Restaurants are not like retailers. The price doesn’t start high when it hits the shelf and bottom out on the clearance rack. Many restaurant owners think it works as simply as that (simple supply and demand: when you lower the price, you increase traffic). In actuality, restaurant owners have to be very careful to distinguish between discounting and devaluing. Thousands of restaurant owners think that their promotions are providing a beneficial discount (for customer and the business) while they are actually devaluing the food and/or dining experience.
Customers smell blood when it comes to restaurant prices that drop (they have a great memory for them too). Customers instinctively decide if the discount is reasonable or desperate (devaluing). If it seems desperate, the customer will never be convinced that the pre-discounted or “normal” price isn’t a rip off. The discounted price becomes the new “normal” price. It is because the psychology of your customer frequently does not reflect simple supply and demand. It seems obvious. No restaurant owner will ever argue that we are rational about food.
How Does Devaluing Happen?
As you can imagine, significant devaluing can kill a restaurant. In extreme cases, the restaurant’s traffic becomes completely reliant on discounts. The majority of restaurants are not immune from devaluing. Most have some promotions that somewhat devalue their food. Most times, the damage isn’t catastrophic, but it builds up.
Let’s talk about the worst perpetrators of devaluing. Daily deals is the first thing that comes to mind. Restaurants that put their business in the hands of Groupon or LivingSocial miss the perception they are creating with customers (especially the 20% of customers that make up most of the restaurants’ business). A customer will conclude with the 50% discounts Groupon offers that either you are desperately buying new customers or the price of the food is jacked up (but unpleasant).
Even weekly discounts devalue to some degree. Can you imagine every Monday a customer returning for the same freebie or deal? The point is you cannot change customer’s lifestyles. You can put your business in front of their desires. But on Monday night, I want to watch TV and not think about the 4 days of mountains of work ahead of me. No restaurant is going to get rid of that worry.
Some promotions are just promotions in name only. A promotion must be a campaign that breaks from the norm (whether in price, etc). Since a huge percentage of bars have a happy hour, realistically, a bar has one to keep its position not gain more ground.
The Different Types of Devaluing
Devaluing applies in several ways in the restaurant business. Devaluing can happen on one particular thing on the menu. This is very subtle unless every promotion offers one freebie of it. The solution here is simple in one sense: discount more than one dish. For me that can cure the symptoms but not the disease.
Sometimes, a restaurant takes an entire meal and reduces the price. We all know of lunch specials and how you are supposed to get less quantity for less money. Too bad our stomach doesn’t have a scale to measure it. This is truly problematic in areas where people work at the same place as they live. The price change is confusing and makes us regret coming at night because we could have come during lunch. Of course we then forget to come during lunch and the rhythm is thrown out of whack. In business districts, it does better, but at the cost of lower margins.
The Art of Discounting
For independent restaurants, successful discounting is complicated. People imagine the prices are not determined in some corporate entity, but by a restaurateur who lives and dies by his business. Even if the owner is nowhere to be found, the prices feel almost negotiable to customers. So what does one do?
The key to discounting is to give the impression of a gift and not an incentive. You want to communicate that they would have come anyway but here is a discount in gratitude for their business. This may not be the case. The incentive may be driving the customer’s visit (although owners normally overestimate this). However, you can give the impression that it is out of gratitude even though it may be a shrewd business decision.
Gifts are somewhat different than incentives. Incentives are an agreement beforehand, but a gift has some element of uncertainty. Anytime, a discount moves on the road to devaluing the more it feels like an agreement. Customers see that you are striking many of these similar agreements (a lower price), so they aren’t the exception. This is not something special. Anyone can walk off the street and get this price. Customers sense that they have gained the upper hand.
Contrastingly, a gift (or anything gift-like) has a bit of generosity attached. You made a little sacrifice. In this case, it is your customers. For example, putting in a degree of luck may help. A restaurant may have a promotion where for a week by ordering one undisclosed dish on the menu, the person receives a free dessert (even better if it isn’t on the menu). The item would change every week and you’d take pictures of the winners with their prize. It is fun like a grab bag. The lost revenue of the freebie is the last thing in your customer’s mind.
Getting Away From Price
Yes, discounting has its place. But a restaurant should do everything possible to make the customer not conscious of price. It interferes with the meal and the experience
Only rarely do customers proclaim that they feel like they are getting a steal. I can probably count on my fingers and toes how many dining experiences (food, atmosphere) made me think that. Indeed I did visit those places regularly. But most of those places had dishes under $8, eliminating a huge chunk of independent restaurants.
However, I don’t go a week without be really dissatisfied with a meal at a new restaurant. I cannot help by believing I paid too much. Many times, it crosses my mind that I should have known (even though that doesn’t make sense). I swear never to go back there and to cook my meals except when I go out to restaurants which I know I get my money’s worth. Of course, I change my mind 3 days later and decide a life of bagged lunches is not for me.
There are many techniques to limit the concentration on price. We have all seen menus where every entree is the same price. To a customer who asks why, your server can say that the dishes are all brought to the same level of quality. It’s about food now and the business element moves to the background. Chipotle, even though their prices are terribly good, moves the focus onto the food as you are making a series of choices of what you want on your burrito.
A good idea is to start by making sure you haven’t overcharged customers. Have a honest friend or an acquaintance try out a dish and tell you how much they value it as. After you can an average, add about 15% and you have put your food in a price range that will allow customers to not fixate on price. If you want to charge more, you can always improve the taste of the dish.
Also, if your promotions express your brand and are fun, price becomes less involved. You have created value that isn’t on the plate. It’s hard to do, but you normally take home most of that extra value.
I hope you have become aware of the risks involved with discounting. Customer psychology is very pronounced in restaurants because of our emotional attachment with food. The allure of increased traffic with lower prices is normally a temporary fix. With price, you can either control those emotions or let those emotions endanger your restaurant. Take a good look at your promotions and make sure you aren’t devaluing the dining experience.
