Diner Misperception— Why The Price We Expect Our Food To Cost Is Wrong And Why It’s Ruining The Restaurant Industry

Image credit: Katarzyna Grabowska

“In determining how he will behave, an actor must try to predict how others will act and how their actions will affect his values. The actor must therefore develop an image of others and their intentions. This image may, however, turn out to be an inaccurate one; the actor may, for a number of reasons, misperceive both others’ actions and their intentions.”

— Robert Jervis, Hypotheses on Misperception

One of the tricky parts of growing older is your perception of the world around you. You start to develop a timeline, and as such, you begin to look back at how things used to be. We all do it, and it’s the slogan for anyone who’s ever uttered this phrase:

“In my day X cost this much…”

Once upon a time, a loaf of bread cost 10 cents, a bag of chips was 85 cents, and so forth. Inflation and economic growth globally has left some struggling with the notion that what was once the price of said good is no longer the case. It’s a bitch of a scenario to deal with for anyone who’s part of this world. “Everything costs more and I’m having a hard time dealing with it.”

This reality has dawned on many in the restaurant industry who’ve tried to keep up. When you’ve been selling hamburgers at your restaurant for $12.00 for the past 2 years and now face the prospect of a new reality dictating that unless you charge $14.00 this summer you’ll lose money, you’re forced to ask yourself a few tricky questions: How do I stay competitive if I’m to all of a sudden up my price so abruptly? Will my competitors do the same? If they don’t, how do I compete?

In my opinion, you can’t. This is why the restaurant industry has a perception problem.

If a restaurant’s cost of selling hamburgers goes up $2.00 in a short time frame, say within 2 months, they’re oftentimes left holding the bag on this price increase. Why? To remain competitive a restaurant is forced to compete with thousands of other establishments, all of which are at the mercy of us — the consumer. We will always stop for the best deal. It’s why fast food still looms large over the food industry — it’s cheap.

The misperception we consumers possess is this laughable idea that what you paid for a hamburger 10 years ago is what you should pay now. It’s why we all complain when the bill arrives. We have this idea of what the perceived value of the goods we want to purchase is, and it’s this regarded value which is hurting the restaurant community. As consumers, we’re slow to catch up with real time changes.

Most restaurants try their best to mitigate their price increases by first becoming more innovative. More automation is one way to do it, or, they cut labour, which in turn has given rise to more of the self-serve restaurant models prevalent today. Enacting either of these measures is a way of keeping prices down while also maintaining profitability. But what happens if either of these scenarios doesn’t work? The problem with our (us the consumer) misperception is the lag time between what things actually cost and what we expect them to cost.

Put simply: how do we close the gap?

For example, let’s assume I expect to pay $10.00 for a sandwich at X sandwich shop. This is in December. But let’s say over the next 3 months the cost of making sandwich X rises $1.50 due to rising food costs. To maintain profitability, a price adjustment has to be made. But let’s throw another wrinkle in here. Let’s say that by June, the cost of making sandwich X will rise once more, but this time it’s because minimum wage has increased by $1.30.

In the first scenario the sandwich shop owner found that producing his sandwich had changed from a cost of $3.50 to $5.00 in a span of 3 months. This was due in part to inflation and the rising cost of meat. His supplier has passed on this price increase, and subsequently, the restaurant owner passes that increase on to me. Therefore, sandwich X is now going to be $11.50.

Now if the sandwich shop owner chooses to not increase the price of his sandwich, then his food cost will rise, which will in turn start to affect how he runs his business. Either his profits will dwindle or cuts will need to be made. This all happened in the months of December to March. It’s now May and as of June 1st, the cost he pays for labour will rise, as minimum wage will increase from $11.35 per hour to $12.65 per hour. This is a $1.30 raise, and he needs to make up for that increase to his costs somewhere.

**To note, this just happened here in BC. On June 1st the minimum wage rose from $11.35 per hour to $12.65 per hour.

To summarize: in a span of 5 months, to offset a new minimum wage increase and rising food costs, our sandwich shop owner will likely have to raise his sandwich price to a possible $13.00. These hikes had nothing to do with greed or changes in the quality of the sandwich. They were just natural external forces he’s been forced to respond to. To stay profitable he’s had to make the necessary adjustments. Our restaurant owner’s hope is that all of his competitors will do the same, thus mitigating the threat of one undercutting the other. But it’s a hope he’s fearful will go flapping in the wind as some of his competitors will try to find ways to circumvent these economic changes. He’ll likely try to do the same.

But how does one compete with a sandwich giant like Subway who can command cheaper prices from their distributors due to their brand and buying power? Our sandwich shop owner knows he cannot; therefore, he’s left hoping that a strong local brand and his delicious sandwich are all he’ll need to maintain competitiveness.

