If you’re wondering whether you should increase some or all of your menu prices, chances are the answer is yes. Most likely you’ve started considering this because you know you need to increase your revenue, or you know that your margins are just too low.
Did you know that a well-planned and strategised menu is one of the single most effective ways of driving revenue and profit?
Wage costs, food costs, rent and expenses creep up every year, so why is it that restaurateurs are so reluctant to put their own prices up? –We all know that those increasing costs erode our already skinny margins right?
The main reason we tend to put off increasing our menu prices is fear. We’re scared that our customers will get upset and go elsewhere.
We fear that we’re better to take a little hit on margin now to retain the sale, than risk loosing the sale altogether; and hope that something else in your business will change to increase your profit.
Day to day we don’t really feel that margin hit, but at the end of the month when you have to pay those bills and review your P&L, that lack of suitable margin becomes fairly apparent.
The simple reality is that every meal you sell has to help pay for your staff, your ingredients, utilities, rent, wastage, repairs and maintenance, marketing and so much more. Plus, it needs to pay you as the restaurant owner for all your hard work and risk.
With all of this understood, the next step is easy; we simply need to remove the fear involved in a price increase . . .
My five fear-busting mindset changes will give you the confidence to boost your revenue by simply charging your customers a fair price:
1. Always charge as close to four times your food cost as possible*.
We all know this, but are you applying it to your business? If not, you’re simply not going to be profitable.
This is a ratio you should be checking all the time, as your food costs will invariably increase. If you’re not hitting the four times multiplier then you need to increase your price. Or reduce your food costs through portioning or changing ingredients. If you can’t do either of these things, delete this item from your menu.
*I recognise that there are exceptions to this multiplier in some categories and markets such as franchise QSR. In these cases, make sure you know what the most appropriate multiplier is for your business/ sector that still delivers you a profit.
2. Maintain your value proposition.
Your customers should be buying your food because they’re receiving great value, not because you’re the cheapest in town.
Customers will all have different criteria for assessing value, which will include variables such as, service, food quality, convenience, branding, portion size and ambience.
If you can deliver on these value drivers; you can reasonably increase your prices.
3. Customers may surprise you.
When done correctly, I’m yet to see any negative feedback from my clients’ customers when they have implemented a price increase. In fact, on numerous occasions, when putting the price of a particular menu item up, we’ve seen record sales volumes of that item the next day.
4. Profit is amplified.
I probably don’t need to tell you this, but restaurants typically operate on a low margin. This means that any small price increase will exponentially increases profit.
Let’s say you sell a hamburger for $15.00, which has an operating profit (profit after all costs and expenses) of 10%. Every time you sell one of these hamburgers you’ll make $1.50 profit; and in order to make a $100 operating profit, you need to sell 66.6 of them.
If however you increase the cost by 10% to $16.50, your operating profit leaps from $1.50 to $3.00. Now in order to make a $100 operating profit you only need to sell 33 hamburgers – half as many as before.
You can see this played out in the table below which shows what happens at a restaurant with a 10% operating profit and another with a 5% operating profit.
5. You can sell less to make the same money
You may find that one or two customers drop off when you increase your price, but the reality is, those customers were probably just shopping on price so were unsustainable customers anyway.
As you can see from the table above, lifting your price means that you can sell a lot less to make the same money; so if you do loose a few customers you’re still ahead. And what’s more, you’ll be making this money with lower total labour and food costs.
When’s the best time to increase your prices?
The best time to increase your pricing was yesterday, and the next best time is today. A good place to start is by downloading and reading my free Price Increase Hacks Cheat Sheet. You can then review your food costs against your selling price and make a plan to get them as close to that four times multiplier as possible.
IN SUMMARY . . .
Be bold. Be brave and increase your restaurant menu pricing to a level that will ensure your long term profitability. It’s not about being greedy; it’s about ensuring your business is viable and that you as the business owner are rewarded for your time and risk.
Download my Price Increase Hacks Cheat Sheet to learn more about how to increase your pricing.