Increasing Costs Necessitate Raising Menu Prices Not Surcharges

QUESTION FROM: Matt in PA

“I don’t know how much longer I can go on trimming costs, streamlining labor, slightly reducing portions and pushing takeout in order to make this work.

Although I hate the idea of increasing my prices across-the-board I’m not sure what else to do.

What do you recommend?”


HH ANSWER:

It’s CRAZY but when the cost of everything needed to support, maintain, staff, supply, repair and stock your restaurant skyrockets - while operating on razor thin margins as it is - you have to increase your prices if you want to continue to exist.

It started with rent, logistics and lumber - then labor, chicken, dairy, beef, lamb, plastic cups and to go containers, cooking oil/fryer oil, gas, bank fees, produce, etc… and once unemployment benefits and and traffic starts to build back up… Do you really think suppliers are going to go back to pre-pandemic pricing now that they’ve seen they can get what they ask for? IMHO - we will see a slight decrease but nothing too significant. Inflation is inevitable and it seems everyone is increasing prices except us. I would suspect it’s because these other industries are not guest-facing the way we are.

But regardless of that, restaurants are / were working on 7-12% profit / flow-thru so When our prime costs (labor, rent and the goods sold) doubles, triples or even quadruples - there’s nothing left to do but increase pricing.

Believe me when I tell you that many of the independent owners and operators I work with are more worried about their guests thinking they might be unnecessarily gouging them than they are about how they’re going to turn a profit because so many other restaurants (many larger chains and corporate restaurants) are not increasing prices around them.

Perhaps it’s because those bigger restaurants can take bigger losses or afford to “wait it out” - I don’t know but increasing costs is inevitable and I wish more restaurants would raise their prices now so that those who are already doing it in order to give themselves a better chance of being there next month, don’t stand out as much and draw as much ire.

I hate saying that… In fact, that’s the first time I think I’ve ever use the word “ire”.

We need to do what every other industry is doing…we need to follow the lead / example of the oil industry that gets together collectively and jacks up gas prices all together so that people get annoyed initially but then simply (and quickly) accept it as “what it is “.

I’d say go ahead and increase now the way you would if you were reevaluating your pricing matrix at the end of the quarter or year for your new menus and simply work your COGS as usual. There’s no need to shelter the guest from the reality of your costs - Just please don’t start adding on line item surcharges as many of my clients have been asking about. Whether it’s increased cc processing fee, the new cost of a covered patio, an increase in the cost of chicken or the fact that to-go containers are now costing twice as much… it doesn’t matter. They’re all simply costs of doing business. No one wants to feel like they are getting nickeled and dimed. That’s why there is a standard, tried-and-true method for determining COGS and menu pricing.

If I’m a guest, I don’t need to see every line item associated with my meal. If I ask for extra ice or extra napkins I don’t want to see a separate charge on my bill for those things. If I go to the bathroom are you going to add a toilet paper surcharge to the check? You see where I’m going with this. Nobody cares to see your books. No one needs to know that your prices are what they are because of an increase in any one or two line items no matter how significant. And no guest deserves an unpleasant surprise at the end of a pleasant experience or a P&L review with every check - they just want to know how much their meal costs.

That being said, If you need to charge more for things like cc processing - the most painless way I’ve seen it done with the least amount of pushback (and most amount of understanding) is to increase costs across the board by 6 or 7% and then offer a 3 or 4% discount for paying cash. This covers your increasing ancillary costs while not unfairly passing those costs off to guests who don’t cause you to incur those additional costs.

Which brings me to another option that’s just making it’s way into the market - a data driven approach to building revenue known as: Dynamic Pricing. As Sherri Kimes sted in her article: Is it Time for Dynamic Pricing in the Restaurant Industry?:

“Think about it, are there ways to get a cheaper fare on an airline? Sure, if you’re willing to travel at a less convenient time or are open to a non-refundable ticket. Similarly, can you get a lower rate for a hotel? Absolutely. Perhaps you’re a member of the hotel’s loyalty program, you book for a low demand day or you’re willing to book a room without a great view. Even Uber gives you a choice. The Uber app shows you the fare ahead of time and you can either choose to take it or not. As I discussed in an earlier article, these restrictions and rules are what’s called rate fences.”

But you don’t have to wait for Juicer or any other company offering suggested analytical pricing (something Juicer refers to as: “precision pricing”). Try increasing your prices on your largest margin items to be in line with the increased cost of: labor, logistics and ingredients (I’d make sure you have fields for those costs in menu pricing worksheet) and then offer a discount equal to your current pricing for those menu items for whichever revenue center, daypart or time would benefit most by an increase.

I spoke with Ashwin Kamlani of Juicer who described their algorithm architecture as one that considers the same vagaries of economy I teach operators to consider when forecasting sales, understanding P&Ls or scheduling staff. (See: Scheduling App For Restaurants under the LABOR” section in the HH Library.)

It might not be too much longer before reservation apps like OpenTable or Resy (or perhaps a POS with built-in reservation widget by Juicer) will have precision pricing built into the platform the way Google Flights does for flight reservations:

Stay in touch and let me know what you end up deciding.

See also the HH article: “Adding a Small Fee or Surcharge To Cover The Increasing Cost Of Survival”

Regards,

Josh