12th October, 2018
Turning a profit in hospitality is starting to be like knowing the secret ingredient on Masterchef, and staffing is one of the highest costs. Is the solution to raise your menu prices to compensate? Well, perhaps give it a go.
The cost of hiring and training people in the hospitality industry weighs heavily on the bottom line.
According to Restaurant and Catering Australia, 2016–17 wages and salaries made up a whopping 39.6 percent of total hospitality costs.
This was a 10.6 percent jump over three years. While a cut to Sunday penalty rates offers some relief for small businesses, the minimum wage has also increased.
At the same time, competition in the café and restaurant space is cutthroat. One of the natural reactions to competition is to compete on price too.
But let’s look at the consequences.
First is the closure of hospitality chains such as Max Brenner in Australia, while their overseas operations are humming along nicely.
The second one is more troubling.
Some hospitality owners have tried to cut corners on staffing costs by simply underpaying their workers.
The hospitality sector accounts for the most complaints that the Fair Work Ombudsman receives about underpayment.
A simple solution would be to raise prices to balance a rise in staffing costs – a route too few businesses want to travel.
They fear that by raising prices, punters will choke on their lattes and go to the café down the road. But what motivates a customer to go to a particular café goes way beyond a price point.
According to consumer behaviour expert at Deakin University, Dr Paul Harrison, what motivates a customer is much more than a price point.
“The mistake people make is assuming price point is the be all and end all – it would be if humans were rational beings. But we’re not,” he told The Pulse.
“Retailers only really see one or two things that they think are influencing behaviour, but we’re a very complicated mix of life stores, decisions and priorities.
“We forget that customers are complicated. They’re willing to trade things off for other things.”
For example, somebody is happy to pay $10 for a cup of coffee in a bar in Venice. That’s a perfectly acceptable decision, but it’s literally crushed beans and hot water in a cup.
Now there’s the green factor. In recent years people’s purchasing decisions take in ethical considerations.
For example, a person may think twice about buying a cheap T-shirt if they think it was made using sweatshop labour.
Underpayment of workers is a hot topic in the news so people are talking about the price pressures on business owners. Does this mean there’s a case to be made that raising prices to cover increased staffing costs could work?
While Dr Harrison says ethical considerations influence buying decisions, they’re only part of a broader set of things consumers weigh up.
“Ethics fit into a whole other set of purchasing considerations – like its convenience, price range. People adapt their price range the more they learn about products,” he said.
It’s about figuring out why people come to you for coffee in the first place.
Instead of whacking out a clipboard and a questionnaire, Dr Harrison said the key to gathering data was to simply have a conversation with some of your frequent customers.
“It’s about having good conversations with people, and playing it out over time. So not ‘we’re doing a survey today’,” he said.
So, you may figure out that your customers are ethically led if they bring Keep Cups to get their coffee or they ask you about the material your takeaway cups are made of.
If you decide to raise prices as it would be palatable to your customers and it wouldn’t lose you business, how do you communicate the price rise?
The first step to know if raising prices is a good idea is to discover if your customers are price-led.
“If they’re coming to you because your coffee is really cheap, then raising prices is definitely a bad idea,” said Dr Harrison.
He advised there was no hard-and-fast rule around whether you should build more margin into low-cost options like a cup of coffee, or higher-cost options like a cooked breakfast with all the sides. But there is a caveat.
“It’s about looking around to look at the range of pricing in the market,” he said.
“People know that a plate of smashed avo will cost 18 or 20 dollars, so if you see one for 28 dollars that’s immediately going to trigger people.”
Once you’ve figured out if you want to raise prices, and what items you want to raise prices on – it becomes about good communication.
“With loyal customers, it’s a good idea to communicate why prices are going up. It’s important to have an honest conversation with your customers – and because you’re a small business, you’re not some faceless entity raising prices. You get a little bit more slack,” said Dr Harrison.
“But if you try to hide the price rise or just don’t explain it, that’s when people get resentful.”
Above all, Dr Harrison said hospitality owners would be well-advised to simply give it a go and see what happens.
“Think about it, but don’t worry about it too much.” said Harrison.
“If you’re providing a good overall product, then people are willing to absorb price increases. Your customers, if you’re good to them, will be good to you and they’ll understand it.”