All too often, foodservice operators are eager to talk about menu innovations, brand storytelling, and their core mission. But at the base of these more marketable elements is the simple mandate of all businesses: to make a profit. And at the base of making a profit is each company’s pricing strategy.
Pricing strategies dictate much of the rest of a business, from finding suitable suppliers to rolling out new menu items. They can also drive innovation in those same areas. And yet the pricing strategy itself is rarely tinkered with or even discussed beyond promoting value meals or limited-time offers. The majority of operators have long relied on cost-plus models in which the price of a menu item is determined by multiplying the cost of goods by a standard rate.
But the times are changing. Through emerging technologies like digital menuboards and analytics, restaurants have an unprecedented amount of data to explore consumer patterns, competitor activity, and sales insights—information that could benefit a pricing program. The best way to use this data, however, is a point for debate, at least as far as pricing is concerned.
Justin Massa, president and cofounder of Chicago-based data analytics firm Food Genius, says operators should be more daring in changing their prices and experimenting with new strategies. “We believe there’s a lot of opportunity for operators to move the margins on price in ways that they historically have been a little more hesitant to do,” he says.
Conversely, Leslie Kerr, president and founder of the Boston-based pricing advisory firm Intellaprice, says that while new metrics and tools can better inform pricing, the best strategy still boils down to the tried-and-true basics.
“It’s what we learn in Econ 101. … Everybody understands that as something becomes more desirable, it should become more expensive,” she says, adding that her advice on pricing was the same 10 years ago and will be the same 10 years in the future. “I think operators are constantly on their toes to try to deliver as much as they can, and price is one means of that. There’s so much that goes into the equation of what customers value that it’s no different now.”
A shifting landscape
Industry experts and operators all believe the restaurant landscape is quickly changing, both in terms of consumer demand and companies’ ability to respond to that demand more quickly. Massa says this change gives operators a major opportunity to experiment with their pricing structure.
“Those delineations between [quick service], fast casual, and casual dining are getting increasingly fuzzy. It gives operators some freedom to experiment with price,” Massa says. “If they view themselves only as competing against other locations in the same historic segment definition, they’re probably missing out on a bunch of folks that they actually do compete with.”
Luckily for operators, they can monitor the competition—and their competition’s price points—easier than years past. “For a long time it’s been really hard to track competitor pricing. It meant people on the street walking in with clipboards,” Massa says.
But some operators are not convinced of the merits in keeping tabs on competitor prices and cite consumer data as a more comprehensive means to optimizing prices.
“Seeing more of your competitors’ pricing and making changes that way, doing like we did in the old days, is going to be ineffective,” says Terri Snyder, chief marketing officer and senior vice president of Checkers/Rally’s. The revenue management system the brand uses does not directly track geographic and demographic data, she says, but rather uses them indirectly to understand how consumer demand changes as prices increase.
Other brands do take demographic and geographic (for example, urban versus suburban versus rural) considerations into account, especially larger chains and franchises that establish a number of pricing tiers. When entering a new market or location, some operators choose a tier based on the demographics for that area. Checkers/Rally’s has 14 tiers. Snyder says that while franchisees are not beholden to the tiers, they can prove a helpful resource in setting the right prices.
Nashville-based seafood operator Captain D’s also uses a tier system, although promotions like its “5 under $5” are consistent across markets.
“Like most brands, we have more than one pricing tier to account for local variables such as competition and local operating costs,” says Jonathan Muhtar, chief marketing officer for Captain D’s, via email. “The price variability is minor, however, and we ensure that we consistently provide a great value to guests across our entire system.” Muhtar adds that sales figures and foot traffic affirm the efficacy of Captain D’s pricing strategy.
In addition to quantitative data, social media can also inform prices by aggregating real-time feedback, as well as a better understanding of how consumers are using the brand. “Research quantifies it for you, but social media listening is some of the best qualitative research that we do today,” Snyder says.
The new digital toolkit
Online ordering and apps can also gather consumer data valuable for price changes, and create an opportunity for the operator to bundle or upsell. Massa says fast casuals have taken the lead over traditional quick serves in online ordering integration. The tradeoff to their early adoption is that many use outside vendors rather than build their own internal ordering system.
“Those companies who are taking on the really big work of building their own solutions from scratch are where we’re going to see this [pricing] innovation happen first,” Massa says.
Wing Zone is one brand that has found success in working its pricing strategy around a robust online-ordering platform. The Atlanta-based company has stronger upsell rates when orders are placed online; those orders also tend to be more expensive since they are often feeding a larger group than dine-in guests. With these orders, guests tend to add appetizers, sides, drinks, and desserts.
“What we really try to do at Wing Zone is bundles because we’re able to get a little more aggressive, and if we push them toward an online order, it saves in labor efficiency rather than being on the phone with somebody trying to take a delivery order,” says Dan Corrigan, director of marketing at Wing Zone. “A customer is able to order online, take [his or her] time, and upsell into desserts or drinks.”
Wing Zone has the benefit of being a company that does not rely too heavily on menuboards, given the amount of advance and takeout orders. For larger chains with a greater emphasis on dining in, menuboards have presented a considerable hurdle in changing prices; nobody wants to frequently redesign a menuboard.
Checkers/Rally’s restaurants use drive-thru menuboards more than in-store boards, and Snyder believes the switch to digital boards will simplify the price-changing process. Currently, managers have to arrive early, remove menuboard sheets, scrape off the price, and put up a new decal. Although back-office systems and registers have already become more user-friendly, menuboards remain roughly the same as they were 30–40 years ago, Snyder says.
