Lessons from a New York City Pizza Price War

A fellow pricing aficionado recently passed along a great New York Times article on a pizza price war written by N.R. Kleinfield. While the article is humorous, it reveals key lessons on value and pricing that are applicable to all products and services.

The story starts with Bombay Fast Food/6 Ave. Pizza happily selling pizza slices for $1.50. Life was good back then. Next, Joey Pepperoni’s Pizza opened close by and offered slices for $1. Bombay Fast Food reduced its price to $1 and life remained good, albeit less profitable. Trouble started when 2 Bros. Pizza moved in literally next door – this resulted in a price war. Bombay dropped its price to 75 cents and 2 Bros. immediately matched. Now Bombay is threatening to drop its price to 50 cents.

This simple story illustrates several key lessons:

1. New competition will likely result in your price going down. I know it’s common for spokespeople for incumbent firms to say “we welcome the new competition.” But really, they don’t.

1. If your product is a commodity, you have little choice but to match the competition. It’s curious that Joey Pepperoni’s Pizza has not joined the pricing fray (still $1). Perhaps since it is a part of a growing New York pizza chain, it has the brand power to differentiate itself from the two 75 cent providers.

1. Robert Crandall has a great line about pricing in the airline industry: “you’re at the mercy of your dumbest competitors.” Mr. Crandall’s sage comments apply to all products and services, even differentiated ones. I tend to buy Coca-Cola products – but hey if the private label price is low, I go with it. There’s really not that much of a taste difference. 

So what should Bombay Fast Food do?

1. Keep in mind that once it lowers price, its slices are devalued. It’ll be hard to raise prices back to normal.

1. Take a moment to decide if its pizza slices are really a commodity. Not all slices are the same. Perhaps its Yelp ratings are higher or its pizza received a rave review that distinguishes it from the competition. If Bombay’s pizza is better than the competition, it needs to let customers know - which allows it to (justifies) charge more.

1. Upsell “premium slices.” Perhaps offer higher prices premium toppings such as tandoori chicken.

1. Offer unique bundles that the competition cannot match. If the competition does not have deep fryers, for instance, why not offer a catchy combo that includes chicken wings?

1. Finally, truly match the competition. If Bombay is open longer than 2 Bros., it can raise prices when 2 Bros. is not a realistic “next best alternative” for customers.

So what do you think? Any other ideas for Bombay to wiggle out of the price war that it created? I’d love to hear your thoughts!

Posted on April 16th, 2012 (0 Comments)

Can One Bank’s Leasing Program Boost the Economy?

So what are the reasons why housing prices have plummeted? It all goes back to economics 101: demand and supply. As more homes are foreclosed on, supply increases - which in addition to hampering housing prices – adversely affects our economy.

Check out my latest blog for the Harvard Business Review which discusses Bank of America’s new “Mortgage-to-Lease” program and ponders whether a new pricing strategy can help resuscitate our economy.

As always, your comments will be appreciated!

Posted on April 6th, 2012 (0 Comments)

Why Consumer Reports is Wrong About Extended Warranties

While Consumer Reports advocates passing on extended warranties, I argue that this decision is not so clear cut.

Please check out my latest blog for the Harvard Business Review which discusses the value of extended warranties and why offering some type of insurance can better serve your customers as well as improve your company’s bottom line.

As always, your comments are welcomed and appreciated.

Posted on March 23th, 2012 (0 Comments)