As of May 19, My Two Cents is now on the new Intellaprice website. Please see this site for recent postings.

copyright 2010 L. Kerr

Myth or reality: with the tools and technology available today, management can take it easy and let software do the heavy lifting around pricing decisions.

The truth is, I wish that was the case, but for restaurant operators responsible for pricing decisions or recommendations, it’s still necessary to devote significant thought to pricing decisions. While it’s true that automation can help greatly, making the actual decisions around pricing requires management judgment, and that won’t change.

At the upcoming NRA show, I will be giving a session on how to approach the most common challenges of making pricing decisions. Having spent much of my career in this area, it’s a subject near and dear to my heart. As part of the presentation I’ll be debunking some myths surrounding pricing (see previous blog post: Can We Talk About Pricing?) Here’s more on some of the myths surrounding pricing.

So why aren’t restaurants poised to take advantage of pricing systems? Here are a few reasons.

  1. Garbage In, Garbage Out – if your concept is lucky enough to have an accurate, state of the art Point of Sale (POS) system, then good for you. However, we all know that register coding and ringing are not exactly standard, so that if your company isn’t exactly consistent, you could be factoring in obsolete products or incorrect data depending on how sales are rung into the register.
  2. Software Sensitivities – Of the software out there that pertains to pricing, many packages are geared towards business-to-business industries. These products offer solutions for managing the sales pipeline, quoting, and discounting – all things that aren’t appliable to restaurants. Few are geared to the retail nature of restaurants.
  3. Non-Price Factors – for systems that do work with POS data, results can attribute an undue amount of weight to price, when in fact, it is rarely the most significant driver of restaurant performance. Having participated in many customer interviews and focus groups, I have heard customers mention convenience, service, quality, and location far higher on their lists than they do price as a factor in restaurant selection. Systems (or their developers or users) that do not allow for these variables – not to mention weather, advertising, promotions – are  omitting important determinants of revenue and profitability.
  4. Operating Realities – Even if tools and technology perform calculations such as price trends, comparable item price differences, price elasticity, and can point to potential price change candidates and the potential new pricing options, this is still not enough. Why? Because there are too many sensitivities that management should consider when finalizing price lists. These variables include the competitive environment, promotional activity, trade area differences, customer attitudes – and this list goes on.

I consider tools and technology extremely valuable in pricing analysis, and my firm consistently seeks to automate outdated ways of conducting analysis. But there is no substitute for management insight and review, and to think that pricing decisions can be made in the absence of this is simply wishful. A thorough approach with checks and balances to review information generated by automated systems will always be necessary to make sound pricing decisions.

I look forward to sharing more on this topic both at the NRA Show and in future blogs.

Boston’s water main break was fascinating from many perspectives. It was first and foremost a lesson in emergency management and maintaining public safety. Second, from my own vantage point as a restaurant pricing advisor, the implications for restaurants, schools, and hospitals were noteworthy. Lastly, the retail and pricing angle - in which I include the consumer dynamic – was possibly the most interesting, so I’ll focus on this. As for the first two, suffice it to say that this was a well-handled situation, quickly resolved via strong teamwork and expectation management. The institutions affected weathered this as best they could, some adapting better than others and keeping this in perspective – clearly, this incident pales in comparison to so many other disasters past and current. And I find the retail/consumer/pricing aspect intriguing. 

As the emergency neared an end, the price gouging buzz began. News stories early on showed people clamoring for bottled water, some of whom had purchased $150 worth. Wow, someone transported and stored that much bottled water for a situation that was only expected to last days? I went to stores and never encountered a depleted stock. I saw almost-empty shelves, signs limiting purchases to 2 per customer, and some stores with no limit. I saw pallets of water displayed in aisles, and at grocery stores and CVS, sale prices were being honored. I couldn’t help but think of Lloyd Bridges in “Airplane” as I thought, “they picked a terrible week to put water on sale.”

Note that not only did we have running water, but we also had hot water. We could shower (we were advised to sponge-bathe kids lest they ingest water), flush toilets, and even fight fires if necessary. I’ve been on vacations with less favorable conditions. All we could not do was drink, cook, or wash dishes with the untreated water in our pipes, hence the need for bottled or boiled water. Yet people hoarded supplies anyway. Emergency supplies were available from the National Guard in some areas, though it was difficult to know where the problems were. I figured somewhere, somebody was probably without water, or worse yet, did not know about the situation and would ingest it, but heard no such stories.

