Client Successes

Demand-based pricing strategy counteracts minimum wage increases

Our Client's Challenge

One of the country’s largest quick-service restaurant (QSR) chains, with more than 3,300 company-owned and franchise locations, faced challenging margin pressures from rising minimum wages around the U.S.

The growing minimum wages were increasing the chain’s labor costs by 10 percent. The operators needed help figuring out how to offset this significant spike in expenses.

Specifically, the chain’s managers wanted to better understand the price actions they could take so locations would maintain profitability, store traffic and customer check size.

The Solution

RMS teamed up with the chain to analyze its POS transactional data for all locations. In order to understand each area’s demand drivers, we took into account such factors as competition, weather, holidays, and nearby roadwork.

We analyzed each location’s price sensitivity by looking at menu categories and the price elasticity for each menu item. This allowed us to design restaurant-specific menu pricing recommendations to help the brand to maintain customer transactions and avoid down trades.

We recommended pricing adjustments on the client’s value menu that were implemented at the same time as the minimum wage change. Additionally, we recommended some price adjustments to the rest of the menu. Changes on the value menu are typically very sensitive and more visible to customer, but given the economic context of the minimum wage increase, it was the right time to make the changes.

The Result

Restaurants that implemented our recommendations maintained similar levels of profitability despite the significant labor cost increases. They also maintained the number of transactions at each location.

Restaurants that didn’t participate raised prices more and on a broader basis. This resulted in a reduction in customer traffic of approximately two percent and a loss in profitability of 2.8 percent points (ppt).

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