5 factors that affect restaurant pricing strategies

Consumers consider more than just numbers when deciding the price they are willing to pay when dining out, making menu development and pricing strategy a constant balancing act for panelists from Applebee’s, Captain D’s Seafood and Smashburger who spoke at this week’s Technomic Restaurant Trends & Directions conference.

During the panel, “Pricing Strategies: Something’s Gotta Give,” executives found that consumers say they are willing pay extra for cues like food quality, convenience, ambiance and service — but hitting or not exceeding certain price levels remain as important as ever.

The panelists shared five factors that have recently affected their value-equation strategies.

Price points

Charles Russell, senior marketing research manager of consumer insights for Applebee’s, agreed that food quality and freshness were part of the broader value equation, but revealed that, in Applebee’s own consumer research, price remained the No. 1 driver of traffic to the 2,000-unit chain.

“That doesn’t mean that the other value components aren’t important, because they all play a role together, but the price is absolutely important,” he said. “It’s not just the price your current guests are paying; it’s the price perception that your guests that you want to get have about your restaurant.”

For nearly six years, Applebee’s has promoted its 2 for $20 combo deal, which has created a perception among its consumers that all of the brand’s entrees need to hover around the $10 price point, Russell said. The challenge with that constraint is to show value to consumers when Applebee’s does develop menu items well above $10, he said, but the price of the combo likely will not change any time soon.

“But as far as the 2 for $20 menu itself, we spend more time on engineering the recipes on that to make sure we are making a profit, because … it brings in a lot of traffic,” Russell said. “Right now we’re lucky where it’s margin-favorable compared to a lot of areas on the menu, but we only did that through the close management of commodity prices and through intense menu engineering.”

Consumer segmentation

Technomic principal Melissa Wilson shared a consumer survey the firm conducted in April that revealed spending trends across different demographic groups and how restaurants might account for that in pricing strategies.

Across all industry segments and dayparts, the average expenditure consumers expected to pay for a meal away from home was $12.21, but that average price varied by different demographic groups, Wilson said. For instance, among four key groups of people who spend above that average, women responded that they expected to pay a little more, at $12.53 per person, and Millennials responded they expected to pay $13.51.

Parents with children younger than 12 responded that they expected to pay $13.79 per person at a restaurant meal.

For a demographic subset Technomic labeled the “Busy Balancers” — consumers, mostly women, who identify themselves typically as urban, employed and tech-savvy — that average expectation for spending at a restaurant was $17.97.

The research firm identified six other demographic categories, such as Bargain Hunters or Foodservice Hobbyists, who dine out fairly frequently but always look to spend as little as possible. A subset of older consumers, called the Habitual Matures, reported that they spend more at restaurants on average than any other group except the Busy Balancers, but they only dine out about once or twice a month.

Bindi Menon, vice president of marketing strategy and insights for Captain D’s Seafood, said during the panel that followed Wilson’s presentation that her quick-service chain tries to account for pricing to different customer segments, such as by offering a discount to senior citizens.

Impacts of location, consistency, timing

Location

Menon added that 530-plus-unit Captain D’s tailors its pricing to different trade areas and real estate, sometimes in a counterintuitive way that does not always mean higher price points for higher-income zip codes.

“You may be at a better place to charge a higher price in a lower-economic area, mainly because [those customers] consider you as their destination where they’re going to spend Saturday,” Menon said. “In a place that has higher incomes, you’re maybe there just for lunch, but Saturday they’re going to go somewhere else and spend more money.”

Pricing power can differ whether restaurants are located “on the way to the upscale mall or on the way to Walmart,” she added.

Consistency

Denver-based fast-casual chain Smashburger has refined its commodity hedging and test marketing to be less reactive to major swings in food costs, said senior vice president of marketing and consumer insights Jeremy Morgan.

“Be testing before you need it,” he said. “We spend a lot of time and effort getting our people aligned on what our pricing tiers are, and getting a sense of what the next pricing tier needs to be, so if [franchisees] need to take a few percent next time, we get very little pushback when we need to move quickly.”

When pricing for a new limited-time offer or promotion, Smashburger’s philosophy adheres more toward creating new price tiers for new products, rather than discounting menu items heavily to move traffic around, he added.

“Most of our LTOs we try to price up rather than down, to use the new-news approach,” Morgan said. “Getting too fancy on the dynamic pricing frankly might not set a good expectation over the long run for the guest.”

Timing

Related to the consistency issue, the timing of price increases is important, Russell of Applebee’s said.

“Have an idea about how long you think a certain price will be on your menu,” Russell said, “because if you have a tendency to price every time your commodities shift, then consumer will get a perception that you’re continuously going up. That’s really hard to shake.”

Captain D’s tries at all costs to limit its price increases to twice a year, Menon said, advising conference attendees not to raise prices during the times of the year when consumers are either focused on paying down debt or doing back-to-school shopping.

She added that, if a chain were to increase prices across the menu, it should avoid letting too many items cross over crucial price points so as not to risk having too many items more expensive than $5 or $10 or the like.

“We only take price around December or the start of summer, never in January or August,” Menon said. “Take a look at your menu board and see, if you were to increase 1 or 2 percent, how many people are going to be impacted by that? Balance it out and make sure you’re not passing a lot of crucial price barriers.”

Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN