Why Blanket Price Increases are Bad for Business
For decades, the restaurant industry has relied heavily on blanket prices to combat inflation. According to the Consumer Price Index, food-at-home prices were up 11.8% in 2022 compared to 2021. Food away from home increased by 8.3%. Full-service menu prices rose 8.2%, while limited-service menu prices jumped 6.6%. While there is no data point to share how restaurants increased their prices, restaurants likely deployed them through 1-2 blanket price changes throughout the year. And one thing is for sure - blanket price changes only occur one way - up.
Chain executives deploy blanket increases to support their efforts to hit Year-on-Year margin targets or metrics such as average transaction value in the face of rising costs. Blanket price changes primarily accommodate changes in the cost of ingredients, rent, or overhead resources such as labor - which can increase over time. As a result, restaurant executives deem them necessary to maintain already thin margins. They also make life easier for restaurant operators - sweeping changes to a price is a straightforward process that restaurants can communicate to customers quickly and easily. However, the role of blanket price increases is fast becoming an outdated and risky approach to handling cost inflation. Let's explain why.
If prices are raised too high, customers may switch to cheaper alternatives or decrease the amount they purchase or the frequency of visits.
The time it takes to determine whether any of those lagging indicators have an effect is at least 2x your customer visit frequency, by which time the customer perception of value-for-money has already changed for your entire brand - and not just a specific item.
Different products on a restaurant menu have different levels of elasticity. Elasticity helps determine the impact of sales volume when prices are changed. Some products react immediately to a slight change, while others don't. Blanket price increases often don't accommodate elasticity.
Restaurants should deploy a data-informed approach to pricing. Pricing through data can be achieved by better understanding competitor pricing, order/visit frequency, inventory/ ingredient cost controls, and demand profiles. Note - this adds complexity and will likely result in differing prices for different products at different locations, but the result will be more optimized than a sweeping network-wide change.
Competitive Insights:
Competitors will likely face cost pressure, too, and adjust prices differently to your restaurants' choices. The timing of when price changes occur can be predicted by looking at prior competitor price increase occasions. At JUICER, we identified that most restaurants would deploy price increases at the turn of the year. If a restaurant delays price increases by a month, it could benefit from understanding competitor price movements and positioning its own increases more effectively. In addition, restaurant chains will often deploy a tiered pricing approach, so differing locations may utilize different tiers to increase by varying levels. Therefore, regular competitor price checks across each of your restaurant's competitive environments are essential to survey the market. If the spreads between equivalent products grow too wide, your restaurant may lose market share to the competition.
Order/ Visit Frequency:
A customer's decision to procure from a restaurant may not immediately affect their purchase decision at that exact moment - but it may impact the regularity of their return. For example, when a customer surveys a restaurant's pricing, they do so in one of two ways.
1) When eating out, their commitment to buy had already occurred when they sat at a table. Therefore, restaurants with menu-wide price increases have a much more significant impact on a guest's proclivity to purchase on a future trip than on that specific visit (although guests may choose to buy down or order fewer items if the prices are significantly above what they expected to pay).
2) When searching for your restaurant online, a digital menu provides an opportunity to scan and move on to an alternative option more seamlessly than an on-premise occasion.
Addressing guest visit frequency rate or, even better, the item frequency rate of purchase provides data points to help determine the impact of price changes. Note that many other factors can affect these metrics, such as the guest's satisfaction with service, atmosphere, and the food itself.
Inventory/ Ingredient cost control
Utilizing tools to track and maintain discipline on the delta between theoretical and actual food costs brings many advantages. But it is challenging and time-consuming without the right technology and commitment. Once in place, however, you can have a much greater understanding of each dish's price in case of a supplier increase. This understanding ensures detailed knowledge of the cost and the desired margin, which feeds into each product's price. For example, if a menu item priced at $10 has ingredients where 20% of the item is affected by a supplier increase of 20%, the cost doesn't increase by $2 but by 40c (20% of $10 is $2, and a 20% increase on that is 40c). On the other hand, if a blanket increase across a menu amounts to a 10% increase in ingredient costs facing the whole menu, then this item will likely be charged 60c more than necessary to maintain the desired product margin ($10 + 10% = $11 instead of $10.40).
Demand Profiles
Every product on your menu in every location has a different performance profile. JUICER, through its work with restaurants across many cuisine types and sizes of chains, works to determine each product profile's optimal price. Each profile has an elasticity score attributed to it through small incremental changes in price, which vary by each location and hour of each day. The elasticity score can change week on week too. JUICER's algorithmic forecast helps build a projection of what level of volume a menu item may sell at any given time of the year. Utilizing forecasts is nothing new to restaurants, and the practice helps in numerous ways to support everything from procurement practices to team member scheduling.
Much like restaurants today will schedule different numbers of team members for each day of the week, restaurants don't need to price the same way for each item for each hour of the day. Similarly, just as restaurants today will order different volumes of ingredients based on their anticipated busyness in the week ahead, restaurants don't need to price their menu the same way for every month of the year. During quieter times, restaurants may want to drive volume through lower prices. Conversely, during busier times, restaurants may wish to have slightly higher prices to stem demand and maintain focus on creating a consistently excellent experience for their guests.
A supplier increase or a change in rent should no longer be the core driver of why and when to change a price point. Of course, it should play a role in the decision, but it is sub-optimal to forgo available data on competitor pricing, order frequency, ingredient level pricing, and demand profiles. As a result, restaurants need to price their menu with dynamic pricing functionality. The results will lead to better profitability, better guest sentiment, and reduce the risk that sub-optimal blanket pricing brings. The customer has quickly accepted that dynamic pricing exists in other verticals, such as retail or travel. They already accept that it exists when utilizing the convenience of a delivery app. Restaurant owners/ operators and executives are fast becoming believers that dynamic pricing can help them navigate this cost inflationary environment better than the times that have come before - and it's only a matter of time before restaurants abandon blanket pricing too.
Carl Orsbourn is the co-founder and COO of JUICER. As co-author of "Delivering the Digital Restaurant: Your Roadmap to the Future of Food," he is a respected thought leader and speaker within the restaurant industry. His career highlights include running a 1000-unit c-store chain, establishing the operating model at the ghost kitchen company Kitchen United, and supporting restaurants and technology businesses to adapt to the digital economy through his board positions in start-ups, restaurant associations, and large restaurant groups around the world.