I imagined beverage manufacturers would be thrilled with the surge in demand for soft drinks, sports drinks, and all other potables. As public officials continued to communicate status and work to resolve the problem, it seemed that around me, things were calm and life went on. It was only via news reports that I heard the stories of panic – no surprise there.

The price gouging reports showed a receipt from the Somerville Market Basket with a $23.76 charge for a 24-pack of water, which had reportedly been sale-priced at $3.99. So instead of a $.16 per bottle cost, the store charged $.99 per bottle. I couldn’t find other clear examples, nor could I find clear definitions of gouging – the most common words are “exorbitant,” “excessive,” and “unreasonable” – so while most would agree that $.99 vs. $.16 is all of those things, the consumer did have a choice in the matter – buying it was not necessary, and boiling would be a perfectly reasonable substitute.

Many states prohibit price gouging after emergencies by law to protect consumers. Massachusetts’ Division of Consumer Affairs, which governs prices, is somewhat vague. The Division refers to the Massachusetts Consumer Protection law, Massachusetts General Laws Chapter 93A, and its website states that “the law does not list [violations] in any definitive fashion but states that ‘unfair or deceptive practices’ are illegal.” Unfair or deceptive is determined by a judge, as the explanation states. One scenario that the Division lists as illegal is when “A business charges a consumer higher rates than the marked, published or advertised price.” So if Market Basket had indeed posted the 24-pack of water in its sale flyer, seems to me that’s price gouging. Other stores that decided to jack up prices in more moderation, but had no sale flyer, are arguably operating legally.

It’s ironic that in a case like this, consumers need protection. While it’s noble that the government wants to protect us, shouldn’t our common sense rule? As in the case of Spirit Airlines carryon baggage charges (see blog, April 22), aren’t customers able to make these choices themselves? Much has been written about the merits of the free-market system and how it would apply here. As we learned in Econ 101, increasing prices would deter people from unnecessarily buying many weeks’ worth of water, while maintaining supply for those who couldn’t go to the store immediately after the boil water order was issued, only to find the cupboard bare.

Fortunately, life returned to normal rather quickly – in less than three days, we had a safe water supply. We could tend to our normal water consumption routines; restaurants and institutions were back up and running. The only unknown now is who may have gotten sick from consuming untreated water. According to officials, it takes about a week to notice the resulting gastrointestinal issues. As a friend remarked, “If there was a run on water this week, there will be a run on toilet paper next week.” I certainly hope my next post does not pertain to that. So with apologies to Mr. Whipple, for goodness sake, please don’t hoard the Charmin.

 

copyright 2010, L. Kerr

Yesterday, Nation’s Restaurant News’ Ron Ruggless reported that P.F. Chang’s Bistro will institute a “modest” price increase to offset some significant profit decreases. This is a good time to reinforce some points about pricing decisions and critical information needs.

Let’s start with the P.F. Chang’s first quarter data from the article:

  • Sales are down 2.7%
  • Average check is down 3.5%
  • Traffic is up .8%
  • Profit is down 35%
  • The price increases are projected to be 1% to 2%

Conversely, here is Pei Wei Asian Diner data:

  • Same store sales are up 2.2%
  • Average check is up .7%
  • Traffic is up 1.5%

As P.F. Chang’s Co-CEO, Bert Vivian, says in the article, labor costs have risen and while the company would prefer to wait until traffic has risen more to increase prices, it has decided to take this step now.

I have to ask: how does P.F. Chang’s know that higher prices, which are intended to offset higher costs, will work? Certainly, if traffic stays flat or increases, with all other things being equal, then the tactic should work. But no traffic change is a big assumption. While a 1% to 2% increase is certainly justifiable – and I commend Chang’s on selecting a palatable figure – the crucial issue is whether traffic and ticket will remain the same or not based on the increase? If they change, then it’s important to estimate by how much.

It’s rare for companies to know the exact impact a price change will have – and that’s the rub. The best ways to determine this figure for projections are to conduct a test, or conduct research. To test the new pricing, the company can change prices among a group of stores and compare operating results to a control group of stores. To research the issue, it can survey consumers – typically via web-based conjoint analysis or discrete choice modeling – to determine their guests’ price sensitivity and the effects that new prices will have on total revenue.

