Commentary: Strategic menu pricing boosts profits

As a quick-service restaurant operator, would you prefer efficient menu prices or a 1-percent revenue increase because of more transactions?

 

Arguably, there is no right or wrong answer; however, let's rephrase the same question by highlighting the profit implications of each option.

 

Would you prefer a 7-percent (menu pricing) increase in profitability or a 1-percent (incremental sales)?

 

With this perspective, there is only one right answer: Efficient menu price increases always will deliver substantially higher profits than equivalent transaction increases. The incremental revenue attributable to transaction growth is diminished by royalty, marketing fund, food, labor and other apportioned restaurant expenses. But the revenue generated by menu increases goes straight to the bottom line.

 

For a long time, menu price increases have been QSR operators' primary weapon for combating escalating operating costs. No other tactic can be implemented as quickly and as effectively as a well-designed price increase.

 

 

I believe the ability to efficiently increase menu prices remains one of the most challenging tasks for not only QSR operators, but for everyone who owns a business. Knowing when and (in some cases) where to raise menu prices is not as simple as you may think.

 

If you own a QSR in Colorado, you're probably closely watching the upcoming November elections, when voters decide whether to raise minimum wage from $5.15 to $6.85 an hour. That 33-percent increase will be a bit difficult to absorb when margins are already thin.

 

Then, no matter what state you're in, there are unexpected increases in beef, produce and dairy prices and another oil shortage leading to higher fuel costs. With all these issues, you have the makings of a 'Perfect Storm' of financial challenges.

 

Additionally, QSRs are held to a different menu pricing standard than any other category of restaurants. As an example, a Burger King customer might eagerly buy a $3.50 latte at Starbuck's in the morning and be flaming mad at lunch when his $0.99 Value Burger has been raised to $1.29. The fast-food category is driven by expectations that menu prices remain at low price points. The danger of raising QSR menu prices is that it can adversely change customer purchase behavior.

From the outside looking in, one might think the parent company would be guiding the franchisee. Sure, QSR franchisees are given 'almost' all the tools for success from their franchisor. Franchisees are instructed how to staff, how to order, how to prep, how to assemble, how to deliver, what to wear, what to communicate, when to open, when to close, etc. But menu pricing is the only strategy franchisors cannot legally provide to their franchisees.

 

Any direct assistance in pricing is considered 'price fixing'. One of the freedoms of being a business owner is having the ability to command how, where and when to change prices.

 

However, with this freedom, franchisees are left to their own means when making pricing decisions. And sometimes, they make mistakes.

 

A franchisee often will copy a corporate restaurant's menu pricing without any proof that it will work in his or her market. This practice is flawed for two reasons: It assumes the corporate restaurant has a good menu pricing strategy and it assumes that the franchise restaurant has the same DNA as the corporate restaurant.

 

DNA is the genetic code that differentiates all living organisms. Likewise, every QSR has a unique profile that distinguishes it from the other 100,000-plus QSR restaurants in the United States. Sales volume, growth trends and menu mix are some of the DNA data points that should guide every operator's decisions on pricing strategy.

 

Every restaurant behaves differently and a price increase that works for a high-volume, high-growth restaurant likely will be a disaster for a struggling low-volume, low-growth restaurant. Multiunit operators looking to maximize their profitability should not have the same pricing structure across all their restaurants.

 

A QSR operator with more than three restaurants would be reluctant to have individual pricing structures for every restaurant. However, a multiunit operator significantly can increase the efficiency of future menu pricing strategies by distributing restaurants into three or four different pricing structures. This division should be based on the restaurant's ability to efficiently absorb different levels of price increases. Price increases only are effective if the change doesn't adversely affect customer behavior. The flexibility of assigning bigger price increases to stronger performing restaurants and lower price increases to poorer performing restaurants elevates the efficiency of the overall price increase two or three-fold.

 

Additionally, all future pricing strategies should incorporate both menu price increases and decreases. There are a tremendous number of high priced menu items that contribute no menu value because no one buys them. For a QSR operator, there is no better means of increasing the perception of menu value than finding easily disguised menu price increases that subsidize numerous menu price decreases.

 

Every quick-serve restaurant has a sales history that dictates its ability to efficiently increase menu prices. Powerful financial success lies in unlocking a menu pricing strategy that delivers value to both the guest and the operator.