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.

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?

A Tale of Two Restaurants

As week two of Restaurant Week nears its end, it’s time for restaurants to weigh in on this event. I spoke with representatives of two of Boston’s finest restaurants, L’Espalier and Salts, on their decisions to participate or not. With several high end favorites participating this year, it was difficult to find restaurants abstaining from the promotion. Lauren Loschiavo, Marketing & Community Relations Manager for L’Espalier and Sel de la Terre, spoke with me, as did Executive Chef/Co-Owner Gabriel Bremer of Salts in Cambridge. While L’Espalier is participating, Salts is not. 

L’Espalier – Driving Customer Trial, Dispelling a Myth

L’Espalier’s Loschiavo enthusiastically supports Restaurant Week, which might surprise some given L’Espalier’s stature among local restaurants. Not only is the restaurant offering specials, but it’s done so for all of March. “We want the Restaurant Week crowd to come in and try us, so we created a menu – it’s fared really well,” Loschiavo said. L’Espalier is offering the $20.10 standard lunch deal and is an “unofficial” dinner participant because its dinner price point is $42.00.

The manager explained that at $33.10, profitability would be an issue, but the $42.00 price point is more palatable for the restaurant. The normal price tag for L’Espalier’s three-course dinner is $82.00, meaning quite a discount during March. “We wanted to offer something”  Loschiavo said.

“We’ve been booked up almost every night of the two weeks,” Loschiavo said. Under normal circumstances for this time of year, without the promotion, “traffic would be down – it would be typical for March, which is one of the slowest months of the year. L’Espalier was never affected by the economy at all. I would assume [traffic] would be down because of March. A lot of people travel in March – it’s an in between month after holidays and before warm weather.”

I asked Loschiavo whether the Restaurant Week crowd is a tough one, knowing that some think this promotion is akin to amateur night. “The good thing about Restaurant Week is that we get people in who aren’t our regular customers so we get them to try us – it’s probably one of the easiest ways to get new people in. In general, it’s hard to get people in to try because they assume it’s too expensive.”

Is that a fair assumption for diners? “I don’t think so – maybe for dinner, but for lunch all the time we run a prix fixe three courses for $24.00 per person – that’s just $4.00 above the Restaurant Week price – they’re still not quite as receptive to it as they should be.”  Loschiavo estimates that 20% of Restaurant Week diners return to L’Espalier after the promotion ends.

So why the lack of reception? “I think it’s driven by name and the perception of L’Espalier being only for special occasions or where you save up to go, or where it’s people with money that come in all the time. That’s one of the hardest things.” Loschiavo explained that the normal lunch menu is a “simpler version of the dinner menu” with a la carte offerings that are not offered during dinner. “We have sandwiches, we have a burger, the lobster BLT is a signature lunch item these days – it’s our twist on regular lunch fare.”

When it comes to working the actual event, Loschiavo says the more, the merrier. “The servers love it because it gives them revenue in what would otherwise be a slow month. . . It’s a great way to reach out to people who haven’t tried us before.” 

Salts: Offering Value Every Week of the Year

Management at Salts restaurant is concerned that participating in Restaurant Week would not provide a true representation of the restaurant’s offering.

Chef Gabriel Bremer says, “When you think about Restaurant Week, what you’re trying to achieve for customers is something kind of special and show a sense of value to entice people. That’s what we really try to do on daily basis – we have a vision of a level of service and a level of food that we try to achieve.”

Bremer emphasized that there is value in Salts everyday menu. “It’s not Restaurant Week, but our tasting menu is 5 courses for $75.00 and we actually give on top of that an amuse, pre-dessert and petit fours after, so it’s 7 courses for $75.00 and that’s what we give on a regular basis.”

In addition, Bremer says, Salts uses the same purveyors as restaurants like Per Se and The French Laundry, and farms its own produce “so we are bringing in the best of the best and trying to give tasting or à la carte menus that are still attainable for people. To do it for any less is impossible.”

Though the restaurant may seem out of reach to some, Bremer is constantly attentive to the idea of value in describing Salts dining experience. “We try to focus on constantly giving the best we can at an obtainable price and always have that sense of value,” he said. “One of our important talks when we were contemplating the restaurant and talking about what it is – we always have a sense of value, a sense of ‘yeah this is really worth it and I’d even pay more.’ “  

Restaurant Week wouldn’t allow the restaurant to remain a true to its offering, according to the Chef. “On a daily basis we try to give the same products in that atmosphere but at an obtainable price,” explained Bremer. “So to take a week or so and try to showcase what we do for any less than that, it really wouldn’t be representative of who we are and I wouldn’t want to go through all the work and have everybody come in and try to put forth something that’s really not an expression of what we do – if people come in and try you they really aren’t trying you.”

