Restaurant Happy Hour Pricing: How to Improve Profit Margins

by Ryan Biesecker, Senior Consultant

Restaurants and bars already operate on razor-thin margins in a highly competitive industry. In order to survive, operators need to execute discounting tactics such as a happy hour thoughtfully.

Restaurants all over the world have offered discounted pricing on alcoholic beverages, and sometimes food, before dinner since at least the 1920’s. Today, a good happy hour pricing strategy will drive customers to bars and restaurants. The premise is simple: offer discounted prices at a quiet hour to attract customers. Just because the practice is common and straightforward, however, doesn’t make it universally profitable.

Here's How Restaurants and Bars Can Execute Profitable Happy Hours:

1. Identify Low Volume Days and Hours That Need Additional Demand

In order to set a happy hour, restaurant operators need to first identify when it should be offered. A common period is between 5 – 6 p.m., but that doesn’t make it right for every bar and restaurant. A good happy hour pricing strategy is timed right for the location it’s offered in. Use the following tips to determine the “right” time is for a happy hour.

How to Measure Demand

Operators should gather date, time, and revenue of transactions from their POS system. Then, organize these transactions by the day of week and time of day. Some period of time should stand out as lower demand than others: these will be the best times for the operator to discount prices. Don’t forget to measure the average checks during these periods before choosing a time to discount. If many customers are already paying full price, discounts may hurt more than help.

If a happy hour is offered during busy hours, the restaurant may overflow with demand that operations can’t handle. Additionally, a happy hour during already busy times will likely dilute the profitability of those who would have come anyways.

Determine Length of the Happy Hour

With knowledge of the restaurant’s low-volume periods, operators should decide how long to run the offer. Contrary to its namesake, a happy hour should be exactly as long as it needs to be. If the location needs volume boosted for three hours leading up to dinner, so be it. Be careful not to offer for too long, however, as extended discounts can reset price expectations.

Considerations Vary by Location

Operators should also consider competition and environment when determining happy hour timing, and whether the restaurant needs one at all.

Competition can be healthy or harmful in this instance. A taco shop and a neighboring bar can partner up to offer a happy hour at the same time: one offers discounted food and the other offers discounted drinks, attracting customers to both businesses simultaneously. On the other hand, if multiple restaurants offer a similar happy hour within a few blocks of each other, their offers will directly compete, forcing customers to choose.

Consider the location’s surrounding environment as well. Is the restaurant in a banking district where employees get off work at 5p.m. sharp? Or is it in a neighborhood where families can walk to get a bite in the afternoon? For instance, take a restaurant located near a factory where workers are covering three shifts. That unusual labor market might create demand from 11PM-Midnight when the second shift is getting off work. Restaurant owners should rely on data and local knowledge to identify these areas by location.

Finally, operators should weigh the impact of not offering a happy hour at all. If a restaurant has lines out the door at all operating hours, discounting food and drinks is more likely to harm margins than help.

2. Assess Which Food and Drink Offerings to Discount and by How Much

Menu engineering is the best method to identify happy hour menu pricing decisions. See the article by Stephen Davis, Integrated Insight’s VP of Pricing and Revenue Services, for detailed menu engineering instructions.

Menu Engineering Matrix

Once the menu items are categorized as Stars, Work Horses, Puzzles, or Dogs, choose a diverse set of beverages that are mostly Puzzles. As a reminder, Puzzles are highly profitable but with low volume. The high profitability leaves room for these alcoholic beverages to be discounted and remain profitable for the restaurant. However, the offer might not be enticing to a large enough crowd if only disparate drinks are thrown on a happy hour menu. Don’t be afraid to bolster the menu with one or two Stars (popular items with high profitability) at less of a discount.

Not all locations need to offer discounted food during a happy hour. Cheap drinks may be enough to get customers in the door. Start by only offering discounted drinks, then add appetizers and other sharables if more volume is needed or checks are too small. Be sure to assess the food items’ menu engineering category as well and follow the same practice as with beverages for a strong happy hour pricing strategy.

3. Communicate the Offer to Customers to Bring Them In

A happy hour special will dilute profit margins if a restaurant offers discounted prices without messaging. Communicate the new happy hour outside the restaurant to pull in the volume needed. This response to discounted prices will need to come from existing customers visiting frequently and at quieter hours and from attracting new customers.

There are opportunities to market the happy hour offer to in-house customers without disparaging the value of full price menu items.  Servers can message the offer when delivering the signed receipt with a warming, “come back next week for happy hour!” Additional opportunities include leveraging CRM to send follow-up texts or emails to restaurant guests with the happy hour promotion.

Outside of the restaurant, use organic online channels and word-of-mouth to attract new customers. Have employees encourage customers to bring their friends to generate word-of-mouth demand. Once launched, ask the occasional customer how they heard about the happy hour menu to better understand what works.

Wherever the communication is distributed, ensure the message is clear by sharing a takeaway detail beyond the name “happy hour.” For example, “$5 Draft Beers Every Tuesday!” states the price, product, frequency, and day of week in a memorable message that’s easy to memorize and fits on a receipt.

4. Evaluate the Happy Hour Regularly and Adjust As Needed

At the end of the day, the key to continued profitability is to ensure the happy hour pricing strategy performs as intended. Operators should set goals with several Key Performance Metrics (KPIs) and return to them on at least a monthly basis. While gross margin should be an ultimate metric for profitability, transactions/hour, revenue per hour, table turn time, total food cost, and operating expenses also play a key role.

Customers are often willing to share feedback as well, which can inform discounting decisions. Listen to their thoughts but be sure to take them with a grain of salt. For example, a regular might say there aren’t enough discounts, but return to purchase discounted items week after week. On the other hand, if customers complain their favorite item isn’t discounted for happy hour and food sales are low during that time, consider meeting them halfway.

Be prepared to pivot tactics as needed but be careful not to change too drastically or too often. Maintaining a strong value message with customers is key, and customers will be unwilling to keep up if the days, hours, and offers all change frequently.

Supporting Your New Happy Hour Strategy

Consider other operational support needed to support the new happy hour. Maintain staffing and inventory to handle higher volumes. The last thing a restaurant needs is to sell out of resources at a low price, leaving the full-paying customers with less options.

Identify the best happy hour times, choose profitable food and drinks to discount, message the offer, and measure performance. Restauranteurs can use these tools to confidently execute a happy hour strategy that works well for both them and their customers.

For more information on pricing strategy and how we partner with brands across the globe, please contact us at info@integratedinsight.com.

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