We’re starting to see the light at the end of the pandemic tunnel. Smart, forward-thinking brands are taking a look at what’s changed over the past year and evaluating their price and menu strategies to prepare for the upcoming recovery.
Prior to the pandemic, pricing decisions in the restaurant industry were driven by the desire to maintain a targeted balance between unit economics and market share. Then in 2020, whoever was able to best serve customers stood the best chance of surviving the storm. Some sacrificed profit margins to maintain share. Recently brands are seeing more stabilized traffic, and the focus has shifted back to managing margins or playing “catch up.” In total, the industry has moved from survival mode into an emerging growth mindset as traffic builds toward the back half of the year.
Restaurants are about to launch into another period of extreme change as our industry recovers. While we already know online ordering is here to stay, a recent NRN survey suggests more than 80% of adults are itching to get back to restaurants for in-person dining. When this pent up demand collides with relaxing COVID-19 guidelines, we expect to see a wave of swift changes in guest behavior – how they want to order, what they’re craving, and what they’re willing to pay. Now is the time to take a good look at your pricing, menu, and cost structure so you’re ready for the changes as they come.
If you only add three things to your to-do list in the coming months, here’s what they should be:
Get your on-premise plan in place
Good news: we don’t expect to see the same volatility in commodity costs we saw in 2020, making that end of your profit margin equation more stable in 2021.
Even more good news: due to a sustained increase in online orders and delivery over the past year, price norms have risen significantly in many areas. Particularly for Full Service Restaurants, your brand may have the opportunity to adjust dine-in prices to reflect these higher price norms. If your brand measures location and item price sensitivity, you may be able to find ways to raise prices well beyond the usual 2-3% yearly restaurant price inflation rate, with limited risk to traffic.
Understand your delivery business
While we may be “back to normal” in the second half of this year, we expect delivery to remain a significant driver of overall revenue – for both Full Service and Limited Service Restaurants. If it isn’t already, a comprehensive review of your delivery pricing must be a part of your business strategy.
As some guests transition from online orders back to on-premise, the battle for share of digital orders will intensify and the need to tighten up your delivery pricing gaps will increase. There are three levers to pull when adjusting pricing for online orders and delivery:
By now we know not all 3rd party delivery vendors are created equal. Some brands have the bandwidth to run their own delivery, eliminating 3rd party fees (but taking on the associated labor costs). It’s important to know how much 3rd party delivery and service fees eat into your profits, and choose the options that reduce overhead as much as possible.
When it comes to what charges you pass to your customers, regionality matters. In some locations delivery fees must be low ($1-$2), but in others regional norms allow for higher delivery fees, offsetting your costs.
Even though we have a window with more forgiveness for price increases, it’s still crucial to consider risk. Use transaction and demographic data to understand price sensitivity by guest demographics, location, and product, and lean into adjustments for those with the lowest sensitivity. By concentrating increases in locations and products with low sensitivity, and limiting increases in other areas, brands can generate 50-75% more in price-related sales and profit lift than if they increased prices equally across all locations and items.
The better your data, the quicker you’ll be able to spot patterns in your guests’ behavior and react accordingly with dynamic and nimble pricing.
Ted Babcock has coupled a lifelong passion for food and service with a keen understanding of management, finance, marketing, and statistics. Ted currently leads Personica’s Pricing and Menu Analytics consulting engagements, providing strategic leadership, insights, and recommendations that improve menu, marketing, and financial performance for our clients. His professional experience in the restaurant industry spans over 30 years in a variety of leadership roles as an Executive, Operator, and Consultant.
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