How to Price Menu Items In A Restaurant When Business Is Bad 🍹
How to price menu items in a restaurant when times are bad and you need the cashflow coming through?
The COVID-19 pandemic has completely shaken up the food industry, giving restaurant owners something to think about: how to price menu items in a restaurant when business is not going so well. Restaurateurs are struggling to keep their businesses open amidst the crisis and debt is mounting. Some have decided to raise prices to help cover additional costs for new safety measures just to stay open.
An example is the Pizzeria Napoletana in Montreal’s Little Italy. They added $4 fee per person. The reason is to offset the cost of new sanitary measures, avoiding food cross-contamination. Owner, Linda Girolamo said that they were transparent about it. It was added on the menu and customers were informed upon arrival at the pizzeria. Nevertheless, one customer posted a receipt on social media, showing the fee. Netizens got furious and the owner had to remove the fee completely.
Girolamo said it was a temporary charge. She further said that they were just being honest and transparent. Also, “they didn’t want to abuse anybody.”
Around May this year, restaurants have included COVID-19 surcharges to customers’ bills in response to high meat prices. However, some of them removed the said surcharges due to customers’ retaliation.
In addition, food costs have also skyrocketed. It soared by 38% during the pandemic, according to the restaurant-supply-chain company Buyers Edge Platform.
However, in spite some restaurants increasing menu prices and adding new fees, many restaurants have drastically lowered their prices – largely using excessive discounts. A lot of these restaurants are struggling to stay open as revenue and cashflows are too low. Many see lowering prices as their only option.
In this article, we will discuss and analyse whether restaurants should increase or lower prices during a downturn. In addition, we will provide real world examples detailing how restaurant owners are attempting to survive during these difficult times.
Table of Contents:
How to Price Menu Items In A Restaurant When Business Is Bad
Pandemic’s impact on the restaurant industry
The effect of the crisis on the restaurant industry varies. Pizza chains appeared to have high sales volume during the pandemic. A considerable decline of revenues was noted for casual-dining and fine-dining restaurants by as much as 85% according to a study conducted by McKinsey & Company.
Below is the result of the research and analysis of the same company as of April 17, 2020, on the revenue percentage change from 2019. The data is based on the US sales by restaurant type during the COVID-19 crisis.
Pizza chains: Revenue increase: 5%
QSR (quick-serve restaurant): Revenue decline: 25-35%
Fast Casual: Revenue decline: 45-55%
Coffee: Revenue decline: 60-70%
Casual Dining: Revenue decline: 70-80%
Fine dining: Revenue decline: 75-85%
Furthermore, they have discovered that there are some actors that largely contributed to the performance of the restaurants during the pandemic. They are the following:
- Off-premise versus on-premise sales mix. Restaurants with high off-premise sales prior to the crisis are making revenues better than those that relied only on dine-in sales.
- Reliance on day-part occasions. With the pandemic, many people worked from home. Restaurants that earned from daytime eating occasions have been greatly affected. They lost their customers that are getting breakfast or coffee on the way to work.
There are large disparities in restaurant-traffic declines across states
Densely populated states such as Sydney, Melbourne, and US cities of Connecticut and New York have the highest declines.
- Digital maturity. During the crisis, digital transactions have become the trend. And if trends in China are any indication, consumers would still prefer digital transaction even after the crisis. Starbucks China, for example, saw a 12% increase in the share of digital transactions after the crisis. It started from 15% in January to 27% in late March. It even reached its peak of 80% in February.
- Role of value. Consumers have become thrifty and are increasingly looking for ways to save money. In short, they have their expenses on restaurants because of financial insecurity.
How to price restaurant menu during and after a lockdown
So what pricing options are available to restaurant owners in light of the bleak industry summary above? To answer this, it is important to differentiate how restaurants have fared during and after a lockdown. Also, take a look at how they managed to survive. So, let’s examine how to price restaurant menu during and after a lockdown.
