Your Restaurant Raised Prices. Did Your Profit Margin Actually Improve?
By ProfitWise - a Visa Business Plans company
Food costs went up. Labor became more expensive. Insurance, utilities, and supplies followed.
So the restaurant owner did what many owners eventually have to do: raise menu prices.
Three months later, sales are up 8%.
Great news, right?
Maybe. But before deciding that the price increase worked, there is another number we need to look at: Did the restaurant actually become more profitable?
Higher Sales Don’t Automatically Mean Higher Profit
Imagine a full-service restaurant that increased menu prices by approximately 6%.
A popular entrée went from $28 to $30. Appetizers increased by a dollar or two, cocktails went up slightly, and similar adjustments were made throughout the menu.
A few months later, monthly revenue is noticeably higher.
At the same time, however, the cost of several key ingredients has continued to increase. Hourly labor costs are higher, and the restaurant is spending more on supplies and other operating expenses.
The additional revenue from the price increase may be helping the restaurant absorb those higher costs without actually improving its profit margin.
That doesn’t mean raising prices was the wrong decision. In fact, without the increase, profitability might have declined considerably more.
It simply means that looking at sales alone doesn’t tell us whether the pricing decision accomplished what the owner expected.
Customers May Change What They Order
There is another part of a price increase that can be easy to miss.
Customers don’t necessarily respond by ordering exactly what they ordered before and simply paying 6% more.
Some may choose a less expensive entrée. Others may skip an appetizer, order one fewer drink or decide against dessert. Regular customers may visit slightly less frequently.
The restaurant could therefore have higher menu prices while experiencing changes in average check, customer traffic and sales mix.
That’s why evaluating a price increase requires looking at what actually happened after the new menu went into effect.
Did the average check increase? Did customer counts change? Are the same menu items selling? What happened to food-cost and labor percentages? Most importantly, did the restaurant’s margins improve?
A $32 Entrée Isn’t Necessarily More Profitable Than a $24 Entrée
Pricing also becomes more useful when the restaurant looks beyond the selling price of individual dishes.
Suppose one entrée sells for $32 but requires expensive ingredients and significant preparation time. Another sells for $24, has a much lower food cost and is easier for the kitchen to produce.
The less expensive item may contribute more profit to the restaurant.
Understanding that difference can influence much more than the next round of price increases. It can affect menu design, specials, promotions and even which dishes the restaurant wants its servers to recommend.
Delivery Can Change the Picture Too
If a growing percentage of the restaurant’s revenue comes through third-party delivery platforms, those sales deserve separate attention.
A menu item may sell for the same price, or even at a higher delivery price, but commissions, packaging and other costs can change the economics of the order.
If delivery sales are growing quickly, total restaurant revenue can increase while margins behave very differently than the owner expects.
This is another reason we want to understand where the growth in sales is actually coming from.
So, Did the Price Increase Work?
Good bookkeeping gives us the information needed to begin answering that question.
Instead of simply comparing this month’s revenue with revenue before the price increase, we can look at how the restaurant’s costs and margins changed during the same period.
For some restaurants, the numbers may show that the increase worked exactly as intended. For others, they may reveal that certain menu items need additional adjustments while others are already performing well.
This is also where Fractional CFO analysis can help an owner decide what to do next. Rather than automatically increasing the entire menu again, the restaurant can look more closely at food costs, labor, sales mix, customer behavior and the profitability of different revenue channels before making another pricing decision.
The goal isn’t simply to charge more.
It’s to understand whether the restaurant is keeping more of what it sells.
