Rafi Mohammed

Pizza for Pesos: A Good Segment Based Pricing Strategy...Minus the Death Threats of Course

Posted on January 22nd, 2007 (0 Comments)

You know I love segment-based pricing - its hands down my favorite pricing strategy. Segment-based pricing seeks to “activate” dormant customers by offering a new pricing strategy. The Pizza Patron chain recently implemented a new pricing strategy designed to activate more of its target customer base: Hispanic pizza lovers. All of the company’s 59 restaurants started accepting Mexican pesos as payment.

Pizza Patron has an interesting business strategy. Look at the pizza restaurant market – it’s literally saturated with chains and mom & pop operations. How does one succeed in this competitive market…as my strategy guru friend George screams “differentiate or die.” Pizza Patron has differentiated itself by focusing on becoming the premiere Latino take out pizza chain in the United States. To accomplish this goal, outlets are located in Hispanic neighborhoods, have a bilingual staff, and offer targeted items (e.g., La Mexican pizza – topped with chorizo sausage). The chain is succeeding (third quarter 2006 same store sales were up 23%), growing rapidly (4 restaurants in 2003 - 59 today - 40 more in development), and reaching its target audience (claims 60% of its customers are Hispanic). The chain provides a good value - $4.99 for a one topping large pizza! With frozen pizzas similarly priced, there’s definitely value in the fact that Pizza Patron’s pies are freshly prepared and baked.

In January, Pizza Patron started a two month pricing trial of accepting pesos as payment for its food. When you think about it, this new pricing strategy makes sense. First, many of the restaurant chain’s target customers have extra pesos from their travels. If you’re like me, being able to purchase products in the U.S. with left over foreign currency is akin to getting something for free or at a deep discount. Since I rarely travel abroad, I psychologically code the few extra British pounds that are inevitably left in my wallet when I come back to Boston as virtually useless to me. It’d be a real convenience if I could spend that 20 pound bill I’ve had tucked away in my file cabinet for the last 2 years! That said, the pricing strategy goes beyond giving customers an avenue to spend a few extra pesos – it better serves the chain’s customers. Other businesses serve the pricing needs of their customers by, for example, accepting credit cards, checks, PayPal, and even barter dollars like Ithaca Hours. Retailers along the Mexican border (e.g., Wal-Mart) accept pesos, retailers along the Canadian border accept Canadian dollars.

The pizza for pesos pricing strategy created a frenzy of controversy. Shortly after the promotion started, the company was receiving 1,000 emails a day. While some of the messages were supportive, many accused the chain of being unpatriotic and there were even a few death threats. The new pricing strategy briefly became a lightning rod for the anti-immigrant rhetoric simmering in the U.S.. But with the protests dying down, the controversy may well end up being great marketing for Pizza Patron. More people now know about the chain (I must admit to being intrigued with their pizza topped with spicy pulled pork) and their Hispanic customers may be even more loyal to the chain that took a stance for them.

Preliminary results of the new pricing strategy are encouraging, 10 – 15% of the company’s revenues are now being paid in pesos. Oh, and you know how most companies lose money by accepting new forms of payment (e.g., pay credit card issuers a few percent of charged sales to accept credit cards), Pizza Patron is making money from accepting pesos. While the official exchange rate is 11 pesos to the dollar, Pizza Patron is equating 12 pesos to the dollar – reaping a 9% premium over the official exchange rate.

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