Foodservice
Solutions® 5 P’s of food marketing includes price and the role of pricing may
be evolving faster and increasing importance. Jonathan Marek, senior vice president with APT, in an Op-Ed article in
NRN identified the following five
often overlooked facts about restaurant pricing. I want to share them with you
as well. Here they are:
Fact
1: You can’t understand the impact of changing prices without a test versus
control analysis. If you haven’t
analyzed price changes on a test versus control basis with a well-matched
control group, it is impossible to understand the impact attributable to that
price change. As you may have found, elasticity models are often inaccurate.
Imagine that you dropped the price on gingerbread lattes in December: Sales of
those items would skyrocket, and elasticity analysis would suggest that
restaurants across the network should drop prices. However, in December, many
of those units might sell anyway, so a price decrease would largely subsidize
existing guest behavior. Seasonal biases aren’t the only issues at play, so
year-over-year comps analysis won’t suffice here, either. Restaurants are
impacted by competitors’ actions, economic trends, weather events and many
other uncontrollable factors that don’t happen every year. In short, historical
elasticity curves simply fail to reveal causal relationships that can inform
future pricing decisions.
Fact
2: Cross-elasticity
rules restaurant economics. Introducing a new value item might seem
like a great idea if that item sells like crazy in an initial trial. If you
test in enough restaurants, you might even be able to read a significant impact
versus control, observing that the unit lift far exceeds margin rate
compression, making the new item appear profitable overall. However, pricing
analysis needs to account for inevitable mix-shift of other menu items. A new
value item could drive incremental profits, but it could also cannibalize
higher-margin items.
Fact
3: Price elasticity varies by store — a
lot. Based on APT’s pricing work with dozens of restaurant concepts,
we have observed that restaurant-by-restaurant price elasticity varies greatly
based on restaurant characteristics (e.g. size), competitive density and
demographic factors (e.g. median income and population density). Restaurants
need to do the right analysis to identify which factors impact pricing for
their concepts. Such analysis can often yield tens of millions of dollars in
annual profits by correctly setting price tiers.
Fact
4: If you have
a franchised concept, your franchisees are likely testing prices for you.
Franchisees often make independent pricing decisions; as such, there is an
opportunity to mine historical item-level data to create a test and control
environment without actually designing a price test. However, the biased nature
of these unplanned tests, or “natural experiments,” is an even greater case for
scientifically constructed control groups, as opposed to balance-of-chain or
balance-of-region approaches. For example, franchisees often increase price in
their highest-traffic locations. Comparing these high-traffic locations to
low-traffic locations will lead to inaccurate analysis.
Fact
5: Pricing analysis should not be outsourced.
Why would you turn one of the most impactful levers of your business over to
consultants with their own black box? Black box solutions may lead to the
mistakes outlined above. Restaurants need to own their pricing analysis by
doing it themselves with the right tools.
There
are two ways restaurants can make more money: increase check size or increase
the number of transactions. Changing prices is one of the most important levers
restaurants can pull to impact both of these metrics. However, to correctly set
menu prices, restaurants need to move beyond traditional elasticity analysis
and determine how guests react to realized price changes through scientific
test versus control analysis.
Visit:
www.FoodserviceSolutions.us
if you are interested in learning how Foodservice Solutions 5P’s of Food
Marketing can edify your retail food brand while creating a platform for
consumer convenient meal participation, differentiation
and individualization or learn more at Facebook.com/Steven Johnson, Linkedin.com/in/grocerant or
twitter.com/grocerant
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