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:
- 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.
- 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.
- 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?
- Keep in mind that once it lowers price, its slices are devalued. It’ll be hard to raise prices back to normal.
- 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.
- Upsell “premium slices.” Perhaps offer higher prices premium toppings such as tandoori chicken.
- 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?
- 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!
Readers' Comments on This Blog Entry
Opening at night and attract midnight pizza goers would allow for a $3 slice. During the day price should be $0.50 on greasy slices with published high calories and $2 on and healthy, whole grain low calories alternative. Competition by pricing at $0.50 self declare an unhealthy alternative.
Thanks for this piece. This a common practice in Niigeria and many businesses have failed and closed down. I think it should go for the differentiated strategy as suggested and fix a reasonable price for good margin.
Thanks for sharing. Maybe Bombay can reinstate their regular $1.50 per slice price but during 12 - 2 (peak lunch time) make a big deal about a lunch special like $1.00 slice + soda offer. Even if 2 Bros is .75 per slice, the $1.00 slice w/ soda sounds like a better value b/c for .25 more you get a beverage. And you are right, they should utilize any of their good reviews on some signage in the store, or a postcard take-away with some reviews (or ratings w/ sources listed) and on the other side their lunch special offer.