As costs continue to rise, in part driven by minimum wage increases, you may be wrestling with how to cover higher costs without driving away customers.
Minimum wages have been bumped up in many U.S. cities. Now, Alberta and British Columbia have joined the trend with recent minimum wage increases, and with plans for increases that are greater than the rate of inflation. More provinces may follow suit, making the issue of higher wages one that isn’t going away anytime soon.
While your competitors may be quick to respond with increased menu prices, why not take a more thoughtful approach?
If you take the time to evaluate all the data points available to you — point-of-sale figures, site and location characteristics, trade area demographics and competition, along with overall market economics — you can devise a strategic, long-term solution that addresses minimum wage increases in a way that won’t drive away your customers.
Simply raising menu prices across the board could be a recipe for disaster, but there are ways to address rising costs without hurting your business.
- Don’t change menu prices all at once. Let your competitors make that mistake. You’ll demonstrate a stronger value proposition to your customers if you practice a little patience and are thoughtful about when and how you raise menu prices.
- Review your transactional data. Understanding data that tells you what items sell together, the time of day an item sells best, and which locations sell the most of a particular item or combination will help you determine how to plan your price changes. For example, it’s a no-brainer that people order fries with burgers, but it’s important to know every combination of bundles so you can see how price changes will impact the average customer. The data will also show which items can withstand a price increase and how raising the price of one item in a bundle may impact sales volumes of other items.
- Evaluate each location’s performance.If you have multiple locations, you’ll want to evaluate the performance of each unit to see if any are underperforming, and which ones have the potential to improve. But make sure you set individual standards for each location. While a particular unit may perform at a lower level than others, it could actually be over-performing based on where it is located. Once you have identified which units are truly underperforming, you can determine why and how to help them.
- Consider tier pricing.Different locations can support varying levels of pricing, so study your customer data to determine the best menu prices for each location. To determine how many pricing tiers your operation can support, as well as the composition of the tiers, evaluate the geography, demographics and economic conditions associated with your current sites, in addition to customer behaviour and sensitivity to price changes.
- Don’t just focus on menu prices. You may be able to make changes in other areas of your operation to compensate for increased costs. Review your staff scheduling to ensure you’re properly staffing your restaurant during peak hours and not overstaffing during slow hours. It’s also a good idea to review other costs to determine where adjustments could be made. And you can look for ways to increase sales through better marketing and promotions.
- Get creative with your menu to influence customer behaviour. Another way to increase profitability without raising prices is to influence purchase behaviour. You can do this by playing around with your menu layout. Highlight the highest-margin items on the top and bottom of your menu list while placing the lower-margin items in the middle. Most customers tend to focus on the first and last items they see in a menu category.
– Holly Simmons is Director, Consulting Services at Revenue Management Solutions. She oversees a team of associates servicing clients throughout North America in the areas of analytics for pricing and promotions. Simmons earned her MBA from Florida State University. For more information about RMS, visit http://www.revenuemanage.com.