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Opinion: pricing and discounting

In my last article 'What is Value?', I briefly discussed value and how good value is the result of a wide variety of factors that together exceed the price asked.

By Jeremy Ryland

@expertgourmand


Price is likely the most important component of any business marketing effort. When times are good, setting prices that resonate with targeted consumers is tricky. And in difficult times, testing for optimal pricing, price reductions, and new pricing strategies becomes even more tasking.

 

Remember that price can set the value and competitive set and is an indicator of quality. If the price is too cheap, it suggests to consumers that the product is of low quality and low value. If the price is too high, consumers may resist the purchase.

 

I also mentioned that discounting is dangerous. Consumers very quickly associate the discounted price with the “real” price, making increases difficult. When sales are down, particularly for extended periods, there is a great temptation to attract more customers by discounting prices. This is certainly one method of encouraging new trade, but as a long-term practice, it is fraught with danger as well as being expensive and hitting the bottom line.

 

Long-term discounting may work in high-volume industries, where unit sales are high and overheads are proportionally low, but in the restaurant industry, this is rarely the situation. You should try to avoid discounting and focus on quality. Consumers will pay for quality, so long as there is a perceived value.

 

Determining the right price is a balance between costs, margins and competition. There is no simple formula, just a disciplined process of review.

 

In determining your prices and price increases, consider:

 

·      Cost of sales – what is the product costing? What margin do you need to make? Are the product costs stable?

·      Cost of production – labour, time, waste and other factors.

·      Product mix – what proportion of sales does the product represent?

·      Dollar margin, per product, especially when compared to other products.

·      Competitive products – what are similar competitors charging for the same product?

·      Value – does the product hold more or less perceived value with the consumer?

 

There are several things that impact on pricing strategies. Consider these:

 

Prestige pricing: Are your prices positioned at the cheap end of your category? A BMW or a Kia? Higher prices imply higher quality … think Apple, Rolex, The Ritz. Work differently and imaginatively to find and cultivate the premium customers within your market. Once you get them, treat them royally and incentivise them to become repeat customers.

 

The numbers game: Did you know that most people tend to associate the number 9 with value and a zero with quality? Consider the difference in pricing styles between premium restaurants and fast food joints. A dish at a high-end venue may be priced as a simple, round $35 or even just 40 (no dollar sign), reducing the emphasis on cost. However, a burger on-the-run may cost you only $8.99 – a fraction less than a big, round number that might affect your budget. Do the prices of your products suggest quality or value?

 

Bundle pricing: Many people see better value in one single price – bundling. They know how much they are going to pay for the entire meal – no surprises, and better value. And the operator can sell more. Fixed-price menus are more common overseas than in Australia but represent good value to most people, especially regulars.

 

It’s not easy to target the right group of potential customers with just the right offer, the right value and the right price. Today, people have access to more information and more choices… and we all have very high expectations. It is vital to continually review all aspects of your marketing, especially price.

 

"Pricing is actually pretty simple… customers will not pay literally a penny more than the true value of the product." Ron Johnson, JCPenney