Restaurants Struggling With Increasing Costs

As the price of gas and the prices of raw materials increased at a faster clip in the recent months, restaurants are struggling to make a profit without passing the higher costs through increases prices to their customers.  The price increases were more abrupt than gradual, and hence should be classified as the "Shock" in the economic terms. The price stickiness isn't just due to what economists describe as menu costs.

In economics, menu costs are the costs to firms of updating menus, price lists, brochures, and other materials when prices change in an economy. Because this transaction cost exists, firms sometimes do not change their prices when the economy puts pressure on it, leading to price stickiness.

Restaurants face declining customers due to slowing economy and concerns about the future. So they are unsure of how the price increases would affect sales.  Some restaurants are resorting to cost cutting through substitutions and downgrading ingredients.  Restaurants have another option than looking for lower quality ingredients that risk eroding their brand, unbundle their offerings and price them accordingly.  For instance,

1. Make the price reflect just the core offering
   
2. Identify the extras and list them separately
3. Price the service separate from the product

In the coming weeks I will discuss these options and operationalizing these in practice without alienating the customers.