Menu Design vol. 2 – Menu Pricing part 2: Demand- and Market-Driven Pricing
This is another one of those days where I sit down to write a post, and then the next thing I know I’ve blown an hour on YouTube headbanging to Red Fang videos. Thanks, Brendan. Now that I’ve hopefully gotten that out of my system (at least for the time being), let’s get this party started.
Yesterday we started talking about menu pricing. Specifically, direct and indirect costs, along with a bit of portion control (to help control those direct costs) for good measure. Today we’ll be building off of that by talking about demand-driven pricing and market-driven pricing. I was going to talk about price spectrums today as well, but this post got so long that I decided that we’d save it for tomorrow. Sorry for getting your hopes up yesterday.
All right, let’s begin.
The first step is to take a good hard look at your business and where in your market it sits. What kind of concept do you have? How many competitors do you have doing similar things? What, if anything, sets you apart from the rest of the pack? Specifically, are there any factors in your business that might justify you charging a higher price for a given item?
You need to be brutally honest with yourself about these questions because the answers you come up with are going to form the basis for pricing out your menu. Let me give you three examples:
Let’s say you’re in Chicago and you’re running a beef place. For people not in Chicago, I’m talking about Italian Beef. Maybe you know it as a French Dip. Whatever. All you need to know is that they’re delicious and that there are a ton of beef places in Chicago.
So you’re doing the Lord’s work by selling beef, but there is no shortage of other people doing the exact same thing in your market. As such, your pricing is likely to be market-driven. There is only so much you can charge for a beef sandwich or a pizza puff before people will bail on you and go somewhere else. Maybe there are mitigating factors, as we’ll discuss in a moment, but for the most part you’re going to be beholden to market forces when determining your prices.
Recently we had a quick service kebab place open up about ten minutes from my house. If you want kebabs (and who doesn’t?), they’re the only game in town. I just picked up lunch from them today, and for about $12 I got a chicken kebab (which is long and only has meat on it), a huge order of fries, an order of hummus and pita bread, a chicken kebab sandwich (which is two kebabs’ worth of meat stuffed into a pita shell with a bunch of toppings and a side of cucumber sauce) and a large orange soda.
That’s insane. They charge $3.95 for the kebab sandwich, which for most people is a meal in itself. Did I mention that they’re the only place in town for this kind of stuff? They could easily be getting an extra buck or two for their sandwiches, along with a varying amount for almost everything else on the menu that isn’t drinks or fries. Which isn’t to say that they should fleece people. After all, it’s a QSR, and despite the fact that it owns the kebab market (for now), it still needs to represent a good value to people. But I’m reasonably confident that no one would bat an eyelash about paying between $5 and $6 for that sandwich. It’s a lot of food.
Like most major metropolitan areas, there are no shortage of places in the Chicagoland area to get a good burger. Like beef in Chicago, though, burgers are predominantly considered to be commodities. That is, you can get them anywhere, and as such their pricing is overwhelming market-driven. Most places have to be aware of what the going rate is for a burger.
However, most places aren’t Kuma’s.
Kuma’s Corner is something of a Chicago institution at this point, depending on what kind of circles you run in. The Cliffs Notes version is that it’s a small heavy metal bar that serves food. They’re best known for their burgers (all served on a pretzel roll!), which are named after heavy metal bands and have some crazy ingredients on them. For instance, the Black Sabbath has blackening spice, chili, pepper jack cheese and red onion on it. Ingredients-wise, that’s on the tame end of the spectrum. It also costs $13.
A $13 burger might sound crazy, but Kuma’s sells so many of them that they close down to-go service in the warm months when their patio is open. They can charge a premium price for a variety of reasons:
- Nobody else in their market is doing burgers remotely the way they are.
- All of those wacky extra ingredients are a great value add that allows them to charge more.
- They offer a unique experience. Like I said, they’re a heavy metal bar and offer a heavy metal-themed menu.
- The fact that they’re perpetually busy reinforces their pricing. When you see that many people waiting an hour on any given day to eat there, you don’t think twice (or are less likely to, at least) about the fact that chili will cost you $10. The demand is obviously there.
- They’re delicious.
These last two examples illustrate demand-driven pricing; one is potentially leaving money on the table, the other is seemingly raking it in.
In the kebab place example, they’re the only game in town for the moment. Which means that they have a bit more flexibility to price their items a bit higher. Like I said, four bucks for that sandwich is a steal. I understand that they’re a quick service restaurant and have to be priced appropriately with regards to other QSRs in their market, but since it’s tough to get out of McDonald’s for less than $7 these days, they could definitely be more aggressive on their pricing without breaking a sweat given the fact that they offer a completely unique (in my area, anyways) menu. That their food is made fresh to order and isn’t all greasy like most fast food is just reinforces the unique proposition they represent in the local QSR market.
Kuma’s Corner is a good example of a restaurant that creates demand for their product by offering a unique take on their menu along with a unique dining experience and no small amount of street cred. They’ve created a space for themselves where they can charge premium prices for what they’re doing and people are more than willing to line up to pay them.
In our first example, we see that market-driven pricing is often largely decided for you. Depending on your concept and market, you may not have a lot of flexibility in what you can charge for most of your items. That being said, I can point out another local institution as a related market-driven example that manages to seem a bit more premium than their competitors due to a very specific absence on their menu.
Portillo’s is a privately-owned chain of hot dog/beef joints located all over the Chicagoland area. Again, it’s a crowded market for this sort of thing, and their prices are more or less in line with their competition. Sometimes they’re actually a little cheaper, which I attribute to the volume that they’re buying ingredients in.
And they’re delicious. Extremely delicious. As a result, they do a ton of business. However, despite being a QSR whose prices are pretty consistent with their competitors, they don’t have any sort of value menu. Absolutely no meal deals, which means you’re always paying full price for everything you get from them. So even though their pricing is almost entirely market-driven, due to their popularity they’re able to do away with value menus. This benefits them in two ways: first, it directly helps their bottom line; and second, it psychologically positions them as being a premium experience, despite the fact that their individual menu items are on par with everyone else’s in their category. This in turn helps continue driving demand.
So that’s demand- and market-driven pricing in a fairly large nutshell. Tomorrow Menu Pricing parts 1 & 2 will be forming like Voltron to discuss using a pricing spectrum to actually price out your menu items. I know I said that yesterday (sans Voltron simile), but tomorrow will be different. I promise.
*Sorry, that’s another Voltron thing.