9 Questions That Help Determine Price Strategy

Ah, price. This one topic brings sweat to the brow of any restaurant owner, brings the heart rate up, and is often cause for many heated debates around the dinner table across this great country. Almost every family business, whether they own and operate restaurants or not, has to decide on price at some point. I can guarantee you that every single time, it is a contentious issue that is seldom easy to decide upon and resolve quickly. The reason is quite simple: there are so many variables to discuss when it comes to pricing strategy.

The price has to be attractive to the customer. It can’t be too high, however by the same token it can’t be too low because that could easily bankrupt any business. How do businesses decide on price anyway? For large hotel chains they invest in millions of dollars of the best research and software money can buy. They routinely check on their competitor’s prices and they do it daily. If one hotel is charging $500 for one night stay in New York and another, similar hotel is charging $450, guess where most people will decide to stay? In the past customers often stuck with one brand due to loyalty, however today many consumers are fickle. They will quickly change hotels, change restaurants, change supermarkets, if the quality is similar and the price is lower.

Let’s take a look at some of the factors to consider before setting price. These questions will help determine setting price:

1. What the competition is charging for a similar item?

2. What is a high-end retailer or other restaurant is charging for a similar item in a different setting?

3. What is the cost of the product? This is the raw materials and paper cost of putting it all together. Of course you also have to factor in the cost of heating it, the labor cost, etc. But for the sake of simplicity it’s best to just stick to the raw cost of each item since factoring in everything can easily complicate the entire menu.

4. What is the cost of gas and/or transportation fees for the truckers to bring the product and for your delivery service to take it to the customer? Has the price of gas gone up or down (it’s usually cyclical). Large businesses often relay on complicated software to help them plan for this. If you’re a small business just keep tabs on the price of oil.

5. What is the cost of paper goods associated with selling your product? They often go up and down with the price of oil, since oil as petroleum is the raw ingredient in plastic and is used in the manufacturing process.

6. Has the price of natural gas (that you use to heat your food, not for driving) gone up or down? Are you keeping tabs on the utilities? Has the price of water gone up or down? Is your state in a drought? Often food prices spike up considerably in a drought. California is in the middle of a megadrought as I write this book. It is the worst drought we have seen in decades, and the price of almost every major food item has gone up as we all wait and pray for rain in the state.

7. What grade is the beef or chicken you intend on using? Of course, the use of organic food will drive your cost up. You have to determine the desire on behalf of the consumer in your area wether or not that bet is worth making. How many customers are asking for organic beef or chicken? Often a few people may ask but are they willing to pay the $1-2 per unit difference if you make the switch? These are difficult questions to ask with complicated answers.

8. What state is the economy in? If it’s anywhere as bad as it was the last few years during the Great Recession, you may want to think twice about increasing price at all. If the markets are up, jobs are doing OK, and other restaurants are doing well it might be OK. Just remember: No one will argue with you if you find many ways on saving costs (more on that in an upcoming chapter), but there might be resistance to a price increase if it’s done in an inopportune time. This calls for wisdom and patience.

9. Are you increasing the quality of the raw ingredients and/or packaging? If you are going from a decent produce distributor to gourmet, top of the line organic produce that is hand-picked, it may call for a price increase. What if you switch to a higher grade beef? How about if you are using a container for the chicken that is much more presentable but at a higher cost of .15 cents per unit? You can only absorb those costs for a week or two before they really eat into your profit margin. A small price increase may be the right choice at such a juncture. Ask your customers if they re OK with that. Is the tradeoff worth it? Ask 20 customers you love and trust. Ask friends and family members who also are paying customers. They won’t be shy to tell you their opinion. Listen to them when they speak. Listening to customers is the #1 rule of marketing.

In our case we use the highest quality, freshest ingredients. Not only is our produce fresh from the farm, never frozen, so is our beef and chicken. We are unique in an industry where most fast food and fast-casual chains use frozen dough, frozen meats and vegetables. We don’t have a single freezer in any of our locations. We also don’t use canned foods, stabilizers, MSG, fillers, artificial flavors or colors. Everything is all-natural, 100% fresh, and of the highest quality. As you can imagine, this is why I always said we should never try to be the “price” competitor. Not only does it not mix well with our brand, but Zankou customers have now been accustomed to eating the freshest cuts of beef and chicken, with the freshest, raw garlic and other ingredients for over 55 years. They are used to is and they expect it. Anything less and they will walk out the door, regardless of price.

That is not to say we strive to be overly expensive. We use the above listed criteria in making difficult pricing decisions. But as someone who has been doing this for over 25 years I can tell you that determining the price is not just a numbers game. There is more to the story than just seeing what the competition is charging and looking at cost. There is a psychological  factor that plays into all of this as well. You really have to know your customer and see what they are willing to pay. Just to give you an example, after listening to our customers complain about the garlic price (we would charge .50 cents for additional garlic beyond the first extra garlic being free) for a long time we decided to make it free.

We no longer charge for garlic, whether the item comes with garlic or not. If the customer requests it, we provide it. It’s just as simple as that. It’s made a huge difference in terms of customer satisfaction, although it has come at a price. We are now going through much more garlic than we ever did before, and many customers have realized this and routinely ask for garlic not just with plates but with wraps as well. This has driven our cost up; but to us it was worth doing if it would make our loyal customers happy in the long run. You have to factor in the Yelp situation where many angry customers can just go and give negative reviews if/when you don’t provide them with what they ask for.

Our customers would probably skew to the more educated, well-to-do crowd. They completely understand that food costs go up, and they are willing to pay for the best food. I don’t think they mind the charge up front at all; I just think many people had an issue with being charged for garlic if they wanted an extra one since they had to wait in line again. It’s a huge inconvenience, so we made it complementary. You just really have to know your customers, what they are willing to put up with, and what they won’t. If you don’t know, ask them! We have created so many products over the years from just asking customers questions and coming up with solutions from the results.

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