When Raising Prices Is Good Business
Written by Liza Hughes
Jimmy Bannos Jr. is the owner of The Purple Pig, a Mediterranean-inspired restaurant on Chicago's Magnificent Mile whose menu offers lots of "cheese, swine and wine," among other things. He has a problem that a lot of restaurant owners would love to have—his restaurant is too popular.
Doors open at 11:30 in the morning, it stays jam-packed until closing, and customers have made it such a big hit that a four-hour wait to get a table is not unheard of. As problems go, it's not such a bad one to have, but Bannos, who just won the James Beard Foundation's Rising Star Chef of the Year Award for 2014, thinks it means it's time for the business to expand.
Entrepreneur Marcus Lemonis of CNBC's "The Profit" visited the restaurant in April. After examining the operation and doing some research on the local competition he advised Bannos against expanding, recommending the restaurateur to raise prices instead.
"The research that I did up and down Michigan Avenue is you're about $4 to $5 on average cheaper than anybody else," said Lemonis. He said that with hundreds of daily customers, a few subtle boosts to its prices would improve the eatery's bottom line and in all likelihood go completely unnoticed.
"This restaurant seats 500 to 900 people a night," he said. "They have an opportunity to raise (each) ticket by $1, they'll be able to generate an additional $20,000 to $25,000 a month in profit, $300,000 a year."
He gave some details on how to make it happen in the most seamless way possible.
"I'd like you to start by just reprinting your menus, and finding 50 cents to a dollar," Lemonis said. "Studying your margins for a month, and seeing if the supply-demand curve changes … if you can keep the same traction, and pick up an extra dollar."
Finally, he warned that a successful business can quickly become unsuccessful if it expands too soon.
"More chairs and more tables in a bigger space doesn't mean more profit," Lemonis said. "It sometimes means more loss, bigger expense. … Until you have your current business absolutely perfect, don't expand. It's a lot harder to run two than it is one. Get it right the first time."
A few weeks after the visit, Bannos implemented the price increase, and he could see immediately that the advice was right on target.
"It wasn't about raising the prices to make things overpriced, it was just a little bit just to keep up with what the rest of the market's doing," he said. "But we like staying a very affordable and value-orientated restaurant that serves the best product we possibly can."
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Source: CNBC