Beyond the usual questions about design, budget and contractors, you are most likely thinking about guest-related questions:
Will longtime guests like your new look and keep coming back? Will it attract new guests? Just as important, will guests pay higher menu prices, especially if you spruce-up everything?
The good news is that with proper planning and a deep understanding of guests, a remodel can help you fine-tune your image in a profitable way. And with smart menu pricings, you can offset costs of the work over time without hurting traffic.
Analysis has shown that guest price sensitivity generally decreases when guests are enjoying an updated restaurant environment.
Guests will place added value on a sleeker experience. When you improve the restaurant with an updated design and features such as flat-screen TVs, mobile charging stations, and Wi-Fi, guest experience is transformed. In turn, they will be more willing to pay for added benefits.
How much you choose to raise prices should depend on the extent of the redesign. Simply sprucing up the interior or painting the exterior may not support a significant increase in the pricing structure. However, a complete rebuild at the same location probably will. Also, consider that added efficiencies like an additional register or drive-thru lane will result in faster service, another way to boost profitability.
Here are some things to keep in mind to make sure your remodel is profitable in the long term:
- Determine your expectations for return-on-investment and revisit menu pricing before reopening. A remodel can be a big investment on many fronts. Before you start, it’s important to plan for recouping the expenditures and to be realistic about how long it may take. Also, as you estimate the Return-On-Investment (ROI), consider your lease terms, lost revenue (should you need to stop operating during the remodel), and whether partnership dollars will be available to cover some of the cost. The ROI analysis needs to include updated menu pricing in the equation. Menu price adjustments should be done while the remodel is underway, not after reopening.
- Be very aware of the “decay rate” when pricing. It is diminishing opportunity to raise prices because of a change in guest’s perception. The decay rate depends on location, brand and size of remodel, but this opportunity for significant menu price changes will generally decline every day after reopening. Guests are very smart shoppers and will notice. As already noted, the goal should be to have new menu prices set for your reopening. This is especially true if your house has been closed for a while, since most guests tend to forget previous menu prices.
- Use demographic and transactional information to reset menu prices. If you don’t have a deep understanding of guests, changing prices could be disastrous to profitability. First, it’s essential to have a clear understanding of guest demographics and income levels in your trade area. As you look at this, consider how close your competitors are to your location. Equally important, understand what guests are willing to pay for each item. An analysis of transactional data can reveal which menu items have low sensitivity to a price change, along with which items you should not change. This type of data-driven insight allows you to increase profit per transaction.
- A remodel creates a special opportunity for your business. You can attract guests who never considered your location before. You can also potentially bring back one-time visitors who didn’t feel the previous experience matched what they were looking for. To help win them over, consider training employees to match this new experience with exceptional service. The value of a visit is based on the entire experience — the aesthetics, the technology, and the service. If you increase the value of a visit, guests are more willing to pay a higher price, and they’ll come back.
- Do a remodel when the restaurant is doing well. The best time for a “refresh” is typically when you are doing well. An old saying goes: “Don’t wait until it’s raining to fix your umbrella.” So don’t wait until your location is in trouble. Rather, make needed improvements when it’s performing well. Nothing is as impactful to same-store sales as a properly done remodel. If your location is viable, you can attract and retain guests with a remodel, leading to same-store sales improvement over the long term. Assuming it’s done in a thoughtful way supported by data.
J Hal Hodgson is a nationally-recognized, award-winning advertising creative professional and noted restaurant consultant. He is membership chair of the Food & Beverage Assn. of San Diego. Email: JHal@marketingdeli.com
Some content credit to Bob Donofrio, SVP of consulting services for Revenue Management Solutions.