Minimum wage increases - Don't just raise prices to offset
When I analyze changes to my business I always consider the same three things. Does this benefit my customers?, Does this benefit my people? and Does this benefit the business model? This triangular thought process is an important one to remember. I use this as a mental checklist to decide what I implement and what I don't and how outside factors impact my business as a whole.
One big change coming in June 2020 is a minimum wage increase for service staff in the hospitality industry. Minimum wage increases have been putting pressure on margins in many industries especially the hospitality industry. As an owner or manager there are two common mistakes that are made: Arbitrarily raising pricing, or just crossing people off the schedule. To be honest, this is a lazy way to remedy this cost increase and can do irreversible damage to your business. Yes, this can keep your labor cost and margins flat temporarily but what does it do to your revenues and guest experience. Remember that labor should always be measured as a percentage of revenue not a dollar figure. This is a critical Key Performance Indicator (KPI).
The goal is to find the balance. You want to increase the spend per customer while keeping your value proposition flat or improving. Cutting back on the schedule is not even a consideration because it adversely affects both the spend per customer and the value proposition in a negative way. Don't get me wrong if there is a bad spend in labor then absolutely adjust but I am assuming that has already been done.
Let's look at the restaurant industry as an example of an industry that is dramatically impacted by minimum wage increases. A restaurants revenue is a pretty simple equation:
Average guest check x guest count.
Average guest check (AGC) is the amount of money each guest spends (on average) when they visit your restaurant, and guest count is the number of guests that come into your business. I visualize this equation like two side by side elevators, knowing that if the AGC elevator goes up there is a good chance my guest count elevator will go down. It's basic economics. If the AGC becomes too high, the guest count decreases based on another key factor, value proposition. Value proposition is the perceived value of the entire guest experience versus the price guests pay.
Now that we understand this, let's look into the example of just raising prices. What are your guests getting out of this? Is the experience better? Has the quality or standards improved or it is the same guest experience as before, just more expensive. Remember, value proposition is a perception, not a science, so measuring daily guest count numbers and comparing YOY is critical. Also, having guest satisfaction feedback on value proposition is essential.
Instead of just raising prices focus on raising the Average Guest Check through value added (ancillary) revenues. In the restaurant industry these are known as upsells or suggestive sells but very few people understand that these additional revenues are how you curb your labor challenges and maximize profitability.
Lets show a simple example. Lets say your labor target is 30% of your total revenue and your revenue is $10,000. That means your labor spend is $3000. Your labor spend is made up of an average wage rate times the number of hours work. Let's say for simplicity your average wage rate is $13.85 and will go up to $15.20. If you want your dollars spent to stay flat that would make your number of hours worked go from 216 hours to 197 hours or 19 hours need to be cut off the schedule. Let's remember our triangle. Does this help the business model ? Yes it does. Does it help our staff? No, they are now getting less hours and if the volume stays the same they are working harder. Does it benefit our customers? Probably not because the staff are more stretched and you could make the assumption that standards will not be as high.