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.

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