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.”