid the temptation to immediately take the easy route—for example, increasing prices by 2 percent to cover a 2 percent increase in labor costs—without considering all your options. Instead, consider other ways to improve profitability. As just one example, make sure your staffing matches your customer traffic levels. Getting this right could save you a significant amount of money.
5. Encourage Customers to Trade Up
Consider using new photos and layouts in your menu to highlight higher-margin dishes and encourage customers to buy certain bundles of items. Of course, this requires careful planning, since changing full-service restaurants’ menus requires significant lead time.
6. Build Some Buzz Around Menu Changes
Don’t just change your menu and roll it out quietly. Create some special offers designed to show your customers that you are listening to them by matching your offerings to what they want. This will help build excitement, since customers like to see that that a restaurant is innovative and keeps up with current trends.
The good news for full-service restaurant owners and operators is that they have several distinct advantages over fast-food and quick-service restaurants in addressing higher costs. By and large, customers of full-service restaurants aren’t fixated on the price of a certain menu item, and they tend to be more open to the idea of a menu that changes from time to time.
Again, the key is careful planning, tied to understanding your customers’ behavior. This deep knowledge of your customers is critical for you to know how to cover costs in a way that won’t hurt your business.
Mark Kuperman, chief operating officer at Revenue Management Solutions, manages client accounts across all food and beverage segments. Kuperman earned a B.A. in economics with a minor in statistics from Northwestern University before attending the California Culinary Academy and completing an apprenticeship in Europe. After several years working as a chef, Kuperman returned to school to earn his master’s degree in hospitality management from Cornell University. After graduation, he followed his entrepreneurial spirit and opened a limited-service restaurant.
Article originally published on June 22, 2017 by FSR Magazine