Menu Costs

I was reading a (different) newsletter last week that explored a few of the reasons why companies don’t optimize prices. Given my job is tied to convincing people to optimize their prices, it felt like a good use of time.

Most notably, I learned a new economic term that’s very relevant to our work - “Menu Costs.” 

I’d never heard the concept before, but in short, Menu Costs are the costs for a business that are incurred by the process of changing prices.¹

For a brick and mortar store, the menu costs are fairly high: 

• Print out new price tags, and get them on all the products

• Relabel your shelves

• Redo any promotional materials (catalogs, mailers, etc) that mention price

• Update other store fixtures (end caps, chalkboards, etc.)

These things both take a good amount of human capital (you need people to retag products and/or to relabel the shelves) and create one-time expenses (new catalog/mailer print runs to replace the now-outdated prices).

In contrast, ecommerce stores and DTC brands should have very low menu costs by comparison.

If you’re pure-play DTC, the costs I can think of include: 

• Coding in price changes per product to Shopify (or whatever system you are using)

• Adjusting shipping fees, offers, etc., in various apps

• Making sure your Google and Meta shopping feeds don’t break or throw errors (should be automated in most cases)

• Updating your ERP software (if you use it)

Not a complete list (please tell me what I’m missing; I’d love to know), and there will be differences between stores. For example, not all brands have an ERP; your shopping feeds will almost always be OK, which means this is more of a “keep an eye out for anything funny” caution. Some brands may type in each product price by hand, others may have a more automated solution (e.g., you can actually hack intelligems to bulk edit and schedule price changes).²

Despite this advantage, DTC brands still don’t change their prices very often. Once a year is pretty typical. Some brands may say this is due to brand considerations, or being constrained by MAP (minimum advertised price) agreements. Fine; but I’d bet that at least 80% of brands would be better served and more profitable by changing price more frequently. So it begs the question: Why don’t more ecommerce stores take advantage of their incredibly cheap menu costs and change prices more frequently? 

I think it’s that there’s a more hidden cost - the headspace that price changes take up. There is emotional (and political) fear and cost to changing prices. I often hear from a VP that they never really touch price because “the founders set the price when they started and are tied to it for  “founder reasons” or “we tried changing prices 2 years ago but it ended up being a cluster because everyone had an opinion and we didn’t have any good data.” 

These, I suppose, are costs, too: Getting the buy-in to adjust the way you do business. And if you do get that buy-in, the upside is pretty immense, because the menu costs are so low. 

The menu costs, so to speak, are setting clear goals around pricing (which, also, maps to business strategy: Do you want to maximize profits for each transaction? Do you want to gain market share in exchange for lesser profits? etc), a process for reaching—and reevaluating—those goals, and an owner for them. The last one, perhaps, is the biggest, but it’s still very low. And, ultimately, creates clarity in the business, so it might actually accelerate some other areas of execution. 

It makes price one of the biggest levers to pull, and it’s one of the reasons we’ve seen it become such a popular topic in response to tariffs: It’s faster, easier and more impactful than most people realize.

1   Presumably, though I did not confirm, this term originated in the restaurant industry and references the fact that a restaurant needs to reprint its menus when it changes prices.

2   As a founder, I relate to “founder reasons.”