Restaurant pricing during lockdown:
During the lockdown, most businesses were closed, including restaurants. With those that have chosen to remain open only offering takeout and delivery to their customers. Let’s take a look at restaurant pricing in Australia and their restaurant pricing strategy.
Azuma (In Sydney), a fine Japanese dining offers pick up or free delivery within the area to Chifley Tower for a minimum order of $30 between 11am-8pm during the week.
Continental Deli (in Newtown). They also switched to a takeaway shop. They sell tins of soup with hearty ciabatta filled with cold cuts. Interestingly, they renamed “mar-tinny” to “quaran-tinny”.
Elva (in Bondi). They introduced take-home-and-cook restaurant-quality Italian meals. Their handmade pastas and sauces start at $7. However, they offer takeaway if you don’t want to cook.
The switch to takeout and delivery for restaurants who generated most of their revenue from in-dining has forced business to re-think their entire operations, business model, distribution, marketing and pricing. Now, more than ever, restaurant owners need to find creative solutions in order to survive.
In favour of price reductions using discounts is Rafi Mohammed, founder of Culture of Profit. He argues this is the time when lowering their prices is advisable. He asserts that restaurants should lower prices during a crisis.
What’s more, he provides three reasons for lowering restaurant price as listed below.
- Firstly, that takeout only gives customers a partial value experience compared to dine-in. Customers ‘pay more’ for ambiance, service and social experience. Therefore, carry-out prices should be trimmed down because of the reduced value and limited experience.
- Secondly, customers are trying to save money considering the situation. They became budget-conscious and do not have the spending power they had prior to the crisis.
- Finally, lower prices can attract new customers that were put off from the high in-dining price list.
However, even though there is an argument to lower prices during a crisis, it’s essential that customers understand that the discounts are temporary. The problem with excessive discounts or menu prices that have been lowered across the board is that it undermines the restaurant and lowers the value of the restaurant and menu in the eyes of the customer. One good way is clearly branding the discount that they are just special offer and are short-term only.
In the short-run, it’s okay to offer a discount. However, do it in a manner wherein it won’t devalue your product in the long run. Say, require a donation for charitable institution. For example, customers can get a lower price if they donate to a charity. Psychologically, you are communicating to customers that this is a one-off. You’re neither setting an expectation that this is for the long term nor you’re requiring them to purchase in bulk.
Restaurant pricing after lockdown:
As restaurants begin to reopen with the lifting of restrictions, they need to have strategies in order to capture the returning demand. These strategies include cost, pricing and marketing strategies and tactics, as well as business model shifts. For example, the cost of running a restaurant has increased because they have to add new safety measures in order to operate. Food costs have soared high too. Consequently, prices are expected to significantly increase, experts say.
The coming months will be tough for restaurant owners. With careful planning, they will definitely survive. There are two ways wherein restaurants can stay afloat in the business. They should consider the things that can help them – go back to stability and that can give them capability to continue to the new normal.
Go back to Stability
- Change operating procedures
Make sure that you follow protocols and precautionary measures to prevent the spread of COVID-19.
- Use customer reactivation strategy
Win back your customers. There are a lot of ways on how you can do it, whether through email, social media, loyalty programs, SMS, etc.
- Prepare food according to your customer’s preferences
Customers food preferences have somehow changed during the recovery. Though they are still concerned about their health and safety, they still prefer the usual stuff. Thus, you will have to make pricing adjustments – i.e., remove items off the menu that people do not buy frequently. Reprice popular, high-selling and value items. However, you have to reprice items under the new market conditions competitively – potentially using the Good, Better, Best strategy. In this way, you can create traffic, focus on value items first, then upsell, without having to discount.
- Use your delivery business effectively
Since on-premise dining was not allowed, delivery business became prevalent over the past three months. Think and develop a strategy for managing third-party aggregators. Contemplate on how you can make pickup as efficient as possible.
