Stay the course

Amy Reeves details how Panera was able to introduce a high price point winner against the same economic maelstrom that everyone else faced,

Panera is also taking the non-discount approach to its new loyalty program, called MyPanera, which is currently in testing. Rather than rewarding customer loyalty with, say, the occasional freebie, Shaich says Panera aims to give its diners unique experiences.

"It may be coming in early to get an opportunity to see our new products, come in for a tasting, (or) cooking school, working in the bakery itself with the kids," he said. "We also do find opportunities to surprise people with something they didn't expect, a gift maybe. But it's all unique to that individual."

Over its 29-year existence, Panera has endured several recessions. And its main key to survival is to not panic, says Piper Jaffray analyst Nicole Miller Regan.

"They're benefiting from what they didn't do," she said. "Unlike some of their peers who've cut labor costs, cut services and discounted menu items, they just stuck with their core strategy."

Wine by any other price

The price alters our sensory experience. A fifty dollar lobster tastes better than a twenty dollar lobster even if it is the same lobster. Jonah explains the results of a study.

Bloom argues that essentialism plays a big role. We automatically believe that more expensive wine has a tastier essence, and that belief alters our sensory expectations. Those expectations, in turn, alter our perceptual interpretations, so that what we experience conforms to what we expect to experience. The essence of the thing has thus been confirmed: more expensive wine tastes better, even if the expensive wine is really Gallo Hearty Burgundy. This helps explain why so many food advertisements focus on the "essence" of the product, whether it's Coors being brewed from Rocky Mountain spring water, or Evian coming straight from the French Alps. The marketers know that the easiest way to increase our pleasure isn't by telling us how pleasurable the product is: It's by weaving an engaging story about essences.

Search for value

Bob Bielinski shares his thought on the new normal

Is the value-conscious consumer the new norm?

A: During the downturn, a persistent theme was consumers search for value. Immediately, lower prices come to mind when people think about value, but that doesn’t explain Panera’s and Chipotle’s strong performance during the downturn. These fastcasual bellweathers are relatively expensive options, yet people understood the value in the brands.

The campaign Subway developed around their “$5 footlong” promotion completely redefined the value landscape in QSR (quick service restaurants). Chains that did not react with their own compelling value propositions suffered. Even casual dining chains reacted to the price point, trying to match value at lunch.

Similarly, McDonald’s expanded coffee line forced Starbucks to rethink their price points as they saw McDonald’s increase its market share with a value-conscious themed advertising campaign.

So, consumers are more focused on value than ever before, but price, while important, is not the consumers’ sole measure of value.

Differentiation Pricing Startegy

Price strategy is a complex dynamic exercise. Peter at SEO Book has explained the differing strategies that can and should be applied to maximize revenue and provide value. The entire article here

Offering one price to one group, and another price to others may seem unfair. This is something you'll need to weigh up for yourself.

However, keep in mind that if the differing price points reflect different levels of value, then the customer is deciding what they value most. If they want the full service, they should expect to pay full-service prices. If they want the lowest price, they may be prepared to wait or sacrifice some features. The customer decides what they value, and votes with their cash.

And they can always say "no" :)

It is not customer appreciation day if it is a marketing stunt

A national QSR sub chain was selling sandwiches for $1 yesterday and calling it "Customer Appreciation Days." It is not customer appreciation day if a regular customer has to stand in line for a considerable amount to get a sandwich for a buck that they normally pay $4.89 for.

Yes, the marketing stunt clearly generates interest in a $1 sandwich, however by alienating the real customers who maybe will come back after this stunt, the net is negative. A relationship with the customer is the key to creating customer advocacy. When that relationship is not honored the consequence is not pretty.

Prepaid Reservation

Pete Wells explains the differential pricing strategy of Next restaurant.

Anyone wishing to eat at Next after its scheduled opening in the fall will pay in advance on its Web site. Like airlines, Next will offer cheaper tickets for off-peak hours. A table at 9:30 on a Tuesday night, say, would cost less than one for Saturday at 8. Ticket prices will also vary based on the menu, but will run from $45 to $75 for a five- or six-course meal.

Mix that with the service charge / tip strategy and you have the ingredients for a grand experiment

But the plan would also have value for Mr. Achatz and his main partner in Next and Alinea, Nick Kokonas. By law, restaurants may distribute tips only to those employees who work in service. But the service charge included in the ticket price “gives him control over the money,” said Bill Guilfoyle, an associate professor of business management at the Culinary Institute of America in Hyde Park, N.Y. “He can give it to whomever he sees fit.”

