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.



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.

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.

Everyone Loves a Deal

March 11, 2010

© 2010 L. Kerr

Free this, all you can eat that. 2 for $20; 15 under $15; starter, entrée and dessert for $12.99. Small cravings. Small plates and snacks. $1 coffees; $1.00 menu;  $5 lunch. And the list goes on – you can’t turn around without reading about specials at restaurants everywhere. It’s deal madness.

Don’t you love it?

And I don’t just mean customers – restaurants have to love them as well. They don’t have a choice.

For cost-conscious customers, as times stay tough and cost cutting is a must, a simple, casual meal out moves down on the priority list, if not off the list entirely. A night out is a true luxury compared to say, the electric bill. So deals are a necessary enticement. And it’s not  just customers who need the deals; restaurants must rely on them as well.

It used to be that many operators tried to avoid offering deals, citing a well-known list of arguments against them:

  • Don’t train guests to be more price sensitive
  • Limited time offers wreak operational havoc
  • Price cuts bite into margins
  • Competing on price just leads to price wars

But desperate times mean restaurants can’t afford not to offer deals.

I remember when operators could focus on growing revenues by pure and noble means – by adding customers and building check. And by building check, I don’t mean via price increases. It came down to such basics as getting customers to come in more often, and to consume more during those visits – simple, right? Of course new products were crucial, but that’s a tough game. All that R&D, maybe some new equipment, the sell-in, the resistance, and the pressure on each new product to be the next great thing. And if sales saw only a temporary, modest blip, and new items didn’t take off like gangbusters, there were post mortems, lessons learned, and disappointment. It’s a tough game, that quest for new news.

But these days the new news is the deals, and while it’s easy for critics to declare that price cuts are damaging, they should keep in mind how much further sales could be down without these dastardly deals – a difficult calculation to make. On the plus side, deals have sparked some menu creativity and consumer excitement. And some of the associated smaller portions benefit chains and their patrons by promoting health and value, or the perceptions thereof.

We don’t yet know to what degree consumers will retain price sensitivity when prosperous times return. With the pace of store closings and the financial pressure bearing down on everyone from guests to shareholders, it’s hard for operators to think about that now.

So until the smattering of good news we have seen lately about positive performance becomes the norm, the reality is that everyone will continue to love and need a deal, including operators.

Pei Wei Means Big Value

March 4, 2010

Photo: L. Kerr

At long last, I got to try Pei Wei, the Asian Diner little sister of P.F. Chang’s, and it far exceeded my expectations. Pei Wei exemplifies the value equation with a great customer experience at a very fair price. Most commonly, the restaurant value equation is Experience/Price = Value, but I’ve rearranged the components for Pei Wei to this: Tasty Food + Reasonable Prices + Pleasing Portions + Great Service + Nice Environment = VALUE.

I was in Dallas for a 12:30 meeting so planned to eat around 11, which was fine with my east coast stomach. I knew there’d be a million restaurants to choose from, and was thrilled to see Pei Wei pop up on my GPS (I’d be lost without that thing). Not knowing much about the concept other than that it’s small and growing, and it’s fun to pronounce, I pointed my car in Pei Wei’s direction. I wanted to eat healthy and I had a yen for Asian, if you will, but little did I know there was so much more waiting for me.

Arriving at about 11:10, I assumed I would be okay on time, and their fast casual service model worked perfectly. I saw several tables already seated, and followed the instructions to order before sitting. Perfect, no delays there. The menu is easy to read – there are digital flat screens posted, and an Asian Chopped Chicken Salad was $6.95. Figuring it would be on the smaller side, I decided to order an appetizer – Chicken Lettuce Wraps for $6.25. Then I decided to make it a feast, and added Dan Dan Noodles for $6.75. I figured I’d treat it like Asian tapas, a smattering of tastes for myself. I knew I was ordering more than I needed, but just how much more, I couldn’t tell, aligning my expectations for the portion with the prices posted. This was definitely enough for 2, and might have been sufficient for 3 people. So while the quantity wasn’t exactly appropriate, I exercised some rare will power! After all, I had a blog to write, and 2 items would have been skimpy. My bill was $21.60. I’ll say it again – my bill for 3 items was under $22.

I sat down, pulled out some reading, and soon I had my lettuce cups – they seemed identical to those at P.F. Chang’s ($7.95 on their menu). Unlike some fast casual concepts, Pei Wei brings you your food rather than having you pick it up yourself. I tried not to fill up on the wraps, and then came my noodles, which were great. On their own they would be enough for a full meal, so I eased off on them, begrudgingly. Last came my salad, which was delicious. Salad snob that I am, I could not find fault with this one at all. It was very nicely presented and the portion was excellent, with plenty of chicken. And the dressing was great, with a pleasing consistency and just-right coverage (I should have been a salad critic). It would have been enough all by itself, which shocked me at that price point. I can’t remember the last time I got one for lunch at what I thought was a fair price. At my favorite Boston lunch haunts, the range is $7.50 to $9 for a much less exotic version at a quick serve establishment, and more like $12 to $14 at full-service locales. My $22 meal would have easily been enough to two, and in fact, on a recent lunch at P.F. Chang’s, a similar order of 1 appetizer and 2 lunch entrées came to just under $28.

By 11:30 the place continued to fill up and I watched a constant stream of runners hustling to deliver food and clean tables as I ate, surrounded by too much food. When I left at noon it was full on busy, and I passed a table being greeted by a manager, who asked how the party’s meal was and if she could refill their waters. This had all the makings of full service but was actually a limited service model at noticeably reduced prices – amazing. I do have one recommendation for the restaurant: could you work on the temperature in your ladies room? It was noticeably warmer than the dining room.

Pei Wei’s website notes that it is a faster, more casual version of P.F. Chang’s, and that all menu items are under $10. Combine the delicious, well-presented food with the nicely-themed environment, the quick service, the clean establishment, the portions, and the pricing, and this is a winner. Too bad I can’t get there more easily. Way to go, Pei Wei!

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.