Competition | July 2012 | By John Morell

How to Make Sure the Price is Right

With commodity costs skyrocketing, price hikes are inevitable. How those hikes roll out will determine how your customers react.

McDonald's Extra Value Menu helps the company on multiple price points.
Items on the McDonald's Extra Value Menu give the company a new price tier. McDonald's
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With economic and climate pressures forcing commodity costs upward, many quick-serve C-suites are facing the grim task of raising menu prices. But with fears that such increases could impact sales and customer loyalty, executives are left to figure out how to best introduce these higher prices.

“Pricing is really the hot potato in the boardroom,” says Leslie Kerr, a restaurant pricing consultant and president of Boston-based Intellaprice. “No one wants to be told by the CEO, ‘Come up with a plan.’ You might feel like the fate of the company will rest with how you do this one project.”

Of course, businesses have successfully bumped up prices before and managed to maintain customer loyalty. Cliff Courtney, executive vice president and chief strategy officer of Zimmerman Advertising in Miami, says customers understand that price hikes are a fact of life. However, it’s how companies introduce the hikes, he says, that determines how customers will ultimately react.

“It’s only when a price hike is very steep or sudden that it causes consumers to step back, and that impacts sales and loyalty,” he says.

Tip-toeing around commodity-cost increases while still offering low prices is something most major chains have to face on a regular basis. McDonald’s, for example, has wrestled with its popular Dollar Menu for years. The loss leader drives customers into McDonald’s stores but also welcomes negative media coverage and irks customers when the company removes items it can’t afford to sell at that price point any longer.

In March, the company overhauled its Dollar Menu in an attempt to drive more business with higher-priced offerings. The company removed small drinks and french fries from the Dollar Menu, replacing them with fresh baked cookies and ice cream cones, and introduced the Extra Value Menu to bring attention to deals over $1.

In a conference call discussing first-quarter earnings for 2012, McDonald’s new CEO Don Thompson talked about the potential of the Extra Value Menu.

“The U.S. continues to broaden accessibility with the Extra Value Menu,” he said on the call. “[It] builds on the iconic Dollar Menu by offering a great selection of products at various value price points, from Snack Wraps under $2 to 20-piece McNuggets at $4.99.”

Offering multiple “value propositions” like this, Courtney says, can be a successful pricing strategy, allowing companies to figure out what price points customers are willing to move up to.

Communicating any price hike, though, is critical to its success, Courtney says. “Some brands have been proactive with price hikes and have been using social media and rewards programs to announce them,” he says. “It seems to go against the conventional wisdom, but they make it work. [Say] you’re part of a loyalty program and you’re told about the price increase and why this has to happen, and maybe there’s a special deal for you if you come dine in the next seven days. They treat you professionally, the way a good vendor treats you when there’s a price increase.”

David Vidal, a director at Simon-Kucher Marketing Consultants, says quick serves should be honest with their customers and “emphasize the need to maintain a certain level of quality amid increasing raw material or labor costs is logical.”

Kerr says coordinating price increases with special events like product releases or marketing campaigns can’t hide the price hike, but can make it more palatable. A big promotion that coincides with a new menu item or anything that gives a company reason to change its menuboards, she says, offers a good time to look at overall pricing.

“Lots of chains have seasonal menus and their customer base counts on it,” Kerr says. “Look at Starbucks with the success it’s had with its fall and winter coffee drinks, and McDonald’s with its Shamrock Shake. When you roll out new items and graphics and add in a new pricing structure, it’s not as noticeable.”

Menu redesigns or tweaks can help alleviate a price hike, as well, says Lori Karpman, a restaurant marketing consultant based in Toronto. “A different font, a different arrangement to the menu, these can communicate to the regular customer that the menu has slightly changed,” she says. “If they’re really focused on prices, they may notice that the price of their favorite item is up, but for your best customers ... are they at your restaurant because of your prices or your food?”

Like McDonald’s, many quick-serve companies struggle with loss leaders, or products that become very popular with customers because they’re seen as a great value for the money. Bumping the price of those items could lead to a drop in business, Vidal says, driving away price-sensitive customers.

Companies that do bump their prices shouldn’t expect a direct correlation between the price hike and increased revenues, says Jon Jameson, cofounder of Bellwether Food Group.

“If you push your menu prices up 2 percent, you’ll see your revenues go up about 1–1.5 percent,” he says. “That’s because consumers who notice the increase will trade down. They’ll buy the smaller drink or they won’t get fries. They do this until they’re used to the new pricing structure.”

The best thing to do with price hikes, Kerr says, is to get lots of opinions throughout the organization and not place the task on any one executive.

“I think the most successful companies use a ‘pricing committee,’” Kerr says. “It’s about listening to what people at different levels have to say about the pricing and how it should be introduced and incorporated into your plan. Remember that pricing is a process; it’s never set in stone.”