Here’s how much prices have to increase before consumers react

New data shows that traffic plunges when price increases get too aggressive, to the point of negating any revenue benefits.
restaurant prices
Overly-aggressive price increases can indeed turn customers away, according to new data. / Photograph: Shutterstock.

Operators have been increasing their prices at historically aggressive rates for the past year. But what’s the level at which consumers break and stop going?

At least one firm believes it has an answer. A study by the consulting firm Revenue Management Solutions found that, unsurprisingly, traffic declines as price increases grow. But it also found that there is a “breaking point” at which that traffic falls precipitously. That point is about 10% to 13%.

“When price increases went beyond 10% to 13%, traffic started to severely decline, negating some or all of the net sales benefits,” Scott Foxworth, director of consulting services at RMS, said in a statement.

RMS, which works with major fast-food chains, analyzed in-store price increases in the second quarter for 25,000 locations to find the consumer breaking point.

Restaurants have been raising prices more aggressively in recent months to offset rising food and labor costs. Full-service prices rose 9% year-over-year in August, according to the most recent federal data, while limited-service prices rose 7.2%.

Most locations in the RMS analysis kept price increases to 9% to 10%, suggesting they understand the impact on traffic.

And indeed, there are growing indications of consumer concern about prices. According to RMS, 45% of consumers said they are eating out less and a rising percentage of consumers say they are ordering less expensive items or choosing less expensive restaurants.

More than two-thirds of consumers in a survey last quarter said that restaurant prices are either “higher” or “much higher.” That percentage was 47% in the same period a year ago.

That said, 78% of consumers say grocery prices are higher or much higher, up from 61% a year ago. Yet that’s also down from 83% who said that in the first quarter.

The results highlight the concern operators face going forward at a time when prices for food and labor remain historically high. As consumers grow more concerned about higher prices, they are increasingly changing their behavior and are turning back from overly aggressive price hikes.

And while customers appear to be more tolerant of price increases these days than they have been historically, there is still a point at which they will turn away.

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