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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Can we talk about pricing?

February 25, 2010

At this year’s NRA Show, I will be giving an educational session on pricing, which will cover strategies for a successful pricing process, lessons learned during my tenure in restaurant pricing, and tips for anyone who has anything to do with managing pricing. But why limit the fun to NRA Show attendees? This blog is another forum where I’ll share some advice in hopes of helping any operators who would appreciate some guidance. The first lesson I’ll impart: my take on talking about pricing in the restaurant environment.

I have found that the issue of what we can talk about is one of the most uncomfortable for my restaurant colleagues, often resulting in a see no evil, hear no evil, speak no evil mindset. So I’ll share my experience with this in hopes of creating a comfort zone. The bottom line: you CAN talk about pricing, as long as you do it in a legal way. Is that clear as mud?

I have often heard my marketing, finance, and operations compatriots declare “we can’t talk about pricing” and change the subject. My usual response to this is “yes, we can talk about pricing, we just can’t price fix,” and then provide a bit of context. 

Every company should consult its legal team to develop and share (ad nauseum) a clear policy regarding the communication of pricing information. I am not a lawyer, nor do I play one on tv, so my layperson’s advice is just that. I repeat: consult your attorney after you read this.

Simply put, price fixing involves intentional or unintentional collusion among competitors that harms consumers and favors the colluding parties. The terms and behaviors that antitrust law covers can be ambiguous, especially in franchised environments, where franchisees can be viewed as competitors and could therefore be colluding without knowing it. There are also implications for the franchisor-franchisee dynamic. This is more clear-cut: franchisees, not franchisors, are responsible for making pricing decisions, so franchisors are limited to recommending prices to franchisees. It’s that simple: a franchisor dictating menu prices to a franchisee constitutes price-fixing. Company-owned restaurants therefore have it easier from a price recommendation/compliance standpoint, though they are not immune to potentially collusive situations. There are finer points about what’s allowable, such as whether or not franchisors can dictate maximum prices to franchisees. This is often covered in the actual contract between a franchisee and franchisor, and has arisen as a key point in the recent Burger King $1 Double Cheeseburger controversy, as Ron Ruggless has written in Nation’s Restaurant News.

Anyone who has dabbled in pricing knows that price fixing is illegal, and the way many companies have avoided breaking the law is by avoiding any discussion of price whatsoever, hence tactics such as having certain parties leave the room during pricing conversations so as not to participate (the corporate equivalent of covering one’s ears and singing).

Some examples of discussions that do not constitute price-fixing might help:

  • Making a price recommendation is not price fixing
  • Explaining the rationale behind price recommendations is not price fixing
    • Analyzing profit at a specific price point is part of the rationale
    • So are projecting sales and traffic
  • Evaluating a promotion in terms of how it impacted customer counts, sales, and guest perceptions is yet another type of analysis

It’s ironic that in an environment where the goal is a consistent customer experience, a discussion of consistency in pricing would be illegal. But we can’t change that, so we just work within the rules. If you believe that the franchisee is a key customer of the franchisor, it should follow that the franchisor should support its customer. This means providing business analysis, promotional programs, and training/tools, to franchisees. So don’t be afraid to talk about pricing, just understand exactly how to talk about it. This is perfectly appropriate – just ask your lawyer.