Restaurants are not like retailers.
The price should not start high when it hits the shelf and bottom out on the clearance rack. Many restaurant owners think it works as simply as that. They are convinced that restaurant pricing is simple supply and demand; when you lower the price or give a deal, you increase traffic.
In actuality, restaurant owners have to be very careful to distinguish between effective discounting and brand-damaging devaluing. Thousands of restaurant owners believe that their promotions are providing a discount that will be helpful to their business while they are actually devaluing the food and/or dining experience. This myth has only become worse in the age of online deal sites, such as Groupon and LivingSocial.
Customers smell blood when a restaurant drops its prices, if they notice at all. Customers decide if the discount is reasonable or desperate (devaluing). If it is seen as desperate, the customer will never be convinced that the pre-discounted or “normal” price is not a rip-off or they will assume the business is in trouble. The discounted price often becomes the new “normal” price. It is because the psychology of your customer frequently does not reflect simple supply and demand.
Customers assume price stability at restaurants and find price changes, whether radical deals, price hikes or discounts as suspicious. 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, both by damaging the brand and by cutting into the bottom line. 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, and any short-term bump in traffic may be canceled out by decreases in margins and the short-lived attention of price-conscious customers.
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.
Even weekly discounts devalue to some degree. Can you imagine every Monday a customer returning for the same freebie or deal? Are you providing a deal for a customer who might otherwise visit your restaurant?
The point is you cannot change customer’s lifestyles, unless you offer a drastic deal. There are exceptions, especially the ones that create cult followings (like bar wing nights). 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 defend its business, not gain ground on the competition.
The Different Types of Devaluing
Devaluing applies in several ways in the restaurant business. Devaluing can happen on one particular thing on the menu, where the owner tries to coax customers to try something or unload inventory. This can be very subtle and fly under the radar, actually having little effect on customers’ orders. To counteract that, some owners turn it into a freebie, normally as a bonus to another item.
Often, by changing the arrangement and design of the menu, a restaurant can draw more attention to a menu item without making customers’ excessively price conscious.
Sometimes, a restaurant takes an entire meal and reduces the price. Let us take a common promotion, the lunch special. We all know of lunch specials and how you are supposed to get less quantity for less money, often with the same menu items. This is truly problematic in areas where people work at the same place as they live, as a restaurant is competing against itself. The price change is confusing and makes us reluctant 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 lunch special, therefore, is not a good business move unless you are defending yourself against competitors with popular lunch specials or your restaurant is in a community that embraces smaller portions for lunch.
The Art of Discounting
For independent restaurants, successful discounting is complicated. People imagine the prices of restaurants are not determined in some corporate entity, but by a restaurateur who lives on their 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 perk 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. I cannot number the times that I heard someone praising a restaurant for its free bread. On the other hand, another restaurant offers mini quesadillas while you wait for your meal, surprising customers.
Perks or 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 that has little to do with the food or the restaurant brand. 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. Customers sense that they have gained the upper hand.
Contrastingly, a gift (or anything gift-like) has a bit of generosity attached and builds a relationship with current customers or customers who are only a degree removed from the restaurant (like who have friends who like it). You made a little sacrifice. In this case, it is for your customers.
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, and for most places, it chips away at the brand’s value.
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 being really dissatisfied with a meal at a new restaurant. I cannot help but believe that I paid too much. This is not some scientific calculation between the price and the quality of the food. I have a conception of what the quality is of a dish under $10, of what one between $10-20 should be, and what above $20 should be. So changing the price from $15 to $12 isn’t going to drastically alter my perception.
Anyway, if I am at the meal trying to figure out if I got my money’s worth, it means I am unlikely to come back. That question never crosses my mind when I loved my food.
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 cheap, moves the focus onto the food as you are making a series of choices of what you want on your burrito. Perhaps, they can inflate all the prices a tad just because of the lack of thinking that customers put into the price.
A good idea is to start by making sure you haven’t overcharged customers. 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 or the quantity.
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 in profit.
In this day and age with Groupon and the many copycats, owners have to be more aware of the risks involved with discounting. Customer psychology is very pronounced in restaurants because of our emotional attachment with food and our strong opinions on good and bad food. The allure of increased traffic with lower prices is normally a temporary fix. It is rarely a good way to give a restaurant the word of mouth marketing that send a restaurant new regular customers.
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.