Outside Insights | October 2014 | By Guest Author

The Cost of Outdated Pricing Strategies: Part 2

A look at pricing strategies that go beyond cost-plus and value-based pricing.

Editor’s Note: This is the second in a series on pricing strategies within the quick-service restaurant industry. Click here to read part one.

Welcome back, class. Last we left off, we were discussing the shortcomings of a cost-plus approach to menu pricing and teasing more sophisticated strategies that have the potential to benefit operators in myriad ways. Now we are back to contextualize our case for more modern strategies through a hypothetical restaurant that we decided to name Millie’s. Think of Millie’s as a fast-casual concept, a sort of hybrid of leading fast-casual and quick-service chains like Five Guys, Wingstop, and Panera Bread. It is located on the north side of Chicago in a neighborhood with a median income of $50,000.

In order to keep the takeaways straightforward and the insights clear, we are going to focus on a few menu items that we think of as variations on standard inclusions across the aforementioned segments and avoid discussing all other specific elements of the restaurant. Those menu items are as follows:

  • Bourbon Glazed Wings (appetizer, serves four)—$10.95

  • Wisconsin Stuffed Cheeseburger (entrée)—$6.95

  • Villa Frizzoni Supreme Pizza (entrée)—$26.95

  • Roasted Vegetables (side)—$4.95

  • French Fries (side)—$2.95

As promised in the last article, the prices of the above items were derived from a cost-plus approach that is based on raw food costs provided by Reinhart Foodservice, and the items themselves were based on recipes accessed through TRACS Direct, Reinhart’s ecommerce solution. We held food cost at 25 percent and rounded to the nearest $0.95. To double check our work, we then compared these prices to those found on Applebee’s menu, which boasts a $10.49 chicken wing appetizer, and Five Guys’ menu, anchored by a cheeseburger with the exact same price tag as Millie’s cheeseburger: $6.95. Now we are going to show you how to tip things in your favor through a new approach we are calling attribute-based pricing.

The difference between burgers that cost less and burgers that cost more is not the actual elements, but the mere mentioning of those elements on the menu.

In its simplest definition, attribute-based pricing is a strategy that draws from a product’s internal characteristics and external factors to ensure that an item’s price reflects its consumer-perceived value. Determining a menu item’s value is something that can only be done through careful observation of data. To crystallize this point, let’s return to Millie’s. By consulting restaurant and menu data, we know that the average price of cheeseburgers among fast-casual and quick-service restaurants within a 10-mile radius of our Chicago location is $9.98. So already we see that there is a $3.03 disparity between a cost-plus-based price and a price that is based off the perceived value of a cheeseburger within Millie’s local competitive set. To be sure, we aren’t saying that an operator could easily increase the price of their burger by $3 without a customer noticing. Rather, we are simply shedding light on the vast difference between pricing of similar items in a close geographic area.

Given the data on average burger prices, an operator of a new restaurant could easily price their cheeseburger at $10 and have that price be aligned with a local consumer’s expectations. Doing so would increase their profit margin on that menu item by upward of 20 percent. By observing the data on an even more granular level, we discover additional insights related to pricing. For instance, we know that there are certain attributes related to a food item that correlate with an increased price. In the case of a cheeseburger on the north side of Chicago, the attributes or terms that are associated with a pricier burger are charred, bacon, beef, lettuce, and tomato. What’s noteworthy is that most cheeseburgers typically include these attributes. Which means, in some cases, the difference between burgers that cost less and burgers that cost more is not the actual elements, but the mere mentioning of those elements on the menu.