“Think about combining digital menuboards [with the POS],” Snyder says. “That central vision of a register system is more sophisticated and allows for those pricing changes to be made nimbly and quickly and efficiently. You have a lot of flexibility.”
Meet your new consumer
The emergence of tools like digital menuboards, online ordering, and consumer data is only one half of the equation in navigating the new pricing terrain. Not only has technology changed in recent years, but consumer demands have also shifted considerably.
According to the National Restaurant Association’s 2015 Industry Forecast, 92 percent of customers cited quality of food as the most important consideration in selecting a limited-service establishment. Nine out of 10 operators also noted that guests paid more attention to food quality than they did two years before.
“With the exception of certain income brackets … if you just look at age and geography, people tend to be willing to spend a little bit more for quality,” Massa says. He points to brands like Chipotle that are popular among Millennials and even teenagers, despite the relatively higher cost.
Alan Wright, vice president of franchising operations and marketing at Newk’s Eatery, says many consumers place a higher priority on quality than cost. The Mississippi-based fast casual offers menu items like a Shrimp and Avocado Salad, as well as premium limited-time offers like an Ahi Tuna Sandwich, both of which retail for $10–$12. The prices are more expensive than many fast-food operators’, but not prohibitively so. “A real nice … position is when guests or customers don’t have to compromise flavor during a food experience, and the value and convenience is still there,” he says.
For many middle-class consumers, price may not be the strong influencer that it once was. Historically, quick serves have congregated around a trending price point, whether it’s 99 cents or another number. In 2008, Subway launched its $5 foot-long sandwich and other operators rushed to match the price point; Quiznos offered $5 Large Deli Favorites and Boston Market peddled $5 meals. The price point continues today with other specials, like Captain D’s 5 Under $5.
Intellaprice’s Kerr says price is hardly the only detail consumers consider when dining out. “It goes to show you that while price is important, it’s often not the driving factor in a guest’s decision in where to go,” Kerr says. “If you feel like Panera, you feel like Panera; you’re going to go buy it. You’re not saying, ‘It’s $10 or $11 for my lunch today, I won’t go.’”
Low prices might not have the same appeal that they once had, but they are far from arbitrary. In order for a customer to choose a restaurant or specific menu item, the price must be in line with the value placed on the quality of the product and the convenience. And consumers across all segments have become smarter in determining the correlation between price, portion size, and value, says Marley Hodgson, cofounder and chief strategy officer for Denver-based fast casual Mad Greens. Consumers, he says, look for the right balance of price and quality in choosing their purchases.
“It’s not necessarily preference, though; it’s value. It’s people’s perception of what makes value,” Hodgson says.
Past research and studies support Hodgson’s viewpoint. Last September, Cornell University published a paper in the Journal of Sensory Studies following a study on price at an all-you-can-eat buffet with pizza, pasta, salad, and soup. Guests were either charged $4 or $8 for the lunch buffet, and the results found that participants found the pizza 11 percent tastier when they were charged more.
“We certainly have increased expectations of food when it’s more expensive. We also think it tastes better when it’s more expensive,” Massa says. “There’s an execution and quality risk that I think operators take on when they think about upping price too dramatically.”
What, when, and where
Massa says that if operators want to differentiate prices based on location, it’s easy to build those increases into ingredient add-ons; for example, location A might charge 20 cents to add onions, while location B charges 25 cents. While a customer is unlikely to notice a 5-cent price difference between two stores, it gives quick serves the chance to capitalize on true market-based pricing.
Beyond geography and demographics, Massa says, operators can use dynamic pricing to charge more when demand increases. Tech-based businesses like Uber, the ride-sharing company, use a similar model. Under this system, high-traffic dayparts such as breakfast or lunch would bump up prices while slower periods would decrease them. Kerr says she has heard of some operators using “graveyard” pricing wherein menu items cost more at late-night hours, when customers may be too tired or too intoxicated to care about the increase.
Kerr and Massa both say traffic-based pricing may upset customers. But Massa believes a parallel tactic that pushes special promotions during quiet hours could boost sales.
Checkers/Rally’s drives traffic during nontraditional dayparts with its $2 boxes. Featuring a combination of items, such as the Chicken & Shrimp Box or the Chicken Slider & Fries Box, these mini meals fill a gap in foodservice offerings, Snyder says. In her opinion, other brands have been relying on the same value meal formula for too long.
“When you look at the $1 and now the $1.25, $1.50, $1.75 [meals], those products have been the same for 15 years. It’s chicken, a bun, and some kind of sauce,” Snyder says. “[They’re] really boring products.”
Pricing strategies should ultimately reflect the menu as a whole rather than a single element, Kerr says. Some items are going to be more profitable than others, so they have to complement each other and the rest of the menu. Menu options that complement each other can often be bundled or customized. Menus with options for mixing and matching—such as Panera’s You Pick Two and McDonald’s prototype build-your-own combo—might be the new value meal.
“The indications we have now are that operators are looking at simplification of prices or customization of items and letting that be the value,” Kerr says. “We’re going to have to understand that the menu is the portfolio of products.”
As digital menuboards become standard and analytics are fully integrated into operators’ strategies, restaurants will have a clearer view of their consumer and the efficacy of their prices. Some may test more aggressive pricing strategies while others tweak menus to feature more customizable dishes and snack options. Regardless of the approach, Massa says, brands that start testing early will have an edge over the competition.
“The groundwork is being laid. All of the components are about to be in place that offer [quick serves], and really foodservice writ large, the opportunity to be far more sophisticated about price than we have in the past,” Massa says. “Those who win are going to be those who get there first, and they’re going to get there first by experimenting.”