Price: The Market's Way of Measuring Value

John Lawn

What's a good lunch in your cafè worth? For too many noncommercial operators, the answer to that question has been a disappointing $3.50 or so for a seemingly endless number of years.

In fact, most marketers consider Price the most important P of the marketing mix next to the Product itself. And that's not only because of the significance it has for customers. The ability to price products well is critical to the health of your business and likely deserves a lot more attention than you give to it.

As marketing professor Tony Cram pointed out recently in a Financial Times column on this subject,

"Price 'captures value' for the company in the most direct way possible—a profitable return. The case is long proven. In 1992 a McKinsey survey of 2,500 companies calculated that a 1 percent increase in price improves operating profit by 11.1 percent a year—greatly exceeding the impact of a 1 percent improvement in volume, variable costs or fixed costs."

It is important to be clear about your pricing objectives since they will vary. In this respect, a menu is far from simple: each item and its price has an implication for an operation's sales revenue, profitability and positioning relative to competing options. Consider these tactics as you implement your strategy:

Value comparisons. Price never exists in a vacuum. If you're letting local restaurants set price benchmarks for your customers, you are ceding control to them. Make sure your menu has its share of lowprice items, but that higher value offerings are not only available but displayed in ways that make their greater value clear.

Food displays at the entrance to a cafè should make the "best deal" look like a great value, but should also show the "top choice" to be an even better one.

Don't forget the "L'Oreal" Effect. Remember that in any crowd there are always some people with a reason to reward themselves on any given day. They got a raise, won an account, hit a milestone birthday or just want a psychological lift. For years, a major shampoo manufacturer tapped that psychological opportunity by closing its ads with the tagline, "It costs a little more, but I'm worth it!" Make sure that any of your customers with this impulse have a way to satisfy it in your cafè.

Know your competition and beat it. Local restaurants play the same value game you do. Assign someone on staff the job of identifying the topselling lunch specials on the outside. Then develop highly-visible rotating daily specials that beat these on price or value. Make your operation the one that sets the benchmark.

Keep any price war to the same category it started in. If you know a local hamburger joint attracts bargain hunters with a "Two for $3" deal, don't respond with a $3 entree plate—respond in kind, but keep your entree price where it should be.

Manage the link between portion control and pricing. While portion control is mostly thought of as a way to keep the cost of ingredients down, it is just as important as a way to raise the perceived value of an offering. "Five oz. of deli meat on our subs while chains offer only four" is a powerful competitive statement and can help position your entire menu.

Research how price factors into your relationship with "regulars." Few operators pay enough attention to balancing the cost of customer retention vs. customer acquisition. Price represents a key place in that balance, not only as a core factor in daily profitability but also because price is a very clear way of " speaking" directly to customers.

Plan carefully for how and when you'll raise prices because eventually it becomes necessary for everyone. Most successful price increases are accomplished over time with small adjustments made regularly along with menu changes that make direct comparisons difficult. "Odd" pricing of items like sandwiches and sides can help so price increases don't have to be made "across the board."

Think carefully about how price fits in to your objectives. Are you trying to increase the bottom line? Grow participation? Tap "bigger spenders?" Promote a new menu category? Attract new customer " trials?" Your marketing mix as a whole should mesh with your pricing strategy to achieve the objectives you've set as most important.

All too often, operators get caught up in setting prices based on costs and margins exclusively, and in doing so, they make a huge mistake. This is not to downplay the importance of cost management, but to put pricing into the proper perspective. It is a critical component of marketing strategy as well as cost management, and is hard to equal for its raw power to communicate a value message to the consumer. At the same time, the best marketers—even Walmart, for whom it is the core strategy—will never let price alone drive the marketing mix.