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.

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.