Rafi Mohammed

The Key to Pricing in Today's Recessionary/Inflationary Environment: Offer New Choices

Posted on September 9th, 2008 (0 Comments)

The other night I ordered carry out from my favorite Chinese restaurant in Cambridge, MA. “Chicken & Broccoli, $8.95; rice, $1; see you in ten minutes” they reliably chimed. 15 minutes later, as I was unpacking my favorite dinner, I was less than enthused to see that the serving size container had shrunk by roughly 33%.

My local Chinese restaurant isn’t the only company challenged with either reducing costs or increasing prices. McDonald’s is deciding whether to raise the price of its dollar cheeseburger to $1.19 or sell a different version with less (or no) cheese for $1. The Wall Street Journal reports that Burger King is now making its $1 Whopper Jr. sandwiches with 2 ounce hamburger patties instead of its normal 2.2 ounce patties while Chuck E. Cheese has reduced the size of its pizzas to avoid further price hikes.

The American consumer is in crisis today: the stock market skyrockets and dips daily, disposable income is down by 2.6%, and the latest consumer sentiment index reading is 43.4 (last year at this time it was 72.0). If your company caters to price sensitive customers, what should you do to keep them in the fold?

I believe the answer in many cases is to maintain (or even decrease) prices by offering new choices. Skimping on quality or size often upsets customers. For example Julie Jargon of the Wall Street Journal reports that when Campbell Soup reduced the amount of chicken in its chicken noodle soup in the 90’s, consumers noticed and stopped buying. Campbell vowed to never cut corners again. Burger King shouldn’t risk causing dissatisfaction with one of its signature products, the Whopper Jr. Raise its price to $1.19 and introduce a cheaper-to-make new sandwich, say a BurgerBurrito for $1. What’s great about a new option is it can enter and leave the market at will. When the economy picks up or if costs come down (permitting price decreases), the Burger Burrito can go on sabbatical until it is next needed.

Offering good, better, and best options, is key to pricing in any environment. A low price tier keeps budget conscious customers in the fold while higher price tiers offer customers the choice to pay your company more. This is exactly the pricing strategy that Cache, the women’s specialty retailer, has embarked on. Cache started offering good, better, and best options within its clothing line this year. This strategy helped boost the company’s Q2 net profits by 63.9%.

So what should my local Chinese restaurant do? It should offer (and clearly explain to its customers) the smaller size for $8.95, a $10.95 regular size, and perhaps a value bundle at $12.95 that offers consumers a better deal by including items they may not normally purchase (e.g., egg roll, dessert, drink, etc.).

My sincere thanks to Jamie Hartford for interviewing me on the $5 phenomenon in QSR Magazine.

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