How Restaurants Adapt to Rising Costs

  • Oct 25, 2018
  • Michael
Close view of a balance sheet with a calculator and pen on top of it

Quick service and fast casual restaurants operate in a cutthroat industry. One of the ways restaurants try to ensure repeat patronage is to offer value for money. This loyalty can be further boosted by smart marketing initiatives like cross-selling and upselling. Management might even cut the profit margin in order for the restaurant makes a profit by driving revenue up with higher sales volumes. To this end, restaurants may offer special discounts or promotions on certain days.

Customers keep coming back to take advantage of competitive prices and perceived bargains. But, how sustainable is this?

The challenge comes in when supply prices rise. The restaurateur will pass some of the price increases onto customers by raising prices by a few dollars at a time. The inevitable push-back from customers will follow.

Customers may express dissatisfaction about the price increases and despite strong brand loyalty, they leave. A restaurant owner’s greatest fear is losing customers. Following closely is bad feedback from customers shared as word of mouth marketing. Avoiding these two negative scenarios requires a touch of finesse.

The key to an increase in prices without customers feeling ‘chased away’ by a price hike

Restaurants can resist consumer push-back from price increases with incremental implementation.

Look at two different scenarios:

  1. Restaurant A absorbs initial price increases from a fuel hike and product price increases. Menu prices remain the same and so do promotions. A two-for-one special run on a Monday continues as usual. The same discounts apply.Constant price increases begin to impact drastically on the restaurant’s bottom line in the way of ballooning cost. Management meets and decides to end all promotions and discounts. There will also be a 10% hike in prices effectively immediately. New menus are presented to customers who visit the restaurant.All the short-term gain from keeping prices low is lost overnight with these steep changes.
  2. Restaurant B’s management sees that the prices of fuel and products are increasing. Their understanding is the long-term effect on the bottom line is inevitable. Management doesn’t wait until options are limited. The team intervenes immediately with some creative approaches.The gradual phasing out of the Monday two-for-one special begins. Management announces that the special only applies every second Monday. As a follow-up after a couple of months, management again makes a change. The Monday special will now be on the first Monday of the month.Management institutes a loyalty card instead of offering discounts. Customers pay full price. The payoff is loyalty points. Earning loyalty points takes longer and will save the restaurant money. The customer still feels valued and treated with favor.The prices on the menu increase subtly. A 1% increase on some items and a 2% increase on others are more acceptable to customers. Customers see increases as inevitable and simultaneously reasonable.

Looking at the two scenarios, the most successful approach will be the latter. Customers don’t like unpleasant surprises.

How to implement incremental price increases without dissatisfying the customer base

A restaurant’s customer base is critical for long-term success. The need to retain customers is balanced against pricing factors. In the history of any business, price decreases are rare. Price increases are the norm. Customers can accept gradual price increases. Big price hikes imposed with no warning are what customers find hard to ‘swallow.’

The subtle approach explained in the scenario of Restaurant B is more effective. Action must be responsive to changes to the market. Restaurant managers and owners should act in a proactive manner. A proactive approach means a gradual implementation of changes so as not to catch customers off-guard.

The overt approach explained in the scenario of Restaurant A is risky. Changes in the market cannot be ignored. Managers and owners cannot afford to behave in a reactive manner. A reactive approach becomes a problem as the results are drastic and will shock customers.

Customers don’t mind that prices rise. Price increases are inevitable as part of life. The crux of the matter is the approach management selects.

Obviously, increasing prices every week or month is hard to do with printed menus, which is why many restaurants are opting to use digital menu boards. With digital menu boards, owners can adjust prices daily from their computer by just a few cents in order to minimize sudden price changes. More on how to make changes to digital menu boards.

The success of restaurants implementing incremental price increases

Owners and managers of restaurants implementing gradual price changes have reported better customer retention figures. The reports indicate that the customer base remains to a large extent unchanged.

Restaurants adopting the opposite approach report an immediate decline in sales. Customers show fickle tendencies, choosing to switch loyalties. Word of mouth spreads online and customers complain to friends and families. The negative experience of one customer who is shocked by a big price hike can result in the loss of up to ten customers.

As one of our clients explained, “It’s a psychological approach. Imposing slight increases doesn’t register with customers. An extra dollar or two won’t anger them. Drastic increases stand out. An extra $10 to their regular bill is a shock and customers may take offense.” This is linked to the framing effect.

Customer satisfaction is the name of the game

Satisfied customers are loyal customers. The odds of such customers switching to another restaurant are slim. Dissatisfied customers are another matter entirely. Patrons may feel dissatisfied by the management’s approach to pricing and price increases. A sensitive approach with incremental increases goes back to the adage ‘you catch more bees with honey than with vinegar.’

Learn more about using digital menu boards to reduce cost and connect with us on Facebook, LinkedIn, Twitter, and YouTube to get the latest info on marketing with digital signage!

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