What are Menu Costs?

Menu costs are the expenses that a business incurs when making changes to the pricing for the goods and services offered for sale by the firm. Costs of this type may include the need to rework and print new hard copy sales material, update web site information, or even change price tags on products already on the shelves. Typically, businesses look closely at menu costs before making this type of permanent change, especially if there is some potential for adversely affecting the current balance between supply and demand for the products.

One of the easiest ways to understand the concept of menu costs is to consider a local restaurant that has determined there is a need to adjust the pricing for each of the appetizers and entrees that are routinely served to customers. The first expense associated with the endeavor is the time spent determining the pricing on each of the items included on the menu. This includes attempting to determine which prices can be increased without creating additional apprehension on the part of customers, motivating them to take their business elsewhere. From there, it is necessary to print new menus for use in the restaurant. If the business advertises online or in local publications, there may be a need to update those ads, a task that means additional investments of time and money.

As many companies know, changing rates or pricing can be risky, especially if the adjustment is upward rather than downward. This sometimes leads to what is known as price stickiness, or reluctance on the part of a firm to raise prices, even if operational costs have increased and profit margins are down. At the same time, companies may find themselves having to incur menu costs as they lower prices in order to remain competitive within the marketplace. The fact that higher prices could cause some customers to abandon the company and turn to the competition plays a major role in the decision to increase or decrease pricing, or to simply leave the current price structure in place.

Businesses of all types have to deal with menu costs from time to time. Shifts in consumer tastes, competition from new firms, and even changes in the state of the general economy may render the older pricing structure no longer viable in the current market situation. When and as the need for change takes place, businesses must consider menu costs carefully, and go with new pricing that is likely to benefit the business without creating undue distress among consumers.