As a CEO of several chains, I have relied on this simple equation for years to frame and guide operational and pricing strategy:

V=E/P

V is value, E is experience and P is price.

In other words, if you want to raise your customer's value perception, you must either improve the experience and/or lower the price. Since lowering the price is difficult and almost always a fool’s errand, the best way to do it is to enhance the experience and maintain price or minimize their increases.

Easy, right? Actually, it’s far from it.

I know of only one example where overt price decreases achieved the goal of value improvement. In 1990, John Martin was CEO of Taco Bell, at the time a brand with declining comp sales. His strategy was to lower prices in a profound manner, sometimes by as much as 50%.

The result? An increase in traffic so great that it outweighed the decline in per person spend and thus he also improved profits. Of course, what is lesser known is that he promoted the hell out of the 59 cent taco and reduced labor dramatically by automating or centralizing production.

The more conventional (and historically more successful) way is to work on the experience. That includes all of the traditional elements: the food, the service and the ambience. But it also includes the public’s brand perception through marketing/promotion and conceptual cues like valet parking, tablecloths and so on.

At the risk of stating the obvious, managing the experience is really what the business is all about. Doing it improperly can and almost always will result in disaster.

As a young executive at the upscale seafood restaurant chain Rusty Pelican, I watched as senior management made “deals” with themselves on conceptual elements.

We served a 10 ounce cut of swordfish, then the most expensive item on the menu. The decision was made to take it to 9 ounces with the price remaining the same. The same happened with other fish cuts going from 9 to 8 ounces. Extrapolated to the entire 35 restaurants in the group, the savings was substantial. Fresh flowers were seen as “unnecessary” and they were soon eliminated, saving $50,000 annually.

The end result? A year of feeling good but with declines in same store sales.

The lesson here is that it is better to work on improving the experience through creativity in menu, attention to ongoing training, strict service standards and physical plant upgrades and refreshes - rather than chipping away at the customer experience, without providing alternative enhancements, for cost-saving purposes.

The last four years have caused a near paradigm shift in restaurant pricing. The confluence of supply chain disruption, inflation and labor cost increases has caused prices to spike much more than is acknowledged throughout the industry. According to Nation’s Restaurant News, restaurant prices have increased 23% since 2020.

Restaurant companies (particularly public ones) have been lying about price increases for as long as I can remember. I have discussed how in a previous blog post.

The problem with these price increases is that the vast majority of customers cannot afford them because their real wage growth has not kept pace. The Covid checks with all that free money postponed the eventual reckoning but we are now at the inflection point.

A customer will say, "I am not going out to dinner five nights a month- I am going to go four times." That’s not a huge change to their lifestyle but it’s a catastrophic 20% decrease in sales to a restaurant.

The shakeout is already ongoing and the high visibility bankruptcies are proof. This is hitting the fast feeders the hardest but it has worked its way well into the other segments, even fine dining where there is a higher than previously believed dependence on “aspirationals.”