Five tips for effective menu pricing
Pricing. The simplest thing in the world, right? Simply decide what to charge and you’re done. Well, in reality pricing isn’t that easy if it is to contribute to a healthy margin and bottom line profit. Many restaurants have employed a variety of tactics which ensure their prices are not just geared to the customer, but play a critical and well-thought through role in increasing financial health the smart way.
In this short blog, we take a look at some simple but clever strategies to ensure that dishes dishes are priced to induce sales, as well as make a major contribution to the restaurant’s coffers.
Many restaurants focus too much on increasing sales - itself a very worthy exercise - while ignoring easier ways to generate improved margins. What’s important here is the cost to the business of increasing sales: let’s suppose a restaurateur wishes to increase his income by x%, which will require y more customers. In theory the increase in custom will multiply the profit on each dish and therefore generate the additional revenue required (assuming the dishes are properly costed to produce a financial surplus in the first place).
However, factor-in the cost of actually generating those new customers via additional advertising spend, special offers and so on and the cost of acquiring those customers is actually quite high, potentially negating the additional income the restaurateur set out to attain.
One simple way to avoid a high cost of acquisition yet improve income is to increase the price, period. A small percentage increase across all dishes will add up over the year and make quite a difference in financial terms. Extrapolate that over, say, five years and the business has effectively made extra profit from nowhere, and with no additional cost of acquisition.
Obviously there are other factors which must be taken into account such a what the market will stand, but there’s an old adage which is as true today as when it was written: “Quality is remembered long after price is forgotten”.
Lead-in strategies involve creating a base-line product at a certain price, to generate interest and secure the customer, followed by the introduction of a higher specification “model” at a higher price. The idea is that the higher level product will contain additional components and perceived benefits, creating a sense of desire in the consumer for a modest extra sum.
That’s all fine for consumer goods like cars, audio equipment and a myriad of other things, but can it apply to restaurant dishes? Yes is the answer. There is a terrific opportunity for restaurateurs to upsell if they have a clever product taxonomy in place, such that - for example - a dish could present perfectly good value “as-is”, but be available with additional items for not much more. Add a touch of luxury to a lead-in dish, add a decent amount to the price and restaurants have their perfect upsell follow-on product.
Long the preserve of fast food chains, bundled pricing is becoming popular among more traditional restaurants, too. By bundling dishes together and allocating a fixed price for the lot, they create a huge sense of perceived value in the customer’s mind’s eye. A starter, main and dessert are favourite examples, but with a little imagination the concept can be applied to anything, including a mix of food and drink.
Restaurants do need to be disciplined with this, however: it is essential to police the “the bundle is a bundle” approach to avoid mission-creep among customers (“...can I have the xyz bundle, but I don’t want the fries and I’d like extra sauce…”). The second critical rule is that the bundle itself should be priced to create a high margin, perhaps by choosing elements which themselves are quick and cheap to create. The mission here is to create that sense of perceived value while selling in high volume.
Portion pricing is an excellent way to increase margins, yet it is often overlooked in restaurants because business owners fear their customers won’t “get it”. Let’s take a full portion dish which sells for £20. Conventional thinking would have a half-sized portion of the same dish sell for £10, but this approach overlooks the fact that it costs pretty much the same to produce a smaller portion as it does a large one when we consider our fixed costs. So, rather than reducing the price of a half portion by 50%, a reduction of say 30% will actually yield a higher margin. Once the point about costs is explained to customers, they’ll get it (and in truth probably won’t
We’ve made a bundle of our own here, to mop up this discussion about pricing:
By creating something special, restaurants have an excellent opportunity to charge extra for it. Specials can be in a number of forms, be them fixed in the menu or transient. They key is to create a sense of exclusivity, luxury and desire in the dish, be it a permanent fixture or on the week’s chalkboard. Restaurateurs just need to ensure the dish is not just priced accordingly, but that it makes financial sense (as we all know, chefs do have a habit of “going to town” with ingredients when asked to make a special: just make sure the dish is properly costed in the first place!).
A staple of mid-point restaurants is to include an array of extras which clearly don’t come with the main dish are available for an additional price. Breads, sauces, vegetables - the list of possibilities is endless. It is all too easy for restaurants to forget to have an honest look at their dishes and take robust decisions about what should, and what should not, be included in a dish given the price charged. For business owners serious about a deep-dive into their costing and pricing, the “we’ve always included fries” attitude isn’t an excuse to continue doing so if it just doesn’t make financial sense.
And finally…two for one pricing (or any variant of the theme). Put simply, by reducing the price slightly on two dishes but selling two of them rather than one, income and profit is increased. What’s more, the cost of acquisition is lower because there is one sale rather than two.
Pricing can be a thorny issue and is too often wrapped up in a polarised view about the possible reaction of customers to change. In reality, restaurants should focus on value and quality, and charge accordingly but employ some of the techniques listed above to generate customers and profit the smart way.
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