Menu prices are the powerhouse of a restaurant. A strategically priced menu keeps the lights on, pays your staff, and delivers ingredients to the chopping board. It’s also one part of the business you completely control. You can’t influence the cost of gas or rent, but you can charge $1000 for a burger and fries if you feel like it. Of course, that doesn’t make it a good idea. Menu price increases require calculated consideration to prevent profit loss. Unfortunately, the rapid rise in inflation makes generating revenue through price increases increasingly difficult. According to restaurant investment research conducted by Capital One, restaurants need to increase prices by 11% to compensate for inflationary pressures. And that’s a tall order considering 42% of consumers say they plan to eat out less due to higher menu prices. We find ourselves stuck between a rock and a hard place.
Integrating a Value-Based Menu Pricing
“The benefit of menu price increases offset elevated costs across the board,” touts Chipotle CFO Jack Hatung. In 2022, the Mexican fast-casual chain increased sales by 7.6% thanks to their 13% menu price increase. It now uses that revenue to address staffing shortage concerns and alleviate other operational pressures. And, despite a 10% year-over-year menu price increase, Mcdonald’s reports that it hasn’t experienced a “significant trade down” and that “consumers are tolerating it well.” It would be easy to attribute name recognition to the success of these price hike campaigns. However, the secret to menu pricing success is undoubtedly more complex, considering fierce industry competition.
A flexible, value-based pricing strategy built around customer behavior is the common denominator among the biggest names in the fast food, quick serve, and fast casual industries. The top players have a nuanced understanding of their customers’ purchasing psychology, the perceived value of menu offerings, and their place in the competitive market. For example, adding guacamole to your Chipotle burrito now costs an extra $2.95 in New York City, a staggering 25% increase in the price of a basic burrito. And despite steep price increases for other high-value menu items, Chipotle is “not seeing people all of a sudden not buying guacamole,” says CEO Brian Niccol. At the same time, Mcdonald’s is strategically raising prices on value meals while simultaneously removing certain deals altogether. “You spend a lot more time thinking about bundled offers and different ways to still deliver value to the customer…but also make sure that you’re able to pass on the pricing,” explains McDonald’s CEO Chris Kempczinski.
Understanding Customer Behavior
Without a quantifiable understanding of customer purchasing behavior and market thresholds, these industry titans would likely be singing a different tune. That’s why harnessing the power of machine learning software offered by FB Menu is the most efficient way to gain insight into customer spending habits and build an effective menu pricing strategy. After harvesting data from thousands of POS transactions, the software develops a psychological customer profile which it uses to produce a risk-reduced list of price suggestions. Using FB Menu’s automated market analysis platform, restaurants can then compare that list with competitor prices. The result is a data-driven pricing strategy rooted in the perceived value of menu items and their market standing. Taco Bell, now featuring high-priced, limited-time offers such as their cult favorite Grilled Cheese Burrito, provides another example of successful value-based price-raising tactics.
“We’re going to watch value and value perception,” says Wendy’s CFO Gunther Plosch. This isn’t surprising, considering value-based or customer-focused pricing strategies provide restaurants the unique opportunity to raise prices without risking customer loss or purchase trade down. Establishing a dynamic pricing strategy that prioritizes value perception and allows for flexibility based on changes in customer psychology and market realities has proven the safest way to walk the price hike tightrope.
As financial strains evolve and intensify, it’s understandable that restaurants are swinging for the fences, hungry for revenue-boosting home runs to relieve mounting pressures. However, big moves create big risks and ignore the advantages of more conservative approaches to price modifications. “We’re taking smaller, more frequent price increases because it gives us the flexibility to be able to see how consumers are reacting and then adjust if or when necessary,” points out Mcdonald’s CFO Kevin Ozan.
If you want to replicate the success of the industry’s leading restaurants, you need to understand your customer. FB Menu provides insight into customer behavior essential to confident menu pricing decisions. Using their machine learning technology alongside comprehensive competitor analysis, you can develop a risk-reduced menu pricing strategy that generates the revenue necessary to power your business.