But are consumers this loyal? Can we afford to be? Some will, others will try and many will not. And it’s this latter, large swath of others who dictate how the markets respond, as they’re generally the largest group of buyers. Their logic will stem predominantly from the economics of the situation — X sandwich now costs more, so I might look someplace else for something cheaper.

For many, however, it will also come from the misperception of what they believe something to cost. In their minds a sandwich costs X price, no more, no less, economic factors be damned. This bit of misperception is what drives restaurateurs to slash their prices and risk going out of business in the hope that they can lure enough visitors in by sheer volume to make up the difference in price. But is this a solution? I don’t believe so, and it’s gimmicks such as these which cause the industry to falter.

When it comes to innovation we expect newer and better things all the time. Each year Apple unveils a new iPhone. We are charmed by how great they are and as such, we expect to pay more for them. It’s this built in reality that “new” generally costs more. But for some reason, with food we get stuck on a price, and it’s really hard for us to let go of what we want to pay for it. A glass of wine in our minds should cost $10.00 not $16.00. My coffee at Starbucks should be $3.50, not $5.20.

It’s this bit of reluctance that causes ripple effects all the way down the chain. It’s why Walmart rules the land, not because they offer the best products, but because they can undercut their distributors due to their large buying power. They keep their prices low and demand that they receive them cheaply from their suppliers even if the supplier is faced with losing money in dealing with Walmart. Either you play their game or you lose out on a large part of your business. Walmart can make or break a company’s bottom line. They’re that powerful.

But it’s on us that this is so.

Their prices are steeped in a past reality, and they’ve realized that we the consumer are very slow to catch up. It’s why mom and pops cry foul when they move into their territory and why large cities like Vancouver have mostly said no to them moving in — they kill small business. Why? Perception, or should I say our own misperception, of what things actually cost. This misperception hampers business owners from pricing things accordingly. Real-time external factors can swing a month’s profit margin out the window in a hurry if bottom line decisions are not made in a timely fashion. But doing so requires us, the consumer, to knowingly understand the economics of a restaurant’s fate. Sadly, that understanding eludes the vast majority of us.

Even if we did understand, should we care?

This last question strikes at the centre of who we are as a society, as for all of us, a strong restaurant industry at it’s core is what makes the lifeblood of any community. We probably shouldn’t care, but in a way we really should.

The nail in the coffin of the places and establishments which we all enjoy daily affects the way in which most of us eat and socialize. If they falter, we all suffer. But the misperception we derive in how much we’re willing to pay for our food comes not from the notion of new, but from past experience.

Behavioural scientists have studied these past experiences for decades, most notably by Daniel Kahneman and Amos Tversky. In their 1982 paper “Judgment under uncertainty: Heuristics and biases”, Kahneman and Tversky looked at the idea of how past experiences, or priming as they would say, is an “effect whereby initial exposure to a number serves as a reference point and influences subsequent judgments about value. The process usually occurs without our awareness.” This essentially confirms the concept that your first experience with anything will invariably become the benchmark for any and all related experiences.

This concept as it relates to heuristics has been called “Anchoring.” To better illustrate what heuristics are, here’s a paragraph from author Lorraine Black from the University of Puget Sound. She states in her paper “The Science of Decision-Making: Heuristics” that: “Heuristics are deviations from rationality formed by previous experiences. Instead of relying on the information at hand to make a decision, an individual might reference past decisions or events that may not be directly relevant to the current problem. Stereotyping, “rules of thumb” and the concept of common sense utilize heuristic methods.”

The key takeaway I’d like you to grasp here is how previous experiences can have a profound impact on the decisions we will make today. Not necessarily a bad idea, as this is something we all do everyday. I’m buying this album by this artist solely because I’ve liked their previous work, not because this current album is good or great. It’s decisions such as these, made heuristically, which help make our lives easier. However, as I pointed out earlier, for a restaurant, which can live and die by so many external factors, our anchoring heuristic tendencies are problematic. These tendencies can oftentimes cause us to unknowingly challenge real time changes, which we might not suspect are something we need to accept. Kahneman and Tversky admit this as much in their paper in which they concede, “in general…heuristics are quite useful, but sometimes they lead to severe and systematic errors.”

Our brains and lives are wired to seek out the path of least resistance. For the most part, this is a great thing. But sometimes this biological tendency needs to be challenged and focused on current phenomena. My brain tells me my glass of wine should cost $12.00, but in reality, in 2018, should it? For a restaurant owner, whose margins make running their business almost unprofitable, any semblance of real time understanding by their customers could go a long way to help stabilize an industry teetering on the brink. Gas used to be 80 cents per litre, now it’s $1.60; I’ve had to adjust to that. It’s only fair we do the same with food and restaurant pricing.