At Famous Dave’s barbecue restaurants, a plate of Southside rib tips will run you $13.49. Does that sound in the ballpark for a full pound of tips, hickory-smoked and fire-grilled with a Memphis-style dry rub (plus two sides)? What if it were $13.89? Would that send you to a pulled pork sandwich? Or what if it were $12.99? Would you splurge on the tips more often?
For one-off restaurant groups and mom-and-pop restaurants, pricing is as simple as building in a desired profit to food costs, which hopefully aren’t more than 35 percent, plus labor, rent, and G&A. But in the world of multi-unit chain dining, pricing isn’t a rough art, it’s an opaque science.
So when Minnetonka-based Famous Dave’s saw growing sales but slipping margins, new CEO John Gilbert decided to get granular with pricing, hoping to boost margins by at least 1 percent. Rather than adding a nickel or dime to each menu item, he hired Tampa, Florida–based Revenue Management Solutions (RMS) to tell his team what each price should be at each of its 53 company-owned locations.
“The math of the exercise is just too substantial for any restaurant company to execute,” explains Gilbert. RMS, he explains, uploads two years’ worth of Famous Dave’s store-by-store pricing and sales data, and using proprietary algorithms, generates an optimal price for each menu item on a store-by-store basis.
“They’re all Cornell graduate mathematicians,” Gilbert says. “It’s an intense process. It will take hours of my team’s time and hours of theirs. It’s very high-touch.”
Gilbert says he used RMS when he was in management at T.G.I.Friday’s. He recalls an RMS recommendation to raise iced tea prices to match soft drink prices. “We were already making more margin on tea, but they understood there would not be customer resistance.”
In the end, Gilbert says Famous Dave’s will cut some prices, raise some others, but overall, consumers will pay less than they would have had the company nickel-and-dimed the menus. “You end up taking lower price increases and seeing increased customer counts and gross margin. It’s pretty foolproof.”