The past few years have been challenging for quick service restaurants. Tough competition and cost pressures around labour, food, and advertising has forced restaurants to implement major price increases. In fact, menu prices have increased the most in the last decade. In the U.S. alone, “menu prices increased over 3 percent” according to the National Restaurant Association.

As a result, pricing strategies for restaurants have been affected and continue to change at a rapid pace. Not so long ago (and still today), cost-plus was seen as a perfectly acceptable and widely used strategy. Then market leaders started adding more value-based components to their pricing via consumer research, in which case data became more available and opened to door to menu price optimization models.

Today, the best players in the game are also trying to get more intimate with their guests and offer tailor-made promotions to very granular customer segments. How do they do this and what does a state-of-the-art pricing process look like today? What is “best-in-class” and how can restaurants use this to optimize their profit margins?

We’ll show you how to develop, customize and implement an effective process, starting with the foundation of your pricing.

Building A Better Approach to Pricing

How can restaurants strike the right balance between profits and guest count? Getting pricing right is the first critical step to survival in this competitive climate. Drastically increasing prices may increase profit margins initially, however over time restaurants will face a sharp decline in guests. Eventually business will suffer as they lose guests to the competition.

We believe there’s a much better way for restaurants to approach pricing. We call it value-based menu optimization. The process is designed to help restaurants boost their profitability through pricing, without sacrificing guest count.

Optimization used to be a “nice to have”, or even a key differentiator, but nowadays the tables have turned: menu price optimization has become standard and companies who are not using data analytics to improve their menu prices are falling behind.

To help our restaurant clients stay ahead and build this process into their pricing infrastructure, we developed a brand-new solution called Menu Price Optimizer^TM. This comprehensive tool uses best practices for value-based menu optimization, including automated pricing software, promo analysis, competitive research and strategic guidance. When these elements are combined, this approach  significantly improves and boosts the business’ bottom line without the loss of foot traffic.

To understand how the solution works, let’s explore each element of Menu Price Optimizer^TM in more detail.

Key Components of Value-Based Menu Price Optimization

1. Menu Price Optimizer^TM Software

The Menu Price Optimizer^TM tool is designed to increase restaurant profit margins by providing several sets of pre-optimized pricing recommendations using our predictive algorithms and is fully customizable based on our client’s data and their goals. Want to maximize revenue with an average 3% price increase and without losing guest count? The tool has the answer. Want 5% instead? No problem.

This software also enables restaurants to experiment with their own scenarios to test all kinds of prices and measure the expected impact immediately. The results speak for themselves by providing a rock-solid foundation for the menu prices.

The Menu Price Optimizer^TM software is only one component of our comprehensive solution for restaurants. Value-based menu optimization also requires tracking market benchmarks and knowing competitor’s prices, assessing the impact of promotions, and conducting extensive customer research.

2. Tracking Market Benchmarks

Simply being reactive to a competitors’ prices is never a good strategy but their prices should be considered as a benchmark and another way to refine the recommendations coming from the analytics.

A lot of comparison data is now available online, either on competitors’ websites and apps directly, or via third party delivery apps. Developing a good web crawling engine that can collect and track competitors’ prices has now become rather economical and a must-have for the industry. We provide fine-tuned recommendations for all of our clients that prevent them from pricing themselves out of their market.

3. Promotion Analysis

In order to make sure promotions work effectively, it’s important to review recent promotions on a regular basis (we recommend two to four times a year). This will provide a clear assessment of what’s working and what needs to be adjusted or eliminated.

At Pricing Solutions, our algorithms help our clients do just that and optimize their promotion dollars by capitalizing on successful promotions and discontinuing the unsuccessful ones.

4. Robust Strategy

Combining analytics, research, competitive benchmarking and promo analysis will take companies 90% of the way. The last essential piece of menu price optimization involves big-picture, strategic thinking surrounding:

• Value positioning: we typically apply the Price Value Map to understand if the value that our client delivers allows for a price increase
• Macro-economic benchmarks, such as the Food Away from Home Index
• Business rules, such as the price ratio between small-/medium-/large-sized items
• Pricing best practices, such as leveraging 9s in price endings or “price thresholds” such as $4.99

Results that Boost Overall Restaurant Profit Margins

Ultimately, a “best-in-class” pricing strategy understands what drives customer-purchasing decisions and uses a solid foundation of pricing research, analytics and strategy to set fair prices and drive store profits.

Our customizable MenuPriceOptimizer^TM software helps restaurants test the customer experiences they face every day while our pricing research and performance measurement guide them toward understanding customer behaviour better, making successful strategic decisions, and staying well ahead of the competition.

How much of an improvement can be expected with such dynamic strategy?

In our experience, based on working with over 30,000 units representing $50BN in sales, count on at least a 2% bottom line improvement without any significant loss in traffic.

Our multi-cultural team has worked with world-class restaurants in over 20 different countries providing proven value-add services, including online training for high-impact pricing strategies – our approach is both reliable and profitable.

Reach out to us to learn more! We would love to discuss how you can improve your margins and profitability, optimize menu prices and build on your continued success.