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National Restaurant Association - Is it time to raise your prices?

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Is it time to raise your prices?

Making sure the price is right for each menu item is no game – it takes lots of work. Before adjusting your prices, consider the following eight factors:

1. Food costs. “You’ve got to know your costs before setting a price,” says restaurant consultant Linda Lipsky of Broomall, Pennsylvania. She recommends that food costs run about 33 percent of menu prices, on average. This can differ per operation, with fine dining restaurants typically posting higher food-cost percentages and casual pizzerias running lower percentages. The percentages also vary widely from item to item. “A soup could cost as little as 18 cents per serving to make, but you’re not going to sell it for 54 cents,” Lipsky says. Soups, appetizers, desserts and alcohol tend to have lower cost percentages than entrees, she notes. Consider your sales mix when pricing items.   

2. Margins. Food-cost percentages are only part of the equation. “The biggest mistake I see operators make is that they rely too much on food-cost percentages and not enough on food-cost margins,” says Dennis Lombardi, executive vice president of foodservice strategies for WD Partners in Dublin, Ohio. Take an expensive item, such as lobster. If operators base their menu prices strictly on food-cost percentages, they might price the lobster too high to sell. If they determine they want, say, a $9 margin on entrees, they can price the lobster to sell with a profit. 

3. Additional costs. Don’t forget to factor in your labor costs. The cost of baking and decorating a chocolate cake in-house, rather than buying it premade, is more than just the price of the ingredients. Include the price of any giveaways, such as bread and olive oil, and the cost of food waste and spoilage.

4. Volatility. Food costs can change at a moment’s notice, based on anything from world politics to weather conditions. While large chains might sign contracts that lock in prices, smaller restaurants usually don’t have that option, Lombardi says. “Give yourself a cushion for volatile items,” he notes. Limit items, particularly those with volatile ingredients, to specials or seasonal dishes, he advises. Lipsky recommends printing your menu in-house, so you can easily reprint it if your costs suddenly soar. “If your menu looks the same, your guests probably won’t notice the price change,” she says.

5. Competitors' prices. When was the last time you dined at a competing restaurant? If it’s been a while, you’re missing crucial information that can help you set your prices. Find out what your competition offers and their price points. Don’t look just at online menus, Lombardi urges. Go in person so you can see the portion sizes, the preparation, the presentation – all factors that impact the value perception. 

6. Menu mix. Lombardi recommends analyzing your menu composition by sorting the items into a matrix like the one below:

 

Low Margin

High Margin

High Volume

 

 

Low Volume

 

 

Using this format, you can spot places to adjust prices, push sales or drop items. For example, can you increase the margin on a high volume/low margin item without losing significant sales? Can you increase sales of a low volume/high margin item by placing it more predominantly on the menu or giving servers a sales incentive? Remember that different spots on the matrix play different roles in building your business. “You need a couple of  items that are priced low enough to avoid the ‘veto vote’ from those in a group who want to go out but don’t want to spend a lot,” Lombardi says.

7. Ingredient adjustments. Before raising a menu price, consider whether you can make the dish for less, Lipsky recommends. Can you select a less expensive vendor, substitute similar but more affordable ingredients or make the portion size smaller? If none of these are feasible, you might need to raise prices. “But that doesn’t mean you have to raise the prices on your whole menu,” Lipsky says.

8. Historical data. Review your menu prices at least twice a year, if not quarterly, Lombardi recommends. Be sure to examine previous price changes, and see how they affected your bottom line before enacting your next set of changes.

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