Free refills are a factor of rent cost?

Tyler explains the economics of the free refill

the first-order economic prediction is that drinks are sometimes used to charge for table space in the restaurant, a'la the Lott-Roberts paper. The more that land costs, the more that table space costs the restaurant. New York City establishments are usually crowded. That means they want to keep on charging you for holding the table and that means no free refills.

tax the heck out of unhealthy foods

Here is a gamechanger for you!

The researchers say their findings suggest that the taxes were more effective than subsidies. This conclusion doesn't surprise Karlan. He sites the theory of loss aversion: "People are just more responsive to price increases than decreases."

Karlan says a "sin tax" — charging more for unhealthful foods — would not change families' diets or approach to nutrition overnight. But it could serve as a first step in raising awareness of bad habits, alerting us to the kinds of things we choose to snack on.

Spectre of deflation.

BLS report on wholesale prices. Prices seem sticky to me.

Finished foods:  Prices for finished consumer foods inched down 0.1 percent in September after 
rising 0.4 percent in August. The index for eggs for fresh use, which declined 9.8 percent, led the 
decrease in finished consumer food prices.  

Ambiguos pricing:

Today is summer festival critique day, earlier I discussed the how brand clarity must be projected across all channels of customer interaction. This post addresses the whole notion of ambiguous pricing.

If more than one customer requires an explanation on the pricing on your sign, be it at a summer festival or in the restaurant, change it. The lasting memory of a customer transaction will not be happy if a customer thinks they are paying $4.00 for a large blended iced coffee when the price is actually $5.75. Case in point, a vendor had sign in large letters Iced Coffee sm - $3.00, large -$4.00, jumbo $5.75 on the right side of the board. The left side of the board read Smoothies and Blended Iced Coffee and listed the flavors. At the bottom in small print sm- $4.00, large $5.75, jumbo $8.00. Looking at the board I thought, a large blended iced coffee was $4.00 and was all set to order one. The customer in front of me had the same reaction. She ordered a large blended iced coffee thinking it was $4.00. When the clerk ask for $5.75 she pointed to the sign and said "it says $4.00", the clerk explained "that the iced coffee is $4.00, the blended iced coffee is $5.75 and I can put that in a small cup for you." Guess what, the clerk made that customer fell like "Cow Chips". Making customers feel bad about purchasing from you is not a sustainable business model. Yes you got the extra $1.75 in sales, however the future value of that customer is now ZERO, Zilch, Zip, Nada.

The sign was creating confusion which creates bad feelings. No business exists to create bad feelings. Fix your sign. This vendor is also another example of brand minefield issues because of the ambiguos pricing.

Watch your language:

“Everything is perception,” Roger Dooley’s post about how to market and cater to “tightwads” cautions us to the importance of language.

Watch Your Language! One rather startling finding in the CMU research was that changing the description of an overnight shipping charge on a free DVD offer from a “$5 fee” to a “small $5 fee” increased the response rate among tightwads by 20%! This is hardly inventive copywriting and didn’t involve any fancy neuromarketing, but the mere reminder that $5 was a small amount of money had an important effect on tightwads.

The lure of the $1 Menu:

The vast majority of consumers and businesses have never experienced an economic headwind of this magnitude. Every restaurateur knows someone who has shuttered their operation or is holding on by the proverbial thread.

In this environment the lure of the $1 Menu popularized by the major chains is powerful. Customers are clearly pinching pennies if they have any. The recent GDP data showing a contraction (-3.8% which I suspect will be revised downward) adds empirical support to the declining traffic counts that restaurants are experiencing. The lure is even more powerful because by now restaurateurs have tried several promotional variants and none have had any positive impact. All that is left it seems is to go to the $1 Menu.

Simply putting your JR Whopper on the $1 menu is not the solution. If your restaurant got 14% of its revenue from the $1 Menu, I am fairly confident that the situation would not be sustainable. Create new cost effective items for the $1 Menu that enables you to offer the $1 Menu in a manner that does not cannibalize your entire pricing structure. You must provide value to your customer, however you must do it in a fashion that is sustainable.

Repricing of Assets:

When prices collapse in the financial and commodity markets like they have in the past three months, it is called “repricing of assets.” Friday’s retail sales figures were not bad they were horrific. The price of oil has dropped 60% from its peak five months ago. Other commodity prices including dairy, wheat and corn have also trended lower. The conditions are changing so fast that business is unable to keep up. Menu prices tend to be sticky, that is when you set them they tend to remain at that price for a while.

