Monday, February 8, 2010

For sale: Restaurant barbells, right price

In the beginning, there was pricing. A restaurant set the charges for menu items on the basis of cost and what patrons were willing to spend.

Then hard times hit, and the chain portion of the industry resorted to what it cleverly called barbell pricing. For the everyday bargain hunter, the big brands offered head-turning deals like a dollar menu. At the other end of the barbell, they sported premium items with a price to match, hoping to snag a higher-margin purchase from sports who felt like splurging.

Now you can scratch “barbell” from the glossary. A single label has yet to emerge, but several bellwether chains are already switching to new and more complex pricing strategies. The approaches differ, but they share the common feature of more precise segmentation.

McDonald’s calls its variety “four-tier pricing.” It’s shifting to a model with four categories of products arrayed by price: Everyday value, or what was once the bargain end of the barbell; core items, with a mid-scale price to match; premium items; and the new fourth tier, or smaller servings of premium selections offered accordingly at a lower price.

The prime example in the United States is the new Mac Snack Wrap, essentially the guts of a Big Mac wrapped in a tortilla. Overseas, McDonald’s offers such four-tier items as the Petite Du Jour in France and the Little Taster sliders in the United Kingdom.

The products are intended to prompt a trade-up by customers who normally purchase off the lower-priced bargain menu. The Mac Snack Wrap, for instance, costs $1.39 in the states, compared with the Dollar Menu.

The items are also seen as a way of building add-on sales. Customers might buy a core item, then try a Mac wrap—in essence, a premium item at a high-value price.

Burger King is taking a different approach with what it’s calling four-corner pricing. Speaking recently to Wall Street, BK executives cited the strategy as a key component of its efforts to build profit margins, but declined to provide details. Their sketchy description suggested that analytics are being used at the store level to help units find the ideal price that their market will bear.

Chain officials said the new strategy was the “primary difference” between the financial performances of company-operated and franchised stores during the last quarter of 2009. The model has now been rolled out to all the licensees, the execs noted.

Starbucks is similarly adjusting prices on a market-by-market basis. The new “architecture,” in the words of execs, is now in place at 90% of the chain’s U.S. outlets.

In a recent conference call with analysts, they described the new approach as a pricing rationalization. Prices were raised or lowered to satisfy the price sensitivities of markets, based in part on demographics and customer reaction. In some instance, that meant dropping charges on selected items. In others, it involved “adjusting some of the more complex costly products,” said CFO Tory Alstead.

Translation: Rising prices on some items to preserve margins, provided consumers don’t balk.

Perhaps not coincidentally, two points of Starbucks recent 3% rise in comp sales were attributed to pricing gains.

The success enjoyed by McDonald’s, Burger King and Starbucks with their new pricing approaches is likely to prompt more pinpoint pricing, at least in fast-food.

Which means the market is about to be flooded with barbells—and possibly some dumbbells, too, if the followers don’t do it right.

1 comment:

Leslie said...

Peter - really interesting (but of course I am biased) and good examples of these practices. Regardless of tactic, I think your article points to the fact that there is more rigor out there now, and that operators can't just get by on a whim or a guess. And as you suggest, it's the decisions require caution and thorough analysis and are still difficult. Thanks for a good read.

Leslie Kerr