Inflation is on the rise and many franchise owners are wondering if and when they should raise menu prices. According to the Bureau of Labor Statistics, the consumer price index for food increased 6.1% for November 2020-November 2021. This increase in food prices, coupled with supply and labor shortages, has serious repercussions for an industry that hasn’t fully returned to pre-Covid-19 levels. Large brands like McDonalds® and Chick-fil-a® have already raised menu prices in response to increased costs.
If you are a franchise owner considering raising your menu prices, here are a few factors to consider and best practices for how to implement price increases.
When to raise prices
Increased inflation shouldn’t be the sole trigger for raising menu prices. Inflation is sometimes transitory and spikes in prices are often too short-lived to necessitate raising menu prices. However, when inflation is combined with other factors that are expected to impact supply prices long-term, it is time to seriously consider increasing menu prices.
From all corners of the market, experts agree, prices will not be decreasing any time soon. The supply chain shortages have caused deficits that will take a long time to replenish.
According to Andy Pforzheimer, co-founder of Barteca Restaurant Group and member of the U.S. Foods Board, supply chains are about trust and as long as the trust is broken, there will be shortages. Trust in the supply chain may never be rebuilt to levels pre-Covid.
With conditions unlikely to change, now is the time to raise prices. At the latest Restaurant Finance and Development Conference, Fred LeFranc, CEO of Results Thru Strategy, urged attendees to raise menu prices 5%. A 5% price increase would normally be out of the question, but with food prices up 6.1% and no decrease in sight, franchise owners must take drastic measures to succeed. However, there must be a balance between raising menu prices and retaining customers.
How to raise prices
Simply reprinting current menus with higher prices isn’t the best practice for raising menu prices. The goal isn’t to hide the menu price increase from customers, but to make the changes without scaring customers away. Additionally, a price increase may not be necessary for all menu items. All menu items fall into one of four categories:
- Stars – most popular items that are also the most profitable
- Plow Horses – customer favorites that have higher food costs
- Puzzles – high profit items that aren’t popular with customers
- Dogs – low profit items that are also unpopular
Where an item falls on the menu matrix will determine the final price and position on the new menu. For example, Stars should be promoted as much as possible while Dogs may be best as off-the menu items for the loyal customers who will continue to request these items.
Tips for introducing new prices
- Revamp menu items – To avoid customer “sticker shock,” change the way items are offered. Try eliminating or replacing the side order for a less expensive option. This makes pricing differences harder to compare.
- Keep some items off-menu – As mentioned before, some items may need to be removed from the standard menu but should be retained for longtime customers by request only.
- Launch new items – Changing the menu is one of the most effective ways to increase prices. Replace Dogs and Puzzles with items that are more profitable and promote them to increase popularity. One of the best ways to test new dishes is to first introduce them as appetizers. Customers are more willing to try a different item as an appetizer than as an entrée. The most popular items then can be move to the entrée section later.
- Expand specials offering – Customers are also more receptive to trying new items when they are offered as specials. Strategically use specials to promote under-performing items and customer favorites to encourage customers to buy into the specials menu.
- Enhance experience – Customer experience and dining atmosphere are vital to price increase reception. Enhanced customer service or a décor update can help customers better accept a menu price increase.
- Use menu engineering – A price increase is the perfect opportunity to implement menu engineering best practices. The art and layout of your menu can persuade or dissuade customers to purchase certain item.
Now is the time to raise menu prices and the sooner the better. However, make sure you take the time to evaluate your menu, customer perceptions, and the competition before printing a new menu. Investing the time and money to review menu item pricing, update décor, or hire a professional to reengineer your menu can be costly. Many franchise owners assume the local bank is the best for funding. However, by nature, bankers are more comfortable with tangible collateral-based financing rather than capital secured by a company’s future cash flow.
An alternate for companies like yours is specialty lenders that are accustomed to working with your industry. First Franchise Capital® understands how a business like yours operates and are familiar with the nature of your income streams so that we can approach the lending process with realistic expectations and an appreciation for inherent risks.
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