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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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?

 
 
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.

My mother will be disappointed to learn this, but I once told a valentine not to buy me flowers on Valentine’s Day, and if he must, not to buy me roses. Despite Mom’s best efforts, my practical nature sometimes gets the better of me. I know roses cost more around February 14th, and I just can’t tolerate the price hike.  

Last week, reading articles and advertisements for Valentine’s Day meals, I was of course was glad to see restaurants projecting positive sales. But I couldn’t ignore the economics of it, and wondered how others view the business of Valentine’s Day dinners. And if you’re reading this, you probably know that I conducted some well-timed research to find out what people think à la the rip-off factor. To everyone who responded to the survey, thank you, and here is the skinny.

I surveyed colleagues and friends via Facebook, Twitter, and emails asking them to respond and recruit others. So while it’s not a random sample, it’s relevant for my purposes. It ran from Thursday night, February 12 until the morning of February 14th, when I had reached 100 responses – 103, actually.  I have to say, I enjoyed learning about others’ views of the occasion via the non-price-related questions, but as a pricing nerd, I care most about the views on costs and value. So without further ado:

  • 40% of respondents believe prices are more expensive on Valentine’s Day than other nights of the year
  • 33% believe prices are similar to those on other nights
  • 20% don’t know or aren’t sure
  • 4% think prices are discounted on this night
  • 5% responded “other,” noting specials and pairings that are available, with no note as to expense

Big aha: more people think dining out on Valentine’s Day is similarly-priced or cheaper than other nights than think it’s more expensive. Restaurateurs, I am happy to be the bearer of good news.

Is Valentine’s Day a special occasion worth the splurge? Is it a hassle to go out for Valentine’s Day? Respondents rated these affirmative statements on a 6-point scale where 1 means strongly agree and 6 means strongly disagree:

  • For both statements, the average score was 2.9
  • No answers were given for either statement in the disagree range of 4 to 6

So people value this occasion and are willing to put up with the crowds, pressure, opportunity to be exploited, and mandatory fun (their words, not mine) because they appreciate the time with their loved one, adult conversation, dessert and lack of dirty dishes (as reported in open ended questions). Again, operators, rejoice!

One Restaurant’s Point of View

To understand the restaurant perspective, I spoke with Byron Lepine, Manager at Kingston Station, a downtown Boston lunch favorite of mine. I had received an email with their V-day specials – a $50 3-course prix fixe menu, $70 with wine pairings. Byron sounded like the host with the most as he described the restaurant’s philosophy. “We want to make sure guests have a memorable evening and go home feeling good about it.” He waxed poetic about the planning and regretted not repeating last year’s late-night anti-V-day party for singles this year.

Lepine knew his menu inside and out, explaining that both customer favorites and special items were among the selections. When he mentioned that one of the items was a $26 entree, I was quick to ask how $24 for a first course and dessert meant a value, and he quickly recited the value and economics behind their meals. He clearly does his homework. “What you pay for an entree doesn’t reflect the food cost. We have a terrible [cost] on skirt steak and should probably charge $35 or $40,” though it’s less. “We eat the cost.” He used the example of the Valentine’s Day special prime rib, a $36 entree, along with two $9 courses, for the $50 package. While I don’t consider a couple of dollars a bargain, his points about the fair market price are well-taken. And those of us in the biz know that not all items’ profitability is created equal.

Side note: I reviewed the restaurant’s typical prices for items on the Valentine’s Day menu, and using these to calculate V-day value is a bit less favorable than using Lepine’s reference points of what the restaurant “should charge.” My calculations do not, however, include the factors he mentioned, like fresh flowers and special atmosphere, as well as the difficulty of handling many more tables in a night. And as we say, value is not just price. And as we also say, the laws of supply and demand hold true, so as demand goes through the roof on Valentine’s Day, it’s fair that prices do, too. So while the wise consumer in me has a narrower view around the pricing, the businesswoman in me says Kingston Station is conducting smart business.

I also asked Byron about the wine pairing, thinking that the extra $20 would not be such a bargain, but when he told me it was a glass of wine with each of the 3 courses, I knew that was a good deal. He estimated $9 price tags for the wines selected. I don’t know about you, but I often see them for more than this. Indeed, many wines on Kingston’s menu are $8 and $9 a glass. So I like that math. And while Kingston’s menu suggested the wine for each course, the restaurant would not hold guests to the recommendation, adding to the value quotient. This left me with a good feeling about Kingston’s wish to spread the good feeling.

A Diner Weighs In

My optimism was tempered when I learned that the warm glow of a Valentine’s value was sadly lacking by a friend who visited a suburban Boston restaurant on this auspicious occasion. Her summation: “Last night’s dinner was the biggest f-*^ing rip-off, it was ridiculous.”

The culprit? Prix fixe menus. This restaurant, like Kingston Station, required guests seated at tables to order the prix fixe dinner, which is how restaurants increase their checks on this night o’ couples. However, my friend noticed that the restaurant allowed those at the bar to order à la carte, which ended up being less money for the same meal served as a “special.” Her dinner deal was a $75 ticket, and she calculated that ordering the selections separately “didn’t even come close to $75.”  Her reaction: “I think I now will officially spend both New Year’s Eve and Valentine’s Day dinner at home. I loved spending the evening with my guy, and the food was good, but it was ridiculous how it was priced.”

So what can I conclude from these various sources of data? If you’re in the camp that wants to splurge, or you don’t mind the hassle, or you can finish 3 courses and 3 glasses of wine, the deals may feel better. If you are restaurant catering to a house full of two-tops, you have to earn your money and manage the crowds, but luckily their price/value perceptions are in your favor.

And if you’re me, you get to take surveys and observe it all in the name of work!

A Few More Survey Findings:

  • 47% of respondents prefer to go out, while 34% prefer an evening at home; 15% want to treat it like any other night
  • Fine dining is the winner for those who want to go out, preferred by 41%, while independent restaurants claim 35% of respondents
  • Respondents who prefer a night at home overwhelmingly want to make a special meal, with 66% opting for this choice; the next most popular option: takeout at 10%
  • 60% of respondents were women, 35% men, and 5% did not indicate their gender.