Rafi Mohammed

Restaurant Week as a Crash Course in Discounting

Posted on March 26th, 2013 (0 Comments)

Reprrinted from the Harvard Business Review website. 

Twice a year, many of the finest restaurants in the Boston area participate in a discount promotion called Restaurant Week. Diners are offered an attractively priced “special” three course menu (typically with a few options for each course) — this year lunch is $20.13 and dinner is $38.13

This successful promotion — which is offered in many U.S. cities — packs restaurants and provides lessons that all businesses can learn from about discounting.

Lesson 1: Don’t crowd out full-paying customers. Restaurant Week is offered during low demand time periods — usually during the end of the summer (August) and spring break (March).

Lesson 2: Don’t encourage cannibalization. By this, I mean try to minimize the chance that customers who would have paid full price take advantage of the discount. For instance, No. 9 Park, a top Boston restaurant, doesn’t include its signature “prune-stuffed gnocchi” as part of its Restaurant Week menu. Instead, it offers new menu items that are likely lower cost. As a result, die-hard fans of prune-stuffed gnocchi can’t order it at a discount.

Lesson 3: Drop the dream of “they’ll try it at a deep discount and come back to pay full price.” We’ve been down this road several times. As Groupon has empirically proven, consumers don’t behave this way. Quite simply, most diners who come for the Restaurant Week promotion are deal seekers who will probably not come back…until the next time there is a deal. And to be clear, this is okay – if discount diners aren’t taking up a table that would have otherwise been occupied by a full-paying customer, it makes sense to reap the incremental margin.

Lesson 4: Capitalize on consumers’ “mental accounting” behavior. Richard Thaler, a well-regarded University of Chicago economics professor, believes that consumers establish mental accounts for specific occasions. So, if they save money on an occasion — say, dining out at a fine restaurant — it’s hard for them to mentally transfer these savings to another “account.” Thus, we’re tempted to spend it on the occasion. In my case, since I get such a good deal on the three course meal, I feel that I have some extra “house money” to blow on profit-laden extras (such as cappuccino, instead of coffee) instead of saving the money for another use.

Regardless of whether you are selling a service or product, the key to taking advantage of this mental accounting behavior is to provide upgrade choices. Many Restaurant Week participants, for instance, offer meal supplement options (to upgrade to a better course) as well as deals on wine. Proactive suggestion allows consumers to envision a richer experience and given that they have extra “budget” in their mental accounts, are tempted to spend it. Sure, diners end up enjoying an enhanced meal at less than the regular price — they get a bargain. But by encouraging diners to spend their mental account surplus, restaurants reap a higher profit.

While discounting is a common pricing strategy, most companies execute on it poorly. Instead of offering whimsical “finger in the air” price breaks which can gut profits, following the above pricing guidelines can rationally generate growth and most importantly, earn significantly higher profits.

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