Restaurant pricing expert weighs on how to offset rising costs

September 8, 2014 | Tampa Bay Times

Authored By:

Susan Thurston

TAMPA — Rising costs of beef, labor and health care mean tight times for fast-food restaurant owners.

Enter Tom Kelly. The chairman and CEO of Revenue Management Solutions works with restaurants and retailers to adjust menu pricing without hurting traffic or the company’s bottom line. Clients range from McDonald’s to Checkers and Famous Dave’s.

Founded in 1994, RMS employs 138 people at offices in Tampa, Singapore, Paris and Tokyo and took in $22 million in revenue last year. It uses statistics and patented mathematical algorithms for analyzing data to set prices for thousands of restaurants worldwide.

From his company’s headquarters on Harbour Island, Kelly, 64, spoke with the Tampa Bay Times about finding the sweet spot for menu pricing and figuring out what customers really want.

With all the talk about boosting workers’ pay, would you advocate raising menu prices across the board to offset the cost?

No, you would really offend the consumer. Suppose I have tripe on the menu board. I might sell one a month. If I put it up there at $18 and everything else is $6.29, what happens is consumers see it and say, “Oh my gosh, that’s ridiculous.” They were never going to order it, but if I query those people, their value score for the restaurant goes down radically based on what they saw, not based on what they ate or what they paid for.

What about cutting employee pay to cover increased food and health care costs?

I do not agree with that approach. People are going to be critical when they go out to dinner, so don’t compromise the experience. The average person, when they go to a restaurant, doesn’t remember what they spent within 24 hours — plus or minus 18 percent — but they do know if they’re going to go back. Frequency comes from really good food and lack of frequency comes from poor service. We’ve never been able to figure out how to charge for something that people don’t want.

How often does a fast-food or fast-casual restaurant change prices?

It depends on inflation. It’s maybe two or three times a year. More inflation, more often. Less inflation, less often.

When you change prices, do you typically target the most popular items?

We gravitate to the most popular items that provide the most cash. That’s because suppose you have an item that has a 98 percent profit margin, but you only sell one a year. It doesn’t matter. It’s not uncommon for us to the lower the price of an item to get people to trade from less profitable items to more profitable items. What we’d never do is change all the prices at one time.

Isn’t it expensive for an Outback or Ruth’s Chris to reprint new menus?

In a chain, the cost of changing the menu across 100 units might be $50,000 to $70,000, but if I could manipulate new prices, the (increase in revenue) could be $500,000, $1 million or $1.5 million. Which would you rather have? That said, I have been at meetings where owners say we can’t afford to do it.

Some people say they would rather pay a little more for burgers and fries so the workers make more money, but restaurants have generally resisted. Why?

(In the late ’50s) there was a car made called the Edsel. There was a lot of research that said people would buy it because they said they would. But they didn’t buy it. You need to go with the hard science because people don’t always do what they say they are going to do. And people don’t always know what they want because they haven’t gotten it yet. What we measure here is the actual behavior at the transaction level.

How are restaurants missing the mark when it comes to menu pricing?

If you are of the generation who remembers (President Dwight) Eisenhower, you are price-sensitive and you will cut costs before you will raise prices. But the truth is that most consumers today will tolerate the higher price, but they won’t tolerate the lesser service. If you look at the quick-service industry, it gets busy around lunch for about an hour. The No. 1 thing that makes sales, other than opening the doors, is opening another register or service lane. Sales go up 10 to 12 percent usually, but owners don’t do it. And when times get tough, they cut back on labor, but then the lines get longer. And if the lines get longer, some people leave. And if some people leave, your profits go down and you have to cut back on labor. You see what happens.

Can you change the prices more easily at high-end restaurants or fast-food restaurants?

How you feel about pricing is much more based on your age than income. It will not correlate to your gross income, but it will have a statistical relationship to your disposable income. In other words, a family with kids approaching college age with two incomes who are doing well, they will be somewhat price-sensitive because they have tuition to pay. Warren Buffett, for example, can afford a new Sony TV. He can probably buy Sony. But he doesn’t. He has a 1982 version in his office because he was born in that era and that’s the way he is.

© 2014 Tampa Bay Times.
Contact Susan Thurston at sthurston@tampabay.com or (813) 225-3110. Follow @susan_thurston.

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