Ratings, Minimum Wage & How Restaurants Thrive

The Wage Debate

It seems the main question in the heated minimum wage debate is always: Will paying employees more force businesses to close their doors?

On one side of the spectrum, the answer to the question is an absolute and resounding “yes.” The logic goes, if businesses must pay their employees more, operating costs will increase, and make it harder to stay afloat.

On the other end of the debate, the argument stands: Even though businesses will have higher operating costs, consumers will have more disposable income, and things will balance out.

The restaurant industry, more than any other, is familiar with this debate. It employs the highest number of people at or below the federal minimum wage.

Both sides of the argument have valid points, and yet, both are in a constant state of disagreement with each other.

A recent Harvard business study found conclusions somewhere in the middle. The focus of the study was to determine if Yelp star-ratings had an influence on a restaurant’s ability to continue operating after a minimum wage increase.

The subjects of the study were restaurants in the San Francisco Bay area. The region has seen 21 different minimum wage changes between the years of 2008–2016. Moreover, Yelp is headquartered there, and the site’s use has become a way of life for restaurant goers. All of these factors offered Harvard researchers a wealth of valuable data.

In the San Francisco area market, the study noted, 5% of restaurants go out of business each year.

So what causes these businesses to “exit,” as industry experts call it?

All of the minimum wage increases? Heavy competition? Poor ratings?

Why Restaurants Exit the Market

According to the study, restaurants with an average rating of 1-star are 50% more likely to exit.

Even a 1-star increase in average rating would decrease the likelihood of an exit by 50%, the study confirmed.

While it seemed many of the restaurants in question were finally pushed to exit by the wage hikes, these businesses were already struggling with their online star-rating.

Predicted likelihoods of exit by minimum wage and rating

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Source: Harvard Business School

When comparing businesses with higher star-ratings, researchers found that restaurants with a star-rating of 3.5, on average, were 14% more likely to exit after a minimum wage increase of one dollar. Restaurants with a perfect 5-star rating were not affected at all by the minimum wage increase.

So, if your competition has a 5-star rating on Yelp, and you are struggling to achieve a star-rating of 3.5 – who do you think is going to be more successful after raising menu prices following a wage increase?

When guests are constantly disappointed with your restaurant and airing those complaints online, any extra money those guests spend will go to your competition.

If you are listening and engaging with your guests, a small bump in prices will not hurt you. A 5-star restaurant will continue to be a 5-star restaurant.

If prices were everything, Disney would have closed its theme parks years ago. Even though they keep raising prices, and people keep complaining, millions of people keep going.

Higher prices do not always equate to a decrease in customer loyalty. In fact, many customers are happy to pay more to support a business they love, even though they may complain. This goes to show that the loudest complaints don’t always negatively impact revenue.

Engaging Guests Online to Increase Revenue

So, whether you are striving for a 3.5 star-rating, or sitting pretty with a perfect 5 stars, which complaints should you worry about? Which ones hurt your bottom line?

This is something we discussed at length in a recent webinar with executives at Results Thru Strategy, Firehouse Subs, and Toojay’s Gourmet Deli.

At what point does slow service stop guests from coming back? Does your restaurant need renovations guests are complaining about? How much are guests willing to pay for orders that are consistently wrong?

If negative issues persist, then it doesn’t matter how much you charge for menu items – guests will choose competitors who outperform you in key categories or “themes,” as we like to call them.

Example: Tolerable level of negative feedback before negative revenue impact

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Source: Merchant Centric’s Business Performance AnalyticsSM

Many business owners can solve most of their problems, but simply choose not to. Thousands of guests share their feedback online every day. They are sharing reasons for selecting a restaurant, as well as reasons for choosing a competitor instead; and their feedback is being ignored.

“You would never accept a guest complaining at your restaurant and not getting a response [from your franchise manager], but there are thousands of reviews online that are missing replies,” said Merchant Centric’s co-founder, Adam Leff, in the aforementioned webinar.

He discussed how businesses who engage with reviews earn more new and repeat guests. Plus, they get more reviews and higher ratings, all of which lead to an increase in revenue.

Harvard’s most recent study lends credence to this, as does its previous study, which found that a 1-star increase in a business’ average rating can lead to a 5-9% increase in revenue.

For Merchant Centric, “across many different brands, we’ve found the increase in revenue anywhere from 4%, up to 17%,” said Leff.

This revenue increase comes from understanding customer feedback data, and taking strategic actions based on that data. This applies at the individual location level, at the brand level, and for franchise owners.

Conclusion

Ultimately, yes, rising wages can shorten your restaurant’s lifespan (if you are already struggling). However, what costs you more than anything, are the dozens, hundreds, thousands of negative reviews not being addressed.

Restaurants and other brick-and-mortar brands are increasing their revenue by as much as 17%, simply by engaging with their guests online. This strategy allows them to not only weather the storm of increased operating costs, but thrive.