Have you checked you vendor invoices recently? Are you still being charged a fuel surcharge? What has happened to flour and dairy prices? Look at your lease, if traffic counts have dropped off the end of the table, renegotiate your lease. The work that you had gotten a quote on five months ago, get another quote, I am guessing the price has been ratcheted downward.

There has not been such a huge “repricing of assets” in eighty years. No one seems to know how to respond, leadership is sorely lacking. There is a massive crisis.

There is also the opportunity of a lifetime!

Early Bird Specials:

Restaurateurs who enact an Early Bird Special, should not offer regular items at a discount price. Create a special menu which offers value. The strategy of discounting regular price items is a death spiral

Do not discount your regular price items.

Apparent pricing power:

Chipotle decided to raise prices in the fourth quarter. There is wholesale deflation occurring in the world and a restaurant chain raises prices. Great strategy, they have pricing power and they are using it.

Get Rid of the Dollar $ign:

Sarah Schmidt’s article explores the notion of perception:

“Restaurateurs can get diners to spend more on a meal if they drop the dollar symbol from their menus, new research shows”

Add on revenue:

The most horrific customer non centric concept on the planet is add on revenue. I do not advocate violence, however whoever came up with this concept should be drawn, quartered and summarily executed. Customers remember only the add on revenue feature of your product or service. How is that a positive? How does paying $15 for pillow on a plane enhance the experience in any fashion? How does paying $.50 for a cup of ice improve the guest experience? I have never heard some one say, “hey I did not get ice with my drink, shouldn’t I be charged less than someone who did?” I have heard billions of people complain that they were charged an add on fee for this or that.

Your business is experiencing slower revenue generation, guess what your customer is experiencing slower income generation, decreasing net wealth, and increasing energy and food prices. In addition to their escalating cost of living your business is now charging for things that you used to give the customer for free. How does that create customer advocacy?

Bigger and More Expensive:

Robert Cialdini, Noah Goldstein and Steve Martin have written Yes! One of the strategies that they discuss is “Superior product increase sales of next tier product”.

A 22oz steak on the menu actually increases the sales of the 16oz steak. Having a bottle of Dom Perignon on your wine list increases the sales of Vive Cliquot.

Irrational Anchors:

Roger Dooley’s post discusses anchors that are irrational, which actually is all anchors. The post quotes from Predictably Irrational, the sensational new book by Dan Ariely.

“In its early years, how did Starbucks manage to thrive despite having prices that must have seemed at odds with the expectations of most consumers?

First, Starbucks did its best to disassociate itself from existing price anchors by redefining the product. The stores offered a different ambiance, they were permeated by an intense coffee aroma, the food items offered in glass display cases were high-end pastry items, and so on. Even the products themselves were distinct from other coffee vendors: the sizes weren’t small, medium, and large, but rather tall, grande, and venti. You weren’t buying a cup of coffee, you were buying a Caffè Misto or a Frappucino. All of this served to weaken the tie to anchor pricing formed at other shops.

Second, according to Ariely, repeated visits to Starbucks served to establish a NEW anchor price for high-end coffee products. Each purchase of $4 coffee strengthened that new anchor point.

Can marketers take advantage of irrational anchor pricing? Would asking customers to think of a number between 90 and 99 while standing in line at a fast food restaurant make them willing to pay more for a burger? Should stores hang posters of big numbers by the checkouts? While Ariely’s work suggests that this kind of irrational anchoring effect could exist, I wouldn’t recommend building a marketing strategy around such techniques.

Menu prices are a very subjective interpretation of irrational anchors.

Menu pricing 101:

Nathan at Restaurant Revolution explains menu pricing;

“The truth is, hitting a budgeted food cost does nothing to guarantee there will be enough money left over from the sale to pay for things like labor, rent, insurance, linens, smallwares, uniforms, utilities, taxes, etc, etc, etc.

Hitting that cost percentage really means nothing.

Further, not hitting it only means, “I should give things a closer look.” It doesn’t mean there is a problem. On the contrary, a high food cost could mean you’ve been selling a lot of high cost items that contribute more gross profit per sale. Are you going to make more money selling 50 hamburgers priced at $6 that cost $1.50, or 50 lobsters priced at $30 that cost $15?

As long as there isn’t a significant increase in the overhead of serving the lobster, gross profit dollars win every time. You don’t want to sell the item with the 25% cost and $4.50 gross profit, you want to sell the item with the 50% cost and the $15 gross profit”.