In the world of food and restaurants, it’s hard to top a resume like Tom Kelly’s. He taught hospitality management at Cornell and served as the Director of University of Minnesota’s hotel school; he’s a former Chairman of the American Institute of Wine & Food, founded by Julia Child and Robert Mondavi. He’s consulted for AAA on how to rate restaurants, ran the Mobil Guides, and started the course on how to be a restaurant critic with famed New York Times restaurant writer Mimi Sheraton.
He adds: “Basically, I go to restaurants for a living. For many years in the ’90s I had the largest bill in the American Express system.”
Now Tom is President and CEO of Revenue Management Solutions, a company that advises restaurants and hospitality firms on optimum margin management. We asked him to share his best practices for pricing a menu and operating a restaurant for maximum profitability — here are some Dos and Don’ts to keep in mind.
DO let the consumer set the price.
Tom works with restaurants to set prices for each item on their menus, which are primarily driven by point-of-sale data from the restaurants. “Something that could be way too cheap at $5 in Manhattan would be way too expensive for the same product in Pocatello, Idaho,” he says. “We actually know that statistically.”
In gathering the POS data he compares the change in prices to changes in profits and guest counts. That way, he knows when a restaurant is leaving money on the table by not charging enough, or when a restaurant took the prices too high and caused a downturn in traffic and a drop in profits. Then he can adjust the prices quickly. A the end of the day, all adjustments are based on guest behavior. “The consumer always wins.”
DON’T be afraid to raise your prices.
According to Tom, three out of four restaurants in the U.S. are underpriced. Instead of charging what they should to make a profit, restaurant owners and managers commit to hiring less staff than they need and, as a result, give poor service. That causes a negative spiral of drops in profits.
As a rule, it’s generally a bad decision to keep prices down and deliver a lesser service; it’s better to move the margin and give the consumer exactly what they want, the way they want it.
DO adjust your food cost along with labor cost.
Labor costs are higher than they used to be, so your food cost needs to change, too. The previously accepted wisdom of 33 1/3% food cost for a restaurant no longer stands. Tom advises to aim for a 26-27% food cost for a truly profitable restaurant.
“If you’re over 30% you’re going to end up breaking even or losing money,” he says.
DON’T assume all guests are equally price sensitive.
Statistically, if you grew up worrying about money, you are probably price sensitive. People who can remember the Depression or the Eisenhower administration tend to be more sensitive to prices than those who can’t, regardless of how much money they currently have.
By comparison, younger generations (such as millenials) are much less price sensitive. They are prepared to pay a premium, but they have extremely high standards on everything from sourcing to service.”You have to be much more professional in your culinary delivery to speak to this generation of people,” says Tom. Tailor your menu and hospitality to the guests you serve.
DO see where you can raise prices without negatively impacting traffic.
Let’s say the price of beef goes up. Many restaurant owners will immediately raise the price of their beef dishes to compensate, but a better course of action is to see where else you can raise prices on your menu that won’t cut into traffic and sales. Here’s how it works:
- Look at your top-performing items to see where you’re making the most money. In general, 15% of your menu will yield 65-80% of your cash flow.
- Ask: are those items price sensitive? In the history of those items, when you last changed the price, did the demand stay the same or go down? If the same number of people buy it either way, it’s not price sensitive.
- If two items trade with each other and are both very sensitive, you might lower the higher-priced item and bump the lower-priced item so people will trade up to the better-margin item. That can result in a huge change in profits.
DON’T put higher prices on a menu unnecessarily.
Sometimes in restaurants that have bars, the price for a drink at the bar includes the tax while the price for the same drink at the table does not. The consumer will always think the one with the lower price is the better value.
“It’s usually a good idea to put the lowest number you can up there,” says Tom. “Don’t put the price of the tax imbedded, because the consumer doesn’t give you credit for supporting the federal government or the local state government.”
Similarly, you never want to list a high-priced item on your menu that isn’t popular. On a menu where the average entree costs $15, a $30 tripe dish will actually cause people to be less happy with the overall value of the restaurant. Even though they didn’t order it and it had no real impact on them, seeing it will negatively impact how they feel about their experience. Only have high-priced items that really move.
DO understand the importance of good service.
For the most part, people don’t really know what they spend in a restaurant. According to Tom, guests aren’t aware of how much they spend in a restaurant plus or minus about 18%. They do know whether they will go back to the restaurant. “They have a strong feeling for the value of what they spend, but not an economic feeling,” he says.
“When people go back to a restaurant it’s because they really like the food, and when people don’t go back it’s usually outweighed by poor service,” says Tom.
A service staff that doesn’t perform up to standard will negatively impact your business. For example, in a quick-service restaurant, the number one way to drive more sales is to open another register. People simply don’t want to wait in line for long.
“I think the crisis of the restaurant industry is the inability to provide serious professional service, particularly in North America,” says Tom. “The quality of the culinary team in the kitchen is excellent, but we don’t have excellent service teams. The people who normally are servers are a small percentage of the population, and they’re not trained as well nor do they have a proclivity for it.”
DO know you have to be better than ever before.
The restaurant industry is more competitive than ever before, and you need more than good food to be successful. The demand for great dining experiences is outstanding and continues to grow. From an economic point of view worldwide, the high consumption generation for restaurants is going to be the Baby Boomer retiring, Tom says.
“It used to be that if hot food were hot and cold foods were cold and the service was accurate, that was all you needed,” he adds. “That’s not true anymore. Now you’ve got to be noticeably better.”