It’s not guaranteed that raising prices – especially in tough times – will raise revenue and profit. We can certainly hope for this, but unless P.F. Chang’s has done the research and analysis, it has to make a guess. The reality is that many companies are in the same position. Price tests take months, and obtaining price sensitivity data requires resources. Therefore, taking action and measuring results is often the most feasible path.

Two important notes: (1) tests and research do their best to help estimate price-change impact, and are the closest we can get to the real thing. (2) I have no information about P.F. Chang’s internal analysis and I do not mean to suggest that the company has not done its homework. The news merely presents an opportunity for me to illustrate a point about best practices.

It’s interesting to note that the figures Ruggless includes point to price sensitivity: P.F. Chang’s, the more expensive concept, is experiencing sales declines, while fast casual Pei Wei is showing sales increases, and higher traffic gains. This suggests that consumers are reacting more positively to the value offering (see previous blog, Pei Wei Means Big Value). Indeed, P.F. Chang’s happy hour, which features noticeable discounts, is credited with increasing traffic by 7%.

Given the inverse relationship of price to demand, the performance P.F. Chang’s has been experiencing seems logical, and the planned price increase – while small – may be illogical. It’ll be interesting to follow this, and I, like those at P.F. Chang’s, and my industry colleagues – would like nothing better to see an upswing soon, as part of a larger picture of good news.

Nickels and Dimes

April 22, 2010

I just booked a flight to Chicago, thanks to Spirit Airlines. I didn’t plan to book it, but realized I should while perusing Spirit’s website after reading about its impending carry-on baggage fees.

I have seen few price changes incense people as much as airline fees do, and the recent coverage was abundant. Michelle Singletary’s “The Color of Money” column, The Washington Post, 4/18/10, characterizes the fees as customer “mistreatment.” Jeff Jacoby’s Boston Globe Column, 4/18/10, reminds us that we operate in a free-market system. Announcements that major airlines won’t adopt the overhead baggage fees gave us a collective sigh of relief.

Despite their differing headlines, both columnists acknowledge that customers will end up voting with their feet, which is the beauty of the free-market system. Clearly, industries that receive consumers’ discretionary dollars have felt the pain of customers opting out either completely, or for substitutes – it’s hard to have missed that for the past year and a half.

Just the other night, a friend noted during a dinner out that she sees more upcharges for extras lately – in this case, guacamole for $.75 at a local Tex Mex dive. I didn’t mention that the restaurant has always done this as it didn’t seem to matter – but as a non-guacamole fan, I’ve often noted at this establishment that my taste buds saved me a bit of money. But for those who consider guacamole a necessary fajita condiment, it’s a slight annoyance. Lucky for them, we’re only talking $.75, and not $45.00 for a suitcase.

I’m sure Spirit suffers more backlash given its industry – as if flying weren’t already distasteful enough, here is one more reason for consumers to resent flying. While Spirit runs few routes from Boston, I’ll assume it’s a fine airline that enjoys good customer perceptions. And as Jacoby points out, Spirit positions itself on this very principle as an “ultra-low cost carrier.”

Customers are often attracted to the “free” label – that “free internet” at your hotel? The “free shipping” from Zappos? I think you all know how these are handled – but boy do people love this anyway – that’s great marketing, all right. There’s something to be said for the all-inclusive pricing model.

So I look forward to watching what happens with Spirit – whether or not they keep the policy, how it impacts revenue and profit. And I wonder if other airlines will refrain from those fees, or add them, or find other services to unbundle from our fares.

Incidentally, Spirit could get me from Boston to O’Hare for $313, connecting in Myrtle Beach. With or without a baggage fee, this just doesn’t make sense, so I stuck with American’s direct flight for $230 (for me and my bag). However, Spirit can fly me from Boston to Fort Lauderdale for $251 roundtrip, on nonstop flights. Having recently paid slightly over $300 (plus $12 for the privilege of seat selection) for a trip to Florida, I know that if I booked Spirit’s $251 fare and paid a baggage fee, I still be receiving the lowest-cost option. But I’d probably feel better about a slightly higher, all-inclusive fare. If Spirit really is the king of unbundling, though, I doubt that’s in the cards. Additional fare searches confirmed that even with baggage fees, Spirit would still be the lowest-cost option. So it’s really just six of one, half dozen of the other, and a lot of buzz in the news from the announcement. And as I’ve experienced, there is no such thing as bad PR. So good for Spirit – I think they just got a lot of “free” advertising.

