The Fear of Raising Prices (FORP) paralyzes many restaurant owners. However, nothing is more important in determining a restaurant’s long-term success than appropriately pricing menu items. If your food is great, it should be priced accordingly.
So why are so many restaurateurs afraid to raise their prices?
Let’s looks at the facts. Life gets more expensive every year. It’s called inflation, and the Federal Reserve has decided that we will have at least 2 percent inflation forever. In the restaurant industry, this means your food, rent, taxes, and labor costs increase every year. Successful restaurants know this and adjust accordingly at least once annually.
The number one reason restaurant owners do not raise their prices each year is fear. An owner fears that increasing their prices will lead to a decrease in customers. Studies have shown that this is simply not true. Customers experience inflation in every aspect of their lives, and rarely do their spending habits change. If price increases are subtle and gradual over time, and food and service quality remain the same, a price increase should lead to nothing but increased profits. Any increase in prices goes straight to the bottom line.
Most independently operated restaurants are underpriced. Many are priced so low that they are not even covering their costs.
So how do you know how to price your menu items? A good rule of thumb is that the average item on your menu should have a food cost of less than 30 percent. This means you must mark up each menu item at least 3x your food costs. If you do not know your food costs, you must calculate them.
There are other factors in determining menu pricing, like the market price in your area and the experience your restaurant offers. Fine dining establishments offering a more premium experience can charge more than a fast casual restaurant. A restaurant in a major metropolitan area can charge more than one in a rural town.
Would you like a confidential, no-cost review of your menu? Do you need help figuring out your food costs? The Wisconsin Restaurant Initiative can help. Sign up today.