When the Chef describes what’s special about Salts, his answer was extremely inviting. “What sets us apart from other restaurants and especially larger restaurants, you’re really walking into our home,” Bremer said. “If I could throw a dinner party every night and actually make a living from it, that’s actually what we do. You’re getting the complete atmosphere as if you’re coming to our home and being honored as our dinner guest.”

Regardless of your dining out budget, and whether you get to try restaurants during Restaurant Week or any other week of the year, it’s nice to know how much thought that these establishments and others put into the offerings.

 
 
Every March and August, I make a slew of restaurant reservations and invite my fellow foodies out to revel in a good meal – or a few – in honor of Restaurant Week. They know they can rely on me to remind them of the festivities, and I know there are two camps among my friends: the joiners and the abstainers. The former see the event as a bargain, a way to expand their restaurant horizons. The latter don’t see the bargain because to them, the occasion is more than just a $33.10 three-course meal once they add in wine, tip, and more food than they want or need. 

Restaurant Week started years ago as a way for restaurants to increase business during down weeks by offering three-course prix fixe lunches and dinners at special prices. At one point, the price was based on the year; I remember dinners costing $20.02 in 2002, though inflation has made this relationship less direct lately, so dinner prices are now in the $30.00 range. With Boston’s heavy student population, spring break is one factor in timing, and summer vacations and the last slow weeks before the back-to-school drive the August timing. At least that’s what I read when I first started enjoying restaurant week.

As an industry professional, I see both the bargain price allure and the overdoing it argument, but my desire to support the industry while eating good food wins out. Taking myself out of the equation, here are the two differing views courtesy of two members of my dining circle.

Foodie on a Budget

One peer I spoke to is a devoted student and lover of food who is in the midst of a career transition and not working full-time. While finances are a factor in her decision, she says that even when she was employed full time, Restaurant Week did not entice her. “I never do it. One or twice I’ve gone, but I just do not do it. To me it doesn’t seem like such a bargain; it feels like it’s a great way to lure you in and I spend more than I usually do for dinner. I don’t order three courses usually, so I just find it gets to be too much.”

This friend has done the math of adding in wine and the tip, which brings her tab to well over $33.00. She admits that it would be a good way to get to dine at out-of-reach restaurants. “I regret that I don’t think of it for those really pricey restaurants – that would be worth it. But at most of them, I could get away with not spending $60.00 by the time I am done. My perception is it’s a little bit of a rip off – at least for me. And I’m usually broke so I am the queen of meeting for apps and a glass of wine! I could enjoy any of these restaurants anyway – I still wouldn’t go out and spend that much.”

Dining Enthusiast

At the other end of the spectrum is the appreciative diner, who recognizes the bargain and is grateful for the opportunity. “I think it’s a great way to try out a restaurant you normally wouldn’t have thought of.”  This restaurant week, she went to Toscano, one of her local favorites on Boston’s Beacon Hill. “They always do a good job and especially in this economy it’s a great way to go out to dinner.” Her meal:  a smoked salmon crostini appetizer, a scallop, leek and spinach entree, and a white chocolate blueberry tart for dessert.

“We had dinner, and split a bottle of wine that was $30.00 so it was cheap, like $60.00 each. With tip it was $63.00 and I overtipped.” This diner is a former server at a high-end restaurant, and is conscious about tipping servers for good service, and based on regular prices when meals are on special. “If you live in Boston and you go to a restaurant of this caliber, that’s cheap. It was a great meal and the server was fantastic. If I were waiting tables it’d be amateur night” and again, this woman knows about difficult customers.  Based on Toscano’s regular prices, her appetizer and dinner would normally come to $47.00. Assuming a conservative dessert price of $9.00 as no menu listing is available, the pricetag would total $56.00 vs. the $33.10 she paid.

Restaurant Week Math

Savvy consumer that I am, I know there are restaurants that are not a bargain for this auspicious week (hint – if you order salad, pasta and a dessert during Restaurant Week, you are not getting a large discount). However, so far this restaurant week, my meals have fallen into the bargain category.

On Monday night I visited Olives restaurant, where there were more selections on the restaurant week menu than the regular menu. I ordered Lobster Bisque, Crispy Confit Duck, and a Chocolate Tart. Based on their normal prices a three course meal would range from $48.50 for the lowest-priced menu items, to $59.45 for the highest.

On Tuesday, I had lunch at Caliterra in downtown Boston, and the meal was less for all three courses than it would have been for just one entrée on the regular menu. I ordered Lobster Bisque (yes, again), Scallops, and Chocolate Truffle Cake (yes, more chocolate, too). Caliterra’s seafood entrées are regularly $26.00 to $28.00, and the three-course lunch was $20.10. If I had ordered an appetizer for $12.00, my bill for two courses would be $40.00, and with dessert, closer to the $50.00 mark. 

While it can be tough for our wallets and waistlines to accommodate eating like this as a rule, Restaurant Week provides several reasons for those looking for excuses to celebrate.