The Myth of Pricing Systems

May 13, 2010

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.

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