Finding the sweet spot: What pricing strategy to use for distribution channels
By Joel Davis, chief strategy officer, Revenue Management Solutions
For years, many restaurant operators have traditionally charged the same prices whether the menu is being used inside the restaurant, at the drive-through or for pickup, delivery or catering. But with the ever-increasing popularity of eating outside the restaurant via delivery or takeout tied to technology that makes adjusting menu prices so simple, a growing number of operators have realized there are opportunities for boosting profitability by varying their pricing among distribution channels.
So how do you increase prices for certain channels without negatively impacting customer traffic?
Before you think about what tactics to use, understand that different channels have different price elasticities, depending on customers’ so-called “need states” and the time and day the person is ordering.
For example, someone rushing to work and buying coffee and food in the morning will not be as price-sensitive as another customer who is heading home and has more time to pick and choose based on price. And a weekend customer likely may be even more price-sensitive. These different price sensitivities – how customers react to changes in price - are also found in the channels used to interact with customers, such as in-house, takeout, call-in delivery and online orders.
As you decide what route to take with your pricing, you don’t want to negatively impact customer satisfaction. Decision-making should start with a deep understanding of your customers and their buying habits, learned through careful, detailed analysis of transaction data.
With this in mind, here are three types of pricing structures to consider, with thoughts on each:
Channel-specific: In this type of pricing, the prices vary by channel, based on each channel’s price sensitivity. For example, delivery customers may be less sensitive to an entree’s price, but more sensitive to something they view as an add-on that they have a close substitute for, like a drink. A restaurant can maximize profits by aggressively pursuing this pricing approach, but there is significant risk, tied to pricing transparency. In today’s environment, it may not be worth it to have entirely different prices by channels, since such inconsistencies can lead to customer dissatisfaction.
Omni-channel: With this approach, all channels have the same price for all items. This is considered a more customer-centric approach, as it reduces the perceived "unfairness" of channel-specific pricing. Pricing should still be based on customer sensitivity to price and menu changes, but now the goal is to maximize profit on transactions across all channels by optimizing prices.
Combined solution: Both extremes in pricing strategies have significant drawbacks. Channel-specific pricing risks alienating customers, while the omni-channel approach leaves profit on the table. So the best solution is probably a combined solution.
When adopting a combined-solution approach, aim for consistent base pricing across channels and use channel-specific promotions and personalized targeted offers to optimize the price on specific items. Look for items or categories that are less likely to be compared across channels. As an example, if entrees are key decision drivers, desserts may offer an opportunity that’s less likely to be "price shopped."
As you craft your strategy, consider offering slightly adjusted assortments of items between channels. Concepts that often bundle items can mask the degree of price differences by offering different bundles. For example, a pizza concept could offer single-topping pizzas for carry-outs only and an online-specific meal bundle.
Strategies that rely on discounting in certain channels should be carefully varied over time, because permanent discounting may be hard to undo. And no matter what course you take, remember that keeping your customers happy is paramount.
Understanding the price sensitivities of your customers is the start to finding the optimal solution. Then, think about targeted promotions that won’t annoy the customers, and look for best practices being used by others in the restaurant industry and beyond.
It’s interesting to note that smart apparel companies will often keep prices the same across channels on items that have a strong chance of being price-checked, like suits, while changing prices among channels for items that probably won’t be double-checked, like belts or socks.
If you do your homework and plan properly, the result will be powerful: increased profitability along with happy customers.
Topics: Operations Management