F&B InsightsMenu Pricing

The Magic Formula: Raising Restaurant Prices Without Impacting Demand

The big question for restaurants has always been how to increase menu prices without affecting demand. Of course, with unprecedented inflation and supply chain upheavals, that question has been on all operators’ minds. According to the Bureau of Labor Statistics, between November 2021 and November 2022, the price index for food away from home rose 8.5%. In 2022, we saw the strongest 12-month gain since 1981.

However, not every area saw the same price increases. The National Restaurant Association reported that the Midwest saw the highest menu price increases, registering at 9.1%. On the other end of the spectrum was the Northeast, with a 7.3% gain.

The Price Elasticity of Demand

In the restaurant industry, the price elasticity of demand measures how a menu item is affected by a price change. It allows operators to understand the changes to the supply and demand curve in relation to pricing. This formula used to calculate price elasticity is as follows:

(% Change in Quantity Demand) / (% Change in Price) = Price Elasticity of Demand

If the price elasticity comes to under 1, the price increase created a decrease in demand. While the equation looks straightforward, determining the precise effect of demand on a price change can get complicated and require high-level math equations. There is a better way.

Keeping an Eye on Competitors

Do as your customers do. While many of you have those brand-loyal guests that do not waver from spending their Friday nights at your establishment, a significant percentage of our clients dine at numerous restaurants in our areas. And, you can bet they notice when prices increase and how they compare with your competitors.

Some operators are so committed to checking out competitor pricing, they commonly visit neighborhood eateries or go online to check local menus. However, in our current fluctuating market, that requires significant time that busy operators have little of.

Do you know what your competitors are doing and how much they’ve raised their prices in the last year? Have they changed their menu or increased the value? Today, it’s easy for customers to comparison shop, and you can almost guarantee that they know if you’re charging more than other restaurants in your market.

The Answer: F&B Insights

F&B Insights is a division of EMERGING that was developed when Mathew Focht, CEO, saw the challenges facing his partners as rising prices mandated quick action to retain profits. Too many were leaving money on the table, failing to increase prices despite unprecedented inflation. The reason? Fear of affecting demand.

F&B Insights consists of the world’s largest menu database. The system contains both local and national menus, helping you stay abreast of changes your competitors make in real time. You can keep local restaurants in one place, easily accessing them and receiving alerts letting you know when they make a change.

Now, you can price confidently. Chris Bisaillon, CEO of Bottleneck Management, a restaurant group that’s home to numerous concepts, including City Works, Old Town Pour House, South Branch, and Sweetwater, had this to say about F&B Insights, “Menu Pricing has been a great resource, to identify where we can consider raising prices. Allowing us to see thousands of menus immediately, we can make very informed pricing decisions. The previous menu pricing process was painfully slow and very manual.”

Optimizing Menu Pricing

While many financial experts predict a possible recession in 2023, the length and severity are up for grabs. If you’ve been in this business for long, you know that running a restaurant during an economic downturn can be challenging but not impossible. One of the main strategies for recession-proofing your restaurant is to optimize your menu pricing and control food costs.

As the cost of ingredients goes up, an increase in pricing follows, but only after you know what your customers are willing to pay. While it can be difficult to determine how a recession will affect the price of common ingredients, sourcing seasonal food and local suppliers can be good for both you and your neighborhood vendors.

FAQS

What is the standard markup for food?

Generally, restaurants aim for a food cost percentage of about 28-35%. To find your food cost per serving, add up the cost of the ingredients for each menu item. Calculating the food cost percentage weekly requires the inventory value for the beginning of the week, purchases made during the week, ending inventory, and the total sales for the week.

Should I notify my customers of price increases?

Most successful operators agree that it’s important to keep your customers in the loop regarding price increases. It was extremely uplifting to witness the many guests that understood the increasing prices due to unprecedented times in 2022. Hopefully, your guests will continue to be understanding as we head into uncertain times.

At EMERGING, we help our partners walk the fine line between leaving money on the table and affecting demand. To learn more about F&B Insights or to schedule a consultation, contact EMERGING today.

Author:
  • Subscribe to our latest insights

chatsimple

Are you capital raise ready?