It’s difficult to concisely summarize last week’s WFF Conference in Las Vegas, but I’ll try. Suffice it to say that as usual, the event was a shot in the arm for attendees, who learned, relearned, and connected with old and new industry peers while benefiting from the insight of leaders and visionaries attending.

Keynote Speakers

 
 
 
 

Photo: L. Kerr

Gladys Knight – as an entertainer and restaurateur, the superstar’s story hit on the theme of work-life balance, a frequent WFF topic. How heartening to know that Ms. Knight understands this issue, having grappled with it while on the road with the Pips. In addition to her nontraditional working mom experience, she supported two children in starting restaurant and bakery businesses, both financially and morally, and she dreams of using her family’s farm to teach youngsters about food and life lessons. For me, Ms. Knight’s life lessons hit home more than did the notion of her as a colleague – but I’ll try to get over that mental hump! Her advice: don’t be afraid to stand tall and take on the responsibility of being a leader. And rest assured, Gladys can still belt out a song – she treated us to a performance of “Need to Be” after speaking.

Keith Ferrazzi of Ferrazzi Greenlight spoke on building and sustaining relationships that garner success. His firm’s research shows that your key relationships – lifeline relationships in his lingo – are predictive of your ability to build business relationships. Not surprisingly, the necessary relationship ingredients he mentioned included intimacy, generosity, vulnerability, and caring. His counsel: to get people to care about you, just care about them. I find I can often apply WFF speaker advice to both work and personal relationships, and this case is no different. To overcome the intimidation of networking, Ferrazzi suggests a simple approach of asking you can help others rather than the reverse.

Gloria Santona, EVP and General Secretary of McDonald’s Corporation, inspired us with her experiences as a young Hispanic woman embarking on her legal career when this was far from a common career option. She noted that the current ratio of women to men in the workforce is much higher than it is in boardrooms, a fact that shapes much of the WFF mission. As she recounted her experiences at McDonald’s, I couldn’t help but think that if all companies provided such opportunities for inclusion, our workplaces would be incredible. Santona defines success as creating opportunities for people of different backgrounds, which was a good backdrop for the Top-to-Top Summit. Additional advice: Focus your career on what’s most important to you; treat failure as a developmental opportunity, develop the leader in you; and you can’t do it alone.

Top-to-Top Summit Highlights

Dr. Saj-Nicole Joni spoke on leadership, using the example of Edward Liddy and AIG bonus controversy. Participant wisdom: Liddy’s desire to do right by AIG employees should have been a backseat to the company’s bankruptcy, the taxpayer bailout, and public outcry that would clearly follow. Moreover, the lack of a diverse group of advisors hurt.

Joni then moderated an executive panel including the following members and their advice on leadership:

P. Liewand, M. Rich, D. Madsen, D. Sweeney

Photo: L. Kerr

Paul Leinwand, VP Global Consumer, Media and Digital Practice for Booz & Co.: Find ways to enable people to take risks.

Mindy Rich, Vice Chairman Rich Products, Inc.: Don’t be afraid to find the confidence to take risks ourselves.

Drew Madsen, President and COO, Darden Restaurants: Encourage everyone to think about leading people, not just businesses. The difference between good and great is often getting the effort from the front line in this special business.

Dawn Sweeney, President & CEO, National Restaurant Association: Strike the balance necessary in fighting battles, as in the case of the recent health care lobbying efforts.

Changing of the WFF Guard

WFF leadership continues to evolve, and a high point this year was Fritzi Woods’ debut as WFF President and CEO. Having listened to Fritzi on many a WFF panel, I know this is as extremely good news for the organization and its members. Here’s to your stewardship, Fritzi – I look forward to it. Furthermore, outgoing Interim President Linda Pharr really gets to leave now, having done an extra tour of duty – which interfered with her retirement, no less – as the WFF worked to fill a management void. How generous of Linda.

