Business and Operations
Higher prices and happy customers
By Laura Aiken
Perhaps no area is more intricate, or less understood, than selling price when it comes to managing your pizzeria.
Perhaps no area is more intricate, or less understood, than selling price when it comes to managing your pizzeria. A myriad of factors determine what the end consumer will pay. Consider the competitive landscape, service levels, atmosphere, quality, portion, service level, type of guest and sales mix. All of these play a role in what you charge for your food. Inevitably, prices are due to rise to reflect inflation or changes in the commodities market, labour expenses or even other impacting costs such as rent and electricity. To stay afloat, you must continue to turn that profit. The cost on the menu is just one factor to examine in the profit game. You can raise your prices, cut your costs or do some combination of both, but food quality or service levels mustn’t suffer. Recently, Molson increased its net income by nine per cent in the third quarter through a combination of raising prices and cutting costs even though it sold less beer, reported Metro News on Nov. 4. Interestingly, the newspaper reported that the company increased prices despite the slow economy to protect its brands from being perceived as too “cheap”.
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In this economy, raising prices can feel like a dicey move. It can also feel like the only way to survive. And for some companies, like Molson, it’s a way to sustain an image. Let’s look at price increases, alternatives and how to approach them in a way that protects your customer base.
Price increases and alternatives
Before looking at raising menu prices, do an analysis of your menu and your inventory. Raising prices is just one aspect of overall menu engineering, the term that describes how to tailor your menu to highlight and sell your greatest gross profit margin items.
Geoff Wilson, president of the Toronto-based foodservice consulting firm fsStrategy, says restaurants “bank dollars, not food cost percentages,” and menu engineering can add three to five points to your margin. Every six months, if not quarterly, he advises doing an analysis of the menu’s performance.
You need an accurate picture of the cost of food sold to evaluate the decision, this being the actual dollar value of all food expense except for staff meals. The handbook Food and Beverage Cost Control by Lea R. Dopson, David K. Hayes and Jack E. Miller makes several suggestions for analysis. Aside from doing a complete physical inventory at the beginning and end of the month (although this is really once a month, as your ending inventory number becomes your beginning number), it’s important to do the actual math for employee meals – not an estimate – for better cost control.
“It is most often a truism that as prices increase, the number of items sold will generally decrease. For this reason, price increases must be evaluated based on their impact on total revenue and not price alone,” write the authors. “Experienced foodservice managers know that increasing prices without giving added value can result in higher prices but, frequently, lower revenue because of reduced guest counts.”
Bear in mind that you can always sell a lower quality product for less but people associate higher prices with higher quality. At the end of the day, if you are doing regular enough analysis, your price increases should be incremental and small enough that customers will barely notice, says Wilson. You never want to leave your increases to the last minute and then thump your customers with them. A rebellion would be expected. A “nickel here and a nickel there” can go unnoticed by customers on a pizza because the overall cost is high enough to bury it, he adds. How big the increase is, as perceived by the customer, depends on the cost of the product. Over a month, those small increases will add up on the books and your customers are less likely to notice.
Hugh Johnston of the Toronto-based firm Strategic and Financial Architecture says that first and foremost you need to know what price your competitors are selling the same items at as well as their promotional prices and, definitely, what grocery is doing. The grocery store is the biggest competitive threat to pizza today, he says.
Make your customers aware of what you offer that frozen pizzas in the grocery store isles don’t, from quality to unique toppings and personal service. Most people believe they get what they pay for, with exceptional circumstances going either way. Keeping in mind the goal of exceeding customer expectations, there are alternatives to price increases that are part of assessing the overall menu performance.
You can take underperforming items and reformulate, repackage or bundle things to create higher margins, says Wilson.
Sometimes you can take a product and cut back slightly on a more expensive ingredient, ensuring the change in taste is not too noticeable, and raise the price just a little bit to create a better return.
Also, you can rename and relaunch products in conjunction with changes in price and/or formulation.
Before raising prices, Johnston suggests taking a hard look at your menu to see whether you can cut costs there. “Ask yourself if french fries travel well and if you’re really making any money off them.”
Then, if you are going to raise menu prices, he says to raise prices on items you are not being paid enough for in light of what you are giving.
Increasing the perception of value in your food is part of profit strategy. However, you are only adding value if what you are providing is something that your customers do indeed value, says Johnston. Free pop is of no value to the pop-free family. He advises adding something to the pizza itself that makes it extra awesome, rather than giving away free sides that may be irrelevant to your customers. The free pop may be valuable to some, but you know the pizza is relevant to all. You particularly want to add value for your heavy-use customers, he adds.
“There are no new customers. It’s a market share game.”
A perception of higher value may be attained through premium quality ingredients such as traditionally raised chickens, Angus beef, and house-made ingredients such as sausage. Adding pizzazz to basics, such as a special sauce drizzled on top, can give the dish a higher perceived value as well. How you approach the value question depends by and large on who your customers are. This is where it is useful to know the price sensitivity of your clientele and what they value. For some pizzerias, it’s primarily about the end ticket for their customers. For others, it’s not as much of an issue if they see that the quality and the price match.
“Independents are way better off putting money on the plate, getting known in the community and getting people loyal to you,” says Johnston, when it comes to competing with the big chains.
Considering the importance of this loyalty, it’s wise to decide whether or not you want to, and how you want to, communicate a price increase to your customers.
When Starbucks raised the price of some of their premium beverages, they made a formal announcement with an explanation. But that’s Starbucks, an enormous chain, and drawing attention to your increase may not bode best for you, particularly in this economy. One note can be taken from Starbucks though. While they raised the cost of premium beverages, they held the cost of basic core items. This is part of their menu engineering, and a similar analysis of your menu would yield the best conclusions as to where price or product changes should occur.
Joe LeRoux, proprietor of Amadio’s Pizza in Mississauga, Ont., recently raised the price of all his pizzas by $1, saying he received few complaints and most customers were unsurprised. LeRoux pointed to minimum wage increases as a driver, explaining that “pizza is very labour intensive to do it right.”
Customers are also becoming increasingly aware of the cost of cheese. It’s visible to them in the grocery store and in the media. The Canadian Restaurant and Foodservice Association (CRFA) has made great efforts to shed light on the disparity between cheese prices for fresh and frozen pizza makers and the issue gets play in articles such as a recent Financial Post story titled “Dairy farmers still milking all of us” by George Fleischmann and Joe D’Cruz, faculty members at the Rotman School of Management of the University of Toronto.
If you do raise your prices be prepared with a good reason, should customers ask, and time the increase carefully. Increasing prices is just one part of overall menu strategy, most smoothly done one “nickel” at a time.