Between increased costs of goods, supply chain disruptions, and wage hikes to attract and retain workers, restaurants are getting squeezed from all sides. As such, operators are looking for any and all ways to increase revenue.
In such an inflationary environment, restaurants tend to react to rising commodity costs by raising prices while price-sensitive diners react by reducing the amount of money they spend. From the supply side, operators must be cognizant of the cost of goods and manage their profit and loss statements (P&L). Since restaurants are a discretionary spend, they are typically one of the main areas where consumers cut back when budgets tighten.
“Many operators don’t consider price elasticity,” says Peter Boivin, vice president and head of industry, restaurants, at Vericast. “There is a tendency to think any price increase can be passed along to the consumer unnoticed, but more sophisticated operators are very sensitive to this. It’s a cautionary tale centered around basic economic theory: As prices increase, quantity will decrease. The real question is how much.”
Increased revenue can be broken down into a straightforward formula: Price x Quantity = Revenue. This formula serves as a framework for those developing marketing plans. Unfortunately, too many operators jump straight to tactics like loyalty programs as a way to increase revenue rather than also creating a comprehensive marketing plan which addresses critical building blocks, like price.
“Price influences several things: margins, unit economics, and traffic, from a price sensitivity standpoint,” Boivin says. “If you’re not careful, you can price yourself out of the market and lose visitation.”
As Boivin suggests, price has two “levers”—the average price per item multiplied by the number of items per ticket or bundle. Currently, inflation is driving up the average price per item, which is increasing total revenue and sales. Conversely, the number of items in the bundle is decreasing as customers look for ways to save. For example, anecdotal evidence points to lower beverage incidence as consumers skip the drink in favor of consuming water or beverages they have at home.
At times like this, customers need incentives to buy more items so revenue can really grow. Restaurant guests want to feel like they are saving money or getting a deal, and who can blame them? Vericast answers this demand by helping operators deliver incentives via direct mail, email, or push notifications to a mobile device or computer.
“We believe that offering consumers an incentive or discount is a tried-and-true way to acquire new customers,” Boivin says. “We find that two things happen when someone uses an incentive to visit a store: They invest the savings back into an additional offering or trade up to a higher priced item.”
For example, if a consumer receives a 20 percent discount, they typically reinvest those savings into a more expensive offering or an add-on, such as dessert. Additionally, customer satisfaction scores are higher when the guest uses an incentive because they feel good about saving money.
“Consumers who use incentives actually spend more than those who don’t,” Boivin says. “Our incentives are a way to take a consumer off a value menu, and through that incentive get them to spend more. This way, the restaurant makes more gross margin and the customer feels better about the transaction because they perceive that more value is created.”
Out of necessity, restaurants have done a good job raising prices to counteract the rising cost of goods and labor. But let’s face it: There is only so much room to continue to do that. Now customers need incentives to attract them to their favorite restaurants.
Note: In Part 2 of this series, we’ll discuss how increasing guest traffic plays into the Price x Quantity = Revenue equation.
To learn more, visit the Vericast website.
-Davina van Buren
