California’s emerging minimum wage presents demanding situations and opportunities for fast-food operators.
I recently read Danny Klein’s QSR article about a recent Simon-Kucher study on the impact of the new California minimum wage law on consumers. As usual (ha!), it got me thinking about revenue management.
California’s upcoming $20-an-hour minimum wage increase poses a significant challenge for quick-service restaurants. While it is worker-friendly, it has a very broad effect on the operating costs, especially the constant costs, of restaurants. Methods from an MD attitude to expedited care facilities cope with this increased cost.
Understanding Fixed, Variable, and Marginal Costs in MR
One thing here is the difference between constant costs, variable costs, and marginal costs.
Fixed prices remain constant regardless of a company’s output. In the context of emerging wages, constant prices, such as rent or rent payments, are not affected, but labor prices, considered semi-constant, will rise.
Variable prices are prices that vary depending on the point of production, such as food materials (you’ll possibly get a reduction in quantity to buy more) and the prices of hard work (you’ll possibly want to get a cook up the line when the volume of consumers exceeds a safe point). With the upcoming wage increase, hard work prices, which account for a significant portion of variable prices, will rise, impacting overall operating expenses.
Marginal prices constitute the charge for serving another customer. In restaurants, the marginal charge is only the food charge.
With profit management, any and all amounts above the marginal charge can be used to offset the higher constant charge. With the constant prices of California restaurants affected by this law set to increase, the question arises as to how to manage this situation.
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Research indicates customers accept price increases when they understand the reasons behind them. The Simon-Kucher study that Danny Klein discussed in his article, highlights this, showing most Californians are aware of the minimum wage law changes and the majority support them, expecting some cost pass-through in prices. Yet, significant hikes may backfire, as consumers may reduce their spending or seek alternatives. This is where ‘mental accounting’ plays a role, as consumers have budget thresholds that, if crossed, can lead to negative reactions. Restaurants need to consider these behaviors when adjusting prices.
And now?
With the law going into effect in April, it’s time to put an end to the gnashing of teeth and chest beating. Yes, the eating places don’t like it and have worked hard to block the law, but it’s happening. For this reason, it is imperative for the restaurant to develop a profitability strategy.
Essentially, there are two simultaneous approaches that can be taken here: operations and marketing. Given the post-Covid shortage of hard work, max quick-service restaurants have already set out to optimize their operations, but they may go much further. It’s not about streamlining operations, but also about taking advantage of generation in the right positions and careful work planning.
Let’s move on to the marketing side. Given Simon-Kucher’s study and previous studies on consumer behavior, what are the ways to mitigate the demanding situations related to this accumulation of constant costs?
Clear communication on equity: It’s critical to make quick installations worth scaling up due to emerging costs. Clients tend to settle for such extensions when informed of valid reasons, such as significant adjustments in wage legislation. But, as mentioned above, a 30% worth accumulating can lead to negative reactions from customers.
Measured use of promotions: Carefully planned and targeted promotions can keep consumers engaged without reducing the perceived price of offers. Overpromotion can cause consumers to expect lower prices, which can hurt profitability.
Tailor-made loyalty initiatives: Loyalty systems will be designed in particular to cater to the maximum price-sensitive visitors, fostering visitor loyalty while maintaining a relationship-based marketing approach.
Pricing based on the local economy: Adjusting costs to reflect local economic situations can optimize profits and ensure that prices are tailored to demographics and region.
Strategic discounting: Discounts deserve to be conscientiously calculated to attract consumers in less busy periods, using knowledge analysis to determine the optimal balance between attracting consumers and preserving rates at peak times. Dynamic pricing corporations such as Revenue Management Solutions, Sauce, Juicer. , Extropy360, and DynamEat can help restaurants calculate the amount of this discount.
Menu Diversity in Pricing: A varied menu that considers customer budgeting behaviors can accommodate those looking for more affordable options while also catering to those willing to spend more. A range of menu entrée prices can give customers the option to choose a more affordable meal and stay at your chain, even with price increases.
Profit-oriented menu engineering: Focusing on parts with a higher profit margin and less labor can help maintain profitability when operating prices increase, such as minimum wage increases.
California’s emerging minimum wage presents demanding situations and opportunities for fast-food operators. By adopting a multi-technique that includes strategic pricing, effective communication, operational efficiency, and visitor engagement, restaurants can adapt to those changes. With customer perceptions of fairness and generation leverage are key to balancing emerging operating prices with earnings expansion strategies, ensuring long-term sustainability and profitability.
Sherri Kimes is Professor Emerita at Cornell School of Hospitality, specializing in pricing and profit control. With more than 25 years of active involvement in teaching, research, and consulting on restaurant profit control, he is passionate about helping restaurants increase their profitability. For those interested in delving deeper into the world of price and profit control, Sherri invites you to sign up for LinkedIn, where she offers more information and methods through her Revenue Mosaic newsletter. She can be reached at sk@sherrikimes. com.
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