Pricing Challenges and Solutions for Hospitality

Running a restaurant successfully sounds easy… if you’re not actually involved in running one! How hard can it be? You know the cost of your ingredients, you know what you pay staff, you’ve got a good idea of how many meals you serve in a week, so do a bit of maths and make sure that your menu prices deliver a positive margin. Sorted.

Yet in 2023, The Drinks Business reported that restaurant closures had hit the highest point for a decade. By the end of the year, Insider.co.uk reported that restaurant insolvencies were up by 46% compared to the previous year.

Even celebrity restaurant chains are not immune - Gino D'Acampo's failed in the summer of 2023.

So clearly it’s not that easy!

Setting the right prices can make or break a restaurant's profitability. From ambiance to ingredients, every aspect of the dining experience contributes to a customer's perception of value. Crafting a pricing strategy that aligns with your restaurant's brand and enhances profitability requires careful consideration and a deep understanding of consumer behaviour.

Let's look at some effective strategies and practical steps to help your restaurant thrive. And if you’re not involved in hospitality, don’t just skip this article – the basics apply to every business.

1. Understand Your Costs:

Before diving into pricing decisions, it's crucial to have a comprehensive understanding of your restaurant's costs. This includes not only the cost of ingredients but also overhead expenses such as rent, utilities, labour, and marketing. Then you can calculate net margins for your meals. And this is not only crucial, it’s also where most businesses (not just restaurants) fail – whoever is responsible for pricing, especially if the customer might negotiate or ask for a discount, needs to understand net margins and not just focus on gross margins.

2. Assess Price Elasticity:

How many customers will you lose if you increase your prices by 5%? By 10%? It’s entirely possible that the answer might be ‘almost none’, so that price increase goes straight onto the bottom line. 

Economists talk about the price elasticity curve, and there’s no doubt that such a curve exists in certain circumstances, but for most businesses it’s a lot more complicated than a simple curve suggests. In theory if you increase your prices by a bit, demand will fall by a bit; and if you drop them a little, demand will go up by a little. 

In reality, for a vast number of businesses, that’s not the case. Demand is relatively unchanged whether prices go up or down, but as prices go up you reach a point where suddenly the food seems expensive and demand drops off a cliff. What needs testing is finding out where the inflection point is with regard to pricing.

This is because price is just a small part of why anyone buys from you (again, this is true whether you are a restaurant or any other business). Many other factors, such as ambiance, the friendliness of staff, the ease of getting to the restaurant and parking, the taste of the food, the ‘buzz’ about the business, all affect demand as well.

So try increasing your menu prices!

3. Analyse Market Trends:

Keeping a pulse on market trends and competitor pricing can provide valuable insights into consumer preferences and pricing benchmarks. Conduct regular market research to understand customer expectations, emerging culinary trends, and competitive pricing strategies. Try eating out at other restaurants! Do some mystery shopping.

This knowledge will help you to position your restaurant effectively within the market and make informed pricing decisions.

4. Segment Your Menu:

Segmenting your menu allows you to offer a range of price points while maximising profitability. Categorise menu items into tiers based on factors such as ingredient costs, preparation time, and perceived value. Incorporating a mix of high-margin signature dishes, mid-range options, and cost-effective alternatives ensures that there's something for every budget without compromising on quality.

5. Implement Dynamic Pricing:

Consider implementing variable pricing based on factors such as time of day, day of the week, and seasonal fluctuations. Offering promotions, specials, and happy hour deals can incentivise customers to dine during off-peak hours and increase overall sales volume.

By and large I’m not a fan of discounting, but one of the positive reasons for using a discount is to smooth demand. To get that footfall that you need when the restaurant would otherwise be quiet.

6. DON’T Implement Dynamic Pricing:

Conversely, many diners get very cross when they see prices double for special occasions such as Valentine’s Day. Although you might be forgoing some additional margin on one or two special days in the year, if you maintain your normal prices (and make a big song-and-dance about doing so, so that everyone knows how ethical you are) then that creates a positive customer attitude to your brand, which can drive additional sales throughout the rest of the year.

7. Utilize Menu Psychology:

Customer behaviour is complex, and largely driven by hidden psychological factors. Strategic placement of high-margin items at the beginning of each menu section can anchor customers' perceptions of price, which makes meals further down the menu seem great value. Or use a really simple approach, and just order your menu by high-to-low prices. This especially applies to wine lists – changing from low-to-high to high-to-low pricing typically increases the average price of the wine sold.

8. Use Menu Apps:

Technology not only enhances operational efficiency but also opens up new opportunities for revenue optimisation. That’s because mobile ordering apps and digital menu platforms applies a psychological approach called price abstraction – the further a customer is away from spending actual cash, the more they spend. This was observed by many restaurants during Covid, when physical menus were not allowed.

Of course, this has to be balanced by the customer expectations, and the different ‘feel’ of ordering from a beautifully presented physical menu rather than an app.

However, integrating data analytics tools enables you to track customer preferences, monitor sales trends, and adjust pricing strategies in real time for maximum impact.

9. Monitor and Adapt: 

You can’t stand still. You must regularly evaluate the performance of your pricing strategy through sales data analysis, customer feedback, and financial metrics. Stay agile and be willing to adjust menu prices, promotions, and offerings based on evolving market dynamics and consumer preferences.

What does all this mean? Restaurant pricing is a strategic blend of art and science. There is much you can and should be doing analytically and financially to make sure you are profitable, but there is a big psychological element to pricing as well – especially when you consider how important it is to provide a dining experience that delights customers and keeps them coming back for more.