We welcomed incoming WFF Chair Maureen Hurley, a consistent image of leadership during my WFF membership. She, as well as outgoing chair Mary O’ Broin, inspired us by sharing their stories, lessons, and goals, both past and future. Congratulations best wishes, ladies.

Fritzi took the opportunity for an informal panel discussion with the following heavy hitters who are always so giving of their time and advice:

Lorna Donatone, COO & Education Market President, Sodexo/WFF Treasurer: Raise your hand – don’t sit back and assume others know your goals and capabilities.

Carin Stutz, SVP, Strategic Operations & COO, Global Business Development, Brinker International/WFF Secretary: take the high road. Add value to a conversation and don’t bring it down – imagine being in others’ shoes when you don’t agree with them.

Maureen Hurley, EVP & Chief Administrative Officer, Rich Products Corporation/WFF Chair: Have confidence in yourself, quit thinking you might be “found out” and set your mind to your goals.

The announcement that Brinker International has donated office space in its Dallas headquarters to the WFF was great news. This gift was due to the generosity of ever-supportive Carin Stutz and Doug Brooks, Chairman and CEO of Brinker.

WFF Awards

There has been much industry coverage of these award recipients. What stands out to me is the extent of their accomplishments, humility, and generosity – it’s truly awe-inspiring. Congratulations to Mindy Rich, Vice-Chairman, Rich Products; Joyce Mazero, Partner, Haynes and Boone; Cindy Novak, President, Communication Leadership Network; Doug Barber, EVP and COO, Cracker Barrel Old Country Store; and Sarah Palisi Chapin, CEO, Hail Merry Snacks. Congratulations to Kraft Foodservice, recipient of the one award that goes to a company rather than an individual, with Tom Sampson, President North American Foodservice, accepting.

While it was a new setting, recognizing some new leaders, the 2010 WFF leadership conference was true to form in continuing to offer top-notch programming and educational opportunities, while fostering new and old connections among industry peers. This year’s tone was one of inspiration and hope to prepare us for the more prosperous times to come for the industry. Won’t those be a welcome change!

Here’s another preview of my upcoming talk at next month’s National Restaurant Association Show, where I’ll speak about restaurant pricing. I want to talk about my definition of pricing strategy because it’s crucial for restaurants – and all companies – to have a clear, concise statement about pricing strategy.

If you Google “pricing strategy,” you will see some overly-simple statements and some lengthy lessons out there on what exactly pricing strategy is.

The overly-simple statements include commonly-used terms like “value pricing,”  “premium pricing,” or “price leader,” which are supposed to convey how a company prices its products. But I see these as tactics rather than fully-thought out strategies. And incidentally, these tactics can actually undermine business goals if not used properly.

The lessons are articles on pricing strategy that are actually comprehensive marketing and economics refreshers. They contain great information, though we still need a clear, concise definition of pricing strategy to ensure that all company stakeholders have a common understanding about the goals of pricing and how they will be achieved.

I think it makes sense to think about pricing the same way we think about any other function, whether it’s human resources, communication, marketing, finance, what-have-you. All of those disciplines have their specific plans, and pricing should have one, too. So I suggest that companies think about pricing strategy as follows:

Pricing Strategy consists of the objectives and plan by which companies compete in the marketplace.

And what’s a pricing plan?

A Pricing Plan is the set of actions a company takes to achieve its business objectives. It is the execution of a process to ensure that the firm achieves the results it seeks, and contains tasks, accountabilities, and timelines for each step.

So it’s not just the pricing strategy that’s important, it’s the pricing plan, because the plan is the means to the end. And I actually hang my hat on the plan, not the strategy, though if someone asks what the strategy is, this gives them an answer. The plan lays out what will be done, when it will be done, and who will do it.

There are plenty of other pricing terms to define, but I start with pricing strategy and pricing plan because these are the most crucial. Once these are clarified, they can be communicated across the company to create a common vocabulary among all concerned. By putting a pricing plan in place, and following it, a company is more likely to reach its objectives than by simply putting a stake in the ground that declares “we are a value/premium/low/predatory pricer” and calling that strategy. “What’s our pricing strategy?” is such a common question that having an explanation will save time and confusion, and will link back to a company’s overall business objectives. And that’s being strategic.

What do you think?

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