What's Up With Pricing? The Good, The Bad And The Ugly

by Paul Schlossberg
Posted On: 5/15/2019

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What does pricing have to do with a classic movie? As you will see, pricing decisions can be categorized as good or bad or ugly. Hopefully, with some strategic thinking, you can improve your pricing decisions to increase sales and profits.

"The Good, the Bad and the Ugly" is a renowned film. It was called a Spaghetti Western because it was made in Italy. The star was Clint Eastwood with Lee Van Cleef and Eli Wallach. Each one respectively, in order, associated with the movie's title.

It is one of my favorites. Thinking about it makes me smile and recall a Saturday afternoon movie event while in graduate school. With a few friends, it was a very enjoyable time seeing a great triple feature – the "Dollars Trilogy." First was "A Fistful of Dollars" followed by "For a Few Dollars More" and, finally, "The Good, the Bad and the Ugly." It was binge-watching long before binge-watching was a thing.  

That's enough about the movies. Let's get back to pricing. Looking back over the years, pricing has been one of the most difficult challenges in our industry. There are several different ways to approach pricing decisions. The primary methods are usually based on:

1.    Percentage gross profit margin. This has been the most frequently used pricing technique in our industry. There is nothing wrong doing it this way. There are other approaches you should consider when setting prices.

2.    Penny profit gross margin. Many foodservice operations use this measure to set prices. My thinking is that this is a complementary approach along with No. 1. What appeals to me is the fact that your bank will never let you deposit your percentage margin. Banks accept money and that's why penny profit is my preference.

3.    Percentage mark-up on cost. It can be a useful way to set prices. It requires that you have a firm handle on your costs (as a percentage of sales) and that those costs do not vary too widely.

4.    Using competitor prices to set your price. You do want to be aware of competitive pricing. But be very careful not to set prices exclusively based on what others are doing. Their costs and operating situations are different from yours.

The chart below shows how each of these approaches could be applied with a product costing $1. You can do these same calculations using actual product cost and your own margin (or mark-up) expectations.

 


Go back 20 or 30 years and you might recall that setting prices in our industry was much simpler than it is today. For a long time, operators focused almost exclusively on keeping product cost (by machine type) at specific percentage levels of sales. If you've done your planning and analysis well, hopefully there will be a PROFIT at the end of the day (and the end of the year as well).

If you think that pricing can be discussed with only the words above, you are wrong. There is much more to it. Think about VALUE and the price versus value relationship. In general, and being overly simplistic, people tend to think that a product at a higher price will have more (and better) features and benefits versus a similar product at a lower price. That can apply to a candy bar, a salty snack or the purchase of new car.  

Why is price-value so important for our industry? A critical issue is how the retail landscape has changed in the U.S. in the past few decades. American shoppers became fixated on buying everything at the lowest price possible. That expectation was fed in many ways by two incredibly successful companies.

One is Walmart. Its focus as it grew was on EDLP and EDLC. What shoppers saw was Every Day Low Prices. To deliver that, they pursued Every Day Low Costs and operated with exceptionally efficient practices in their stores and supply pipeline. They are the low-cost competitor. Add to that, buying power. Eventually Walmart became the largest U.S. customer for many CPG (consumer packaged foods) companies.

The other is Amazon. Only recently did Amazon evolve to add brick and mortar stores. That includes some bookstores and its emerging Amazon Go operations. There