When it comes to raising prices, most pizzeria operators prefer to raise them very slowly while trying to match their prices closely to their nearest competitors’. So, if their competitors do not raise prices, they don’t raise prices. Unfortunately, that means everyone is waiting for someone else to raise his prices. This approach has left all of us in a position where $10 is still the going price for a pizza—the same amount pizzerias charged when I was in college, which is longer ago than I care to admit! Pizzeria operators have been left in the dust in terms of demanding a fair price for their product as compared to other food options. After all, the value proposition of pizza is higher than most, much higher than even that of fast-food purveyors like McDonald’s.
Now we are all faced with a huge problem. Cheese, pork and beef prices are soaring. Employee wages are on the rise. Fuel costs are out of control. Suddenly, the decision to raise prices isn’t arbitrary—it’s mandatory for survival. So what’s holding you back from making this decision? One word: Fear. Fear that customers will get angry, or worse yet, stop coming to your restaurant. How can we overcome this fear and surmount the objections of those few customers who will actually notice a price increase? I think it starts with understanding how money and value work.
Creating Value Perception
We all need money, yet money is a silly concept. Most people, including business owners, don’t really understand money or how it works. Money isn’t real. Money isn’t worth anything by itself. Money is just a perception. It’s nothing more than buying power. Let’s say I offer to trade you my $20 bill for your large pizza. Since I had to work for that $20 bill, my perception of value is based on what I did to earn it, along with my preconceived notions as to what your large pizza is worth versus other pizzas I could buy instead. As long as I believe that your pizza is worth $20 of my labor and that the perceived value of your pizza matches the $20 you’re charging, I will happily buy it. However, if either of those two criteria is not met, I will probably go somewhere else. (This is known as price elasticity.)
Customers make their buying decisions based on perceived value. The greater the perceived value, the more they will pay for it. So, when it’s time to think about raising your prices, you must first ask yourself this question: How much perceived value does your pizza carry? Have you spent your marketing dollars building up that value perception or tearing it down? And remember, value is not the same thing as price. How you create this value perception in your customer’s mind is called brand positioning. You can position your brand as the high-quality, high-price brand or as the low-quality, low-price brand. Or you can position it somewhere in between. The problem is, “somewhere in between” is often where pizzeria owners get into major trouble. They aim to provide high quality at low prices. They compete on price at all times, attempting to matchmajor players like Pizza Hut and Papa John’s. Yet these operators use much better ingredients and make the best pizza they can make, all while still charging a price comparable to that Papa John’s down the street. So what happens? They end up getting crushed underneath the weight of their big-chain competitor’s massive marketing budget. Fortunately, there are better ways to compete and win!
Brand position is the key factor in your ability to raise prices. Position yourself as a premium brand, and you can raise your prices without worry. Position yourself as a discount brand or as an in-between, and you’ll have more trouble.
Positioning Your Brand
Big Dave Ostrander once told me, “You can make money being the high-quality, high-cost competitor, and you can make money being the low-cost, low-quality competitor, but you will go out of business trying to be the high-quality, low-cost competitor.” These words have never rung truer than in today’s highly competitive, price-conscious pizza culture. On a daily basis, customers get bombarded with TV ads telling them how much a pizza should cost. Mass media advertising trains them to look for deals, coupons and bargains. As a small pizzeria operator with bills and wages and rent to pay, how do you overcome this mindset? By positioning your brand as the high-quality, high-value pizza restaurant.
How you have positioned your brand in the past will determine your specific price elasticity. Have you consistently promoted your brand as the high-quality provider? Have you ensured that your special offers and coupons conform with and maintain that brand position in the consumer’s mind? Or have you confused your customers about your brand, leaving them unsure of the difference between your pizza and that of the competition? Brand position is the key factor in your ability to raise prices. Position yourself as a premium brand, and you can raise your prices without worry. Position yourself as a discount brand or as an in-between, and you will have a lot more trouble with a price increase.
I have always tried to position my company, Medina, Ohio-based Romeo’s Pizza (romeospizza.com), as a high-quality competitor. We don’t just use better ingredients—we use the best ones: real cheese, fresh-packed tomato sauce, fresh-made dough in every store, high-quality meat toppings, and fresh-cut veggies. These are all standard for our restaurants, and I charge appropriately. I do offer coupons and specials through different advertising mediums, but they never undercut the brand message that I intend to deliver, which is quality. Usually, our offers consist of family packs or multi-item promotions.