Menu items that feature longer descriptions and mention specific attributes garner higher prices, and nowhere is this made clearer than in the case of french fries. At Millie’s, a regular side of french fries costs $2.95, a price that is once again below the neighborhood average of $4.20. Now, let’s tack on a few terms that require very little additional costs and see what happens to the price. The average price for seasoned fries is $4.71, while hand-cut fries sell for $4.63. In both cases, the mere mentioning of the words hand cut and seasoned garners an almost 50-cent increase in the price. The actionable insight here is that if you are seasoning your french fries or hand-cutting them and not making mention of that, you are leaving a significant amount of money on the table every time you send out a side of fries. There’s no food costs associated with the hand-cut methodology, and seasoning certainly doesn’t cost 44 cents per serving. This is where a cost-plus pricing approach glosses over the value that your market has assigned to specific attributes of items.  

Another easy win associated with attribute-based pricing comes in the form of source labeling. Ever noticed how in every Five Guys there is a white board that features the name of the farm that grew the potatoes? Mentioning a product’s origins is no longer a tactic reserved for trendy, independent operators. Most food items purchased by a restaurant are tethered to a farm (the more local the farm is to the restaurant, the better) and it behooves all operators to mention this reality to consumers. Perhaps prominently displaying their potatoes’ origins is in part why Five Guys can get away with selling a side of regular-sized french fries for $3.19, 26 cents above the cost-plus derived price of Millie’s fries.

But you don’t always have to increase the price of an item because its attributes have a high value in your market. For example, Millie’s sells its wings for $10.95—in line with the average price of wings in its neighborhood. But a quick glance at the data reveals that operators who are charging upward of $11 for their wings are mentioning terms like glazed and dusted. While Millie’s may want to keep an order of wings under $11, it can add to the perceived value of the product by including words whose market value would push the price higher. An order of $10.95 wings sounds expensive; $10.95 bourbon-glazed wings sound delicious and like a good value.  

Number of Unique Descriptions for Frozen Supreme Pizzas in CPG by Pricing Tier
Value 11
Mainstream 15
Premium & Super Premium 44
As with restaurants, pizza pricing in the grocery channel is correlated with unique attributes. There are four times as many unique descriptions for premium and super premium supreme pizzas than there are for value supreme pizzas. Values pizzas use words like deluxe and the works, whereas super premium pizzas use words like fire roasted and Tuscan style. Source: Information Resources Inc.

Discerning customers can and will gauge the value of an item from how it is named and described on the menu. Emphasis on unique aspects of dishes, specific mentions of certain attributes, and references to the ingredient origins are all positively correlated with a higher price. But the nuances matter; while referencing a product’s origins seems to lead to a higher price, the same can’t be said for all attributes. Attributes like premium, artisan, charred, and hand cut all have different values depending on how they are combined with other attributes. Attribute-based pricing strategies require you to leverage external data about your competitive landscape as opposed to the purely internal data of a cost-plus approach. It’s more work, but the payoff can be significant.

Don’t just take our word for it; grocery brands and retailers have long taken advantage of the power of their brands and product attributes to push for higher prices of greater perceptions of value. In the freezer aisle of the grocery store, value supreme pizzas use words like deluxe and the works, whereas super-premium supreme pizzas use words like fire roasted and Tuscan style.

That’s all for this week’s lesson. Make sure to keep up with the conversation on Twitter using the hashtag #menudata and check back in a few weeks for our next article, in which we’ll discuss another pricing strategy that builds on attribute-based pricing and is specifically geared toward multi-location operators with units across the country.

By Justin Massa, CEO and cofounder of Food Genius, with additional reporting and research by Abigail Covington.


Great post about how to price items. It's so true that you should price on perceived value and not on a multiple of cost.

This article (and many others on this site) should be assigned reading for every MBA student (Seriously, no sarcasm!). A lot of people will read this and say "Oh, I knew that already" Really? :)

yes, but how do you do this analysis. There are no formulas, processes or ideas. Should we use GIS? are their data sets for this kind of thing? Where would I acquire them? Or did you use an excel spreadsheet to go through and add up all of the average within a certain area?

Very interesting facts about the pricing of items in the fast food industry.

B.T.W... you can read another interesting post about comparison of popular fast food restaurants prices at bit.ly/1Rks4vx


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