Is Variable Menu Pricing the Next Big Move for Restaurants?

As restaurants continue to look for ways to cut costs and increase profit margins, the idea of introducing variable menu pricing as a form of yield management is gaining steam. The hotel and airline industries have been utilizing this form of yield management for years with great success. While it is clear how this system is beneficial from the business standpoint of more accurately managing costs, what many restaurant operators may not have considered is that the introduction of variable menu pricing could actually help drive more traffic to their restaurants as well.

Consumer Confidence Remains Fragile and Disposable Income Is Spread Thin

The economy has been steadily gaining strength from its major downturn a few years back, but consumer confidence and spending remains fragile, and nowhere near the level of decades past. In 2013, disposable personal income for the average American gained a mere 0.8 percent; an anemic rate, at best.

What’s more, that money is getting distributed over a wider range of consumer expenditures than it did in days of yore. It used to be that a restaurant operator’s biggest competition was other restaurant operators. However, these days, the bigger competition is in getting the consumer to spend that meager disposable income in the foodservice industry at all.

Variable Menu Pricing Represents a Way to Grab Traffic and Build Demand

According to a survey conducted by the National Restaurant Association (NRA), two out of every five consumers said they were not using restaurants as much as they would like to in their daily lifestyles. Interestingly, this number was highest among those with household incomes of $75,000 or more. Even more telling is the fact that 72% of consumers in another NRA study said that they’d dine out more often if menu prices were lower during off-peak times. Menu prices that vary on different days of the week, or times during the day, therefore represent a tangible method of building consumer demand, driving traffic and lowering operational costs—creating a win-win for everyone.

Younger Consumers are Primed and the Technology to Implement Variable Menu Pricing Is in Place

In today’s world, consumers under the age of 44 generally expect restaurants to utilize some form of technology in their establishments. Video menu boards and tablet table menus are already being employed in a number of restaurants around the country. It wouldn’t be a major leap to have real-time menu prices on your websites and social media forums as well.

Despite the fact that yield management is a reasonably sophisticated science, advances in technology over that last 10 years have made it quite capable of handling the demands of a variable menu pricing system. Not only is it easy to alter menu prices by time of day, week or season, it’s also easy to alter those prices according to current market rates. These variable alterations can thus be utilized to meet the demands of both the consumer and the business. Therefore, they represent an opportunity to both fine-tune your restaurant’s operational system, as well as build incremental demand with your patrons.

3 Key Steps to Operational Excellence in the Restaurant

When you consider how much time you spend correcting or minimizing the repercussions of mistakes made in your restaurant, finding a way to guarantee that processes can be run correctly 100% of the time is appealing indeed. Just think what it would do for your business in terms of profitability, reduced cost and hassle, repeat business and customer delight if your patrons could expect to get the same high quality product or service every single time they visit.

The value of operational excellence, or providing the product or service right every time, cannot be underestimated. Same-store sales increase over businesses whose operational excellence is merely average. Even better, increases in operational excellence can often be achieved with little or no capital or ongoing investment, which makes striving for it a no-brainer. Here are three key steps you can employ in your restaurant to achieve the best standard of operational excellence possible.

Design for Quality in Your Restaurant Processes from the Start

The first and most important factor in improving operational excellence is to ensure that the products and services you create delight your customers. This may seem obvious, but all too often businesses start tweaking their procedures for efficiency without taking the time to ensure that those processes first meet customer requirements. Without ensuring that what you are offering is above and beyond a customer’s expectation, you risk too many “me-too” products which do nothing to set your brand apart from the crowd and appeal to your customer base. Once you’re sure you know how to delight your customers, designing quality into your processes is the next step.

The most significant difference between ordinary restaurants and high performers is that quality is designed into their processes from the get-go. These restaurants strive for implementing processes that create 100% success, every single time. For example, if you design a recipe and its instructions for excellence, the final product should always have the same great taste, regardless of who is in the back of the house.

Strive for the Perfect Process in Your Restaurant’s Procedures

Once you’ve designed your process for excellence, it’s time to run pilot tests and refine the procedures based on the results of that data. Test the procedure against multiple equipment configurations, a full range of employees’ and customers’ demands, to ensure that the process is as close to perfect as possible. Once you’ve got a process that can be replicated perfectly every time, document the steps in detail and develop your training materials.

Replicate and Refine the Restaurant Processes that Near Perfection

If your data shows that the process can be operated properly 100% of the time and is an improvement over an existing process, it’s time to mandate implementation throughout your organization. Standardization in the quality of products and services you offer is a critical factor to the overall success of your business. Effectiveness is always ahead of efficiency. Is it truly possible to make your processes so flawless that they can produce perfect products and services every time? Maybe not. But, if you focus on quality; carefully design your procedures so that they can be replicated as perfectly as possible, and have a goal of achieving outstanding operational excellence, you will get as close to perfect as possible.

How the New IRS Rules Regarding Group Gratuities Could Impact Restaurants

For years it has been common practice for restaurants to add a fixed gratuity to parties of five or more. As of the beginning of this year, however, how restaurants handle tips for large parties is going to have to change. The IRS came out with a new ruling this year that draws a more distinct division between what are considered tips and what are considered service charges. From here on out, it will no longer be legal to require a tip and still call it a tip. If it’s a mandatory fee, it is now called a service charge, which changes how restaurants can handle payouts for bonuses.

It used to be that cash tips generally went unreported, though both tips and wages are technically taxable. Those days are mostly gone now, what with credit cards and more stringent reporting and tracking requirements. This change in what constitutes service charges vs. tips comes on the heels of a larger effort by the IRS to crack down on tip reporting in general, though many feel that this added ruling isn’t going to turn up much in terms of unreported income.

What Restaurants Can Call Tips Versus What Can Be Called Service Charges 

In order for something to be considered a tip, it must be voluntary. The customer has to decide who gets the money. It must also be for an amount entirely set by the customer, not dictated by a company policy. If it is a mandatory fee such as a fixed gratuity, it is considered a service charge, not a tip, and therefore must be processed through payroll rather than being paid out to the server that day.

The Biggest Effects of the New IRS Ruling on Restaurant Operations

The biggest effect of the new IRS ruling is that it will complicate payroll accounting. Larger restaurants may already have the infrastructure to deal with the additional accounting, but smaller establishments may not. Employees who are used to cashing out their tips each day will also be affected, since they will now have to wait until payday to get their bonuses for the larger tables they served.

Some restaurants will deal with the additional accounting and maintain their fixed gratuity policy. Others will do away with a fixed gratuity entirely in favor of a gentle reminder encouraging patrons to tip by putting a “suggested amount” for the tip on the receipt instead.

How Restaurant Operators Should Handle the Policy Change

The best thing you can do to handle this new IRS ruling is to simply talk to your employees. Let them know about the details of the new rule and that it’s coming from the government, not you. Ask for their feedback about what might be the best way to handle gratuities for large parties, now that fixed gratuities are no longer allowed to be considered tips. The choices are to either keep letting servers take home large party tips that same night (but let them risk getting under-tipped), or to keep the fixed gratuity as a service charge that then doesn’t allow employees to take home the bonuses until their next paychecks. Talk over the options with your staff and see how they feel about both choices before making a decision.