Menu pricing

Principles, methods and strategies

 PRICING

Strategies and methods

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 What is « Pricing Strategy »
• The positioning of a product and a price
that is intended to make the potential
customer think that he/she should choose
your product rather than another one
• When we talk about pricing strategies, we
mean creating value not as an absolute
but in relation to a similar, competing
product or an expectation
Internal and external strategies
• The internal strategy aims to move the
customer’s buying behavior towards those
products that you prefer selling (for
whatever reason)
• The external strategy aims to move the
customers towards buying from you rather
than from your competitors
• Examples??????
 « Price » strategy
• When we talk about price, we do not mean
high or low, we mean high enough to
make it worth it for us and low enough to
make it worth it for the customer,
• To develop a selling strategy we have to
learn to disconnect production costs from
sales price. The only thing we are
interested in is profit.
 Pricing to make a profit
• If you manufacture Thingamagigs and they
cost you Fr. 10.00 to produce you have a
basic decision to make:

What is that decision?

Sell high or low / sell a few or many

 Choice 1 / sell high and few
• Sell your Thingamagigs for Fr. 1’000’000
per piece.
• It will be very, very hard to sell them at this
price, but if and when you sell one you will
have made enough profit from that one
sale to keep you going for a long time.
• You will have spent very little time
producing it, but a lot of time and effort to
sell it.
 Choice 2 / sell low and many
• Sell your Thingamagigs for Fr. 12.00
• You make very little money when you sell
one but you should be able to sell
thousands of them because they are such
a good deal.
• You spend all your time manufacturing
them and hardly any time at all selling
them.
 Making a profit
• Neither strategy is right or wrong. Both
choices can work very well.

• Ultimately, the only thing that matters is

how much profit you made.
 Examples
• Pricing strategy 1

???????

• Pricing strategy 2

????????
 Two basically different principles
• 1. Cost of raw materials/production +
desired profit = sales price

• 2. Price at which you believe you can sell

a product – desired profit = amount of
money you can afford to spend on raw
materials and production.
 The best pricing strategy?
• It depends on circumstances:
• Competition
• The necessity or luxury of the product
• Perishability
• Imitability
• Newness
• Uniqueness
• Etc.
 A good pricing strategy
• A good strategy is very often a
combination of both approaches where
one could disguise the other. It could
mean getting the customers in the door
with some really low pricing and then,
when you have them, try selling them
something with a very high margin.
• How do people sell cars?
• How do we buy them?
 Weber-Fechner.
• With a weak stimulus, the perceived
difference increases rapidly.
• If we increase the stimulus, the
perceived difference shrinks rapidly.
source: http://www.mises.org/easier/W.asp
• In pricing strategies we are not only talking
about the price and the product but also
about intangible elements like service
delivery, after service, advice, customer
interest.
• All these elements can make a product
more buyable, therefore more valuable to
the customer, without necessarily adding
production costs.
What is the value of « packaging »?
• For the seller is does two things:
• 1. It often allows you to sell items that would
otherwise not be sold (or less often)

• 2. When a package is well designed, it makes it

impossible for the customer to make true price
comparisons with your competitors because
your product (the package) does not exist
anywhere else.
• This is especially true when intangible elements
are part of the package
What is the value of « packaging »?
• For the buyer:
• Convenience
• Speed
• Impression of value
• Less choices to make
 What would the customer
prefer ...
Gasoline for Fr. 1.30 per litre,
with a 10 ct per litre rebate for
cash payment!

Gasoline for Fr. 1.20 per litre with a

surcharge of 10 ct per litre for
credit card payment!
 The problem with the traditional method for
price setting.
Based on competition Cost of goods x coefficient
PROBLEMS: PROBLEMS:
• Small business has higher fixed • Difficult to determine all the

Co
costs than chains. costs connected to the sale

d n-
of a product.

st
se itio

-B
Ba p et

as
ed
m
Co

sed
-B a
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man
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What the market will bear
PROBLEMS:
• Lack of knowledge

© 2000 The McGraw-Hill Companies

The keys to a successful high price
strategy
• Create a product that is not easily
compared
• Make it important for the targeted market
to acquire this product
• Establish a selling price for this product
that is based on the strength of the
« need » you created for this product
• Successful examples?????
The customers will pay more if…
Unique:
Unique
Unique:
Unique …the
…the product
product isis unique.
unique.

Comparison:
Comparison …the
Comparison
Comparison: …the client
client cannot
cannot easily
easily compare
compare
with
with the
the competition.
competition.
Expense:
Expense
Expense:
Expense …the
…the price
price represents
represents only
only aa very
very
small
small part
part of
of customers
customers income.
income.
Basic methods

Mark-Up Pricing (mark-up)

Basic methods
Mark-Up Pricing
Basi methods
Contribution Margin Pricing
(gross margin)
Basic methods
Contribution Margin Pricing
Basic methods
Ratio Pricing
Basic methods
Ratio Pricing
Basic methods
Prime Costs Pricing
Basic methods
Prime Costs Pricing
 TACTICS

• Synchro-pricing
– Coca-Cola Company has tested a machine
that is capable of adjusting its prices based on
exterior temperatures.
 TACTICS

• Decoy pricing
– A high priced item is placed on the menu as a
reference point. The customer determines that
it is too expensive but in comparison to the
« decoy » item, other prices seem
« reasonable », even if they are still relatively
high. We are not really hoping to sell the
« decoy » item but instead we break the price
resistance for the rest of the menu.
– see Shoemaker and Stowe (1990), Decoy Menu Items Can
Enhance Margins, Restaurant & Institutions
 TACTICS

• Complementary pricing
– Separate prices.
– Dim Sum
– A la carte
– Tapas
 THE OMNES PRINCIPLE
• Price spread (lowest to
highest)
– Shouldn’t be more than 2.5 (90% of
main courses)
– Appetizers should be approx. At 35% of
average main course.
– Desserts should be approx. at 25% of
the average main course.
THE OMNES PRINCIPLE
• Spred of dishes across price
range
(main courses)
– The number of dishes in the medium range
should be about equal to the number in the
two extremes of the range.
THE OMNES PRINCIPLE

• Relationship between prices and

average check
• The price structure should correspond to
your expectations for the average check
• The “average” customer should normally
spend approx. what you expect
 THE OMNES PRINCIPLE
• The rule of first to last
– Do not list randomly
– The item with the highest
contribution margin should be listed
first.
– The item with the second highest
contribution margin should be listed
last.
 THE OMNES PRINCIPLE
• Promotion
– A product promotion is not a « low-
priced » offer but an offer at a tempting
price.
–Mid-range pricing

www.tic-et-tac.com/salle/bacpro/1bacpro/
technologie/principesommnesgreg.htm
« Backyard Burger »
 Question 1
• Fast food industry frequently uses odd-
even psychological pricing (0.99, 1.29)
• Taco Bell price lining (.59, .79, .99, all
products fall into these categories)
• Baackyard Burger prices againts
competitor’s premium plus value items)
• Risk of « Gourmet » product could be too
expensice in comparison
 Question 2 (price competitivity)
• Backyard Burgers has an advantage over
competitors in fixed costs (uses only 2/3 of
land, franchise fees are lower than Burger
King)
• Variable costs are higher (« Gourmet »
burgers, 1/3 pound vs. ¼ pound)
 Question 3 (Demand)
• Fast food industry has a history of using
price as key competitive factor.
• If competiton offers similar « Gourmet »
products at lower prices, Backyard Burger
could decline.
• However, if BB are trul perceived as a
better product, demand could increase,
reflecting an inelastice price demand
curve.