Outline the new normal
- Redesign your restaurant
Changes should include something that follows social distancing. To drive efficiencies and to enable contactless services, you may also consider spending money on advanced analytics and automation.
- Change the menu
Check the food trends and adjust to customers’ preference accordingly. Consumers are into “clean” food now as they have become health-conscious. To capitalise on these trends, introduce your menu items pricing them competitively.
- Improve your store footprint
You need to create a footprint-optimisation task force to evaluate the health of specific locations. From there, they will decide whether you need to enter, exit or expand in a market.
- Make customer engagement digital
Use deep personalisation if you want to enhance the digital experience. Make personalised offers across multiple digital channels. Make use of customer data for merchandising, pricing, and promotions.
- Get creative with promotions
Fact: 80% of revenue sales are generated from 16% of the dishes on the menu. Which means you need to find your top selling items quickly once you know what they are. Let your loyal customers know that you are promoting their favourite dishes just for them. Place a fence or restriction on the offer i.e., a time of the day or day of the week. Make them feel special.
Consider offering a Work-from-home lunch specials and coworking
This may be a good idea to get the locals around your restaurant – getting cabin fever all day – out of their houses and apartments and into your restaurant. A great way to introduce new customers to your restaurant during lunch hours.
With stores running short on groceries, people are going to quickly get tired of preparing the same old dishes. Launch a small-group cooking class with your chef to inspire some creative dishes based around canned staples, pasta, etc.
Case study examples of fine dining restaurants that are bucking the negative revenue trend
What have restaurants done in order to stay in business in the middle of this crisis? Some have found ways on how to price restaurant menu just so they can still thrive in the midst of this global setback. Top Sydney restaurants home deliver fine-dining experience. Also, Singapore’s top one restaurant for Asia’s 50 Best Restaurants has its own strategy.
One example is Bentley Restaurant and Bar in Sydney’s CBD. They offer a $110 takeaway box. It is not that expensive but it’s not cheap too. We can say, it is a reasonably priced restaurant in Sydney in the middle of the crisis. Inside it are 13 different packets to formulate multi-course meal, instructions on how to plate it, and even a link to a curated Spotify playlist to play in the background.
Other restaurants offering takeaway for the first time are Monopole and Yellow in Potts Point, Mr. Wong in Sydney’s CBD, Fred’s in Paddington and Ester in Chippendale. However, it’s not a regular takeaway. Customers need to add a few extra steps to maintain the just-cooked quality of the food.
Another one is Merivale’s Bert’s Bar and Brasserie. They also offer takeaway. You prep the meal by heating up the beef rib and fluffing potatoes.
One of their customers say, “In some ways it gives you a feeling of being part of its creation.”
“They do such a good job of putting it together that really you don’t play much of a role, but you feel like you are.”
According to Dan Hong, one of the executive chefs behind the Merivale at Home menus who designed the Mr Wong box, that was really the intention.
The Chef-Owner, Julien Royer said in an email interview:
“I see the industry continuing to pivot toward shorter concise menus with more substance, even once elaborate fine-dining experiences taking on new iterations or identities, more casual carryout models, and off-premise offerings to service the demands of the community. As travel comes to a temporary slowdown, fine dining could also shift to a more local approach — adjusting the accessibility and style of the experience for local gourmands and community — for some restaurants, a new audience and clientele.”
“At Odette, we rolled out a contactless curbside pickup service for all takeaway orders and also installed new cutting-edge purification technologies for our space to disinfect the air and surfaces for a higher level of assurance and peace of mind for both guests and staff.”
“Regardless of what lies ahead, what matters is we, as chefs and restaurateurs, do not lose sight of our passion and why we do what we do,” Royer said. “We must remain nimble and be prepared to adapt quickly and effectively, and I hope we can continue to preserve the unique role restaurants play in celebrating diverse cultures and bringing people together.”
The restaurant industry has faced extreme challenges during the crisis including tremendous declines in revenue and labour losses. And to some, permanent closures.
Many have turned to takeaways. Some involve the customers in preparing or cooking parts of the meal, then plating it up just like what Sydney restaurants did.
What restaurant operators did will go a long way in keeping their business alive. Not just today but also long after the crisis.
In addition, increasing prices during these difficult times is reasonable. They just have to price their products competitively. Also, make it clear that the price increase is temporary or they are just special offers.
How to Price a Menu That Makes Money & Keeps Customers Happy
When you work in the pricing industry – it comes as a given that you understand that pricing is more than just setting menu prices and seeing the profits roll in! A strategic pricing approach will need to be centrally involved with various functions such as marketing, sales and customer service. In order to truly understand the value that a product or service can provide to a customer. Then implement value based pricing.
In today’s blog – we will take a look at the weird and wonderful world of restaurant menu prices. We’ll include how to price restaurant menu. Also, some of the tricks used to “nudge” you into making a decision – that may benefit the restaurant. We previously covered the work of Robert Cialdini and Influence in our blog on psychological framing.
Our intention is not to provide a comprehensive lost of restaurant menu prices and approaches. Rather to use it as an easy to understand example. Like what we can do with smart pricing and understanding of customer value drivers.
Techniques on how to price restaurant menu
As in all industries – there is an entire spectrum of practises from amateurs to experts. And the restaurant industry is no different. From billion dollar chains to small mom and pop stores, the range of menu prices and approaches is almost as broad as people’s budgets!
The leading restaurant chains’ core component is to create best pricing strategy for restaurants before they draw up a menu. They should know how to price restaurant menu. Then they can use lots of techniques and psychology to nudge people into making the desired choices.
An interesting recent article on the BBC highlights this:
“For a large chain that might have a million people a day coming into their restaurants around the world, it can take up to 18 months to put out a menu as we test everything on it three times,” says Gregg Rapp, a menu engineer based in Palm Springs, California, who has worked on menus for small neighbourhood cafes and multinational giants during his 34-year-long career. “
Some of the key things to learn from this expertise include:
Understanding the customers value drivers
A meal out is not just about filling your belly; it covers many aspects from luxury, a treat, showing off to friends or a date etc.
Understanding why people are in the restaurant can let smart restaurant owners use approaches such as:
– Having heavier menus – amazingly – this can convey the feeling that the restaurant is expensive. Or that it is a high price restaurant.
– Drinkers like wine menus with hard to read script!
Using nudges – to drive people to more profitable choices
– Fancy words can nudge people to choose a more expensive dish – a “grass-fed Aberdeen Angus fillet with thick-cut rosemary fries” sounds much more appetising than a simple “steak and chips”, does it not?
– Writing longer descriptions can help justify higher cost items.
– A classic men prices approach is to drop the dollar or Pound / Euro sign. We all know the technique of charging 5.99 – but in menu prices you will often see it written simply as 6. “The dollar sign is a pain point that reminds the diner that they are spending money,” says Allen. “By just using the figure, or even better, writing it out in words, it can reduce that pain.”
– Ordering the dishes by price can have large impacts. By putting a high priced dish first – can make cheaper dishes seem better value.
As in nearly all progressive industries – menu prices are evolving, based on big data and behavioural science to maximise profits and provide enhanced value to clients. As long as business owners know how to price restaurant menu or they know menu pricing strategies, nothing could go wrong with their business.
What can you learn here for your industry?
- marketing strategy (7)
- Organisational Design (12)
- Pricing Capability (60)
- Pricing Career Advice (11)
- Pricing Recruitment (16)
- Pricing Strategy (35)
- Pricing Team Skills (10)
- Pricing Teams & Culture (17)
- Pricing Transformation (17)
- Revenue Model (5)
- Sales Effectiveness (6)
- Talent Management (6)
- Technical Pricing Skills (33)
- Uncategorized (1)