And here’s the best part: We just recently enacted a price increase, yet we saw very little reaction from our customers. Most people didn’t even notice! We may have to increase our prices again in the near future, and we expect the same reaction—or, rather, lack of reaction. Most of our customers order from us because of our perceived value, the customer experience we give, and the taste of our pizza—not because of our prices. As long as we deliver on that value promise, those customers will continue to order from us and pay more for our product.
The Time Is Now
So when is the right time to raise prices? Right now! As our costs increase, the pressure on our margins gets tighter and tighter. As a result, the level of your service will often take a hit. You will staff your pizzeria with fewer employees; your delivery times will slow down, and you’ll start to wear yourself and your staff out, which leads to bad customer service. Once margins start contracting, you may begin to consider lowering the quality of your pizza. You think about cutting back on advertising, and you may even try to reduce your hours. Yet you can solve all of these problems by simply raising your prices!
As long as you think through your price increases carefully, chances are that no one will even notice the change. Right before a new menu comes out, I have spent many a sleepless night worrying about the price increase and how customers will react. But the reality is, hardly anybody even notices. For the few customers that did notice and asked about the change, we simply explained that, due to the rising cost of commodities, we were forced to raise our prices so that we could maintain our quality and service. I would always rather defend my prices than have to apologize for my quality!
You can also justify raising prices when the minimum wage goes up in your city or state or if the news channels are covering rising food costs at grocery stores. Most people understand this, and it can make the price increase less impactful. Moreover, I believe you should set an annual date on which you raise some of your items’ prices every year to account for normal inflation.
Some pizza operators wait until they run out of menus before boosting their prices. But look at the opportunity cost of maintaining your current prices versus printing a new set of menus. In today’s volatile commodity world, I recommend keeping your printed menus to a minimum and simply print them more often to avoid this dilemma. Digital menus and online menus, which can be easily changed at little or no cost, are another great way to save money.
How to Raise Prices
So once you’ve decided to raise your prices, how should you go about it? Some businesses like to raise prices slowly or in multiple steps, while others opt to raise prices all at once. There really is no “right” answer. It all comes down to your pizza’s perceived value. You could start out by asking your customers. If your pizzeria has a Facebook account or email database, create a poll and ask your customers to list their top three reasons for ordering from your restaurant. If the majority lists price as No. 1 or No. 2, you’ll want to raise your prices gradually over a couple of months. If price is lower on the list, one larger price increase may be the way to go.
This poll will also help you better understand exactly where your restaurant is positioned in the minds of your customers. If they say price is an important factor, you need to work on building your brand position more around quality and less on price. All of your marketing materials and messages should place an emphasis on quality, and this brand statement of quality should reach beyond your food. It should encompass your entire brand image, from uniforms to menus, from signage to advertising. Every aspect of your pizzeria must convey the same message of quality, or else the consumer will get confused as to what your brand stands for.
Once you have decided to raise prices, I believe that all of your prices should be uniform. If you add .99 to many item prices, then use that .99 figure throughout your menu. If you don’t use the .99 number, raise your prices so that you can capture those extra cents on every item. Imagine getting an extra nine cents on every order merely by ending the price in .99 instead of .90. If you average 500 orders per week, that’s an extra $45 dollars a week, or $2,340 per year of pure profit. And most customers wouldn’t even notice the change. That’s a nice seven-day vacation somewhere warm and sunny—be sure to send me a postcard!
Controlling Food Costs
If your pizzeria is positioned as the low-cost provider and that’s the way it has to be, there may be some alternatives to raising prices. You can start by using scales to control your portions on every menu item. If you are free-throwing cheese—or any topping, for that matter—you could be losing hundreds of dollars per week. With profitability in mind, determine the exact portions for every ingredient on every pizza, make that the standard amount and weigh out every pizza on a high-quality scale. Additionally, perform a cost-price analysis of every item on your menu. You may find that you’re selling items that don’t make much money, or worse yet, that you’re actually losing money on them!
Ultimately, don’t be afraid to raise your prices. If you provide a high-quality, high-value experience for your customers, you should be proud of it. Position your brand accordingly so that customers will recognize that your pizza is worth the extra money. Your customers demand high levels of quality and service. Give them what they want, charge what it’s worth and don’t be afraid of negative feedback. If you get any complaints, you can easily justify your prices because you have successfully positioned your brand and established its value!