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Adding step-up items — and eliminating unprofitable ones — on the menu could help offset rising costs for restaurants.

4 alternatives to service charges

Mitigate cost pressures and avoid giving guests sticker shock with these tips

Justin Pridon is vice president of consulting services at Revenue Management Solutions. This article does not necessarily reflect the opinions of the editors or management of Nation’s Restaurant News.

Costs are rising for restaurant operators everywhere. The minimum wage is going up in many places. Commodity costs are always a worry. And for many prime locations, rental rates continue to climb.

What’s a restaurant owner to do? In some cities, especially on the West Coast, some restaurants are taking an extreme approach: experimenting with added service charges to offset costs.

Cost pressures on restaurant owners and operators are certainly intense, and many restaurants need to increase revenue as much as 5 percent to 6 percent this year just to keep profit margins intact.

But, here’s the million-dollar question: How can an operator compensate for these cost challenges without either raising menu prices or introducing a flat service fee? In short, how can you avoid giving your customers sticker shock?

Here’s what I think: A service charge should be your last resort, after all other alternatives have been considered. Instead, focus on promoting positive purchase behavior that will help increase your customer’s check size, and, in turn, your restaurant’s profitability. Here are some tips that can help:

  • Consider putting more step-up items on your menu. Let’s say you offer a popular Sauvignon Blanc for $7 a glass. Don’t go crazy with a $14 step-up option, but think about adding an option priced at $9. If the quality is great, customers might try it, without costing them an arm and a leg.
  • Spring-clean your menu by removing unprofitable items. You need to be ruthless in weeding out unprofitable menu items and understanding that transactional-level data is your ally. Be careful, though — sometimes, an unprofitable item is the main reason customers visit your restaurant, and encourages them to buy additional items. These items should be keepers.
  • Use promotions to test new items. Try out a new item and use the promotional period to gauge its impact on customer traffic and profitability. If it’s popular, but isn’t helping your bottom line, you may decide that it isn’t a good long-term fit for the menu.
  • Review operations holistically. Match your restaurant’s staffing with customer traffic. Train staff to upsell once customers are in your restaurant. And look through every aspect of your operation, from the lease to advertising, for opportunities to increase revenue and profitability.

As you decide what to do, don’t rush into changes. And as you implement changes, plan communication with customers carefully, so you are always upfront and transparent.

Times are tough for restaurant operators, and introducing service charges can be tempting. But before you resort to that move, which could be a complete turn-off to your customers, try some of these alternative tactics first to increase profitability without shocking guests.

Justin Pridon, vice president of consulting services at Revenue Management Solutions, has been with the company since 2008. Pridon and his team assist more than 20 large dining brands across North America to optimize their gross profits. His clients have combined annual revenue in excess of $100 million in sales.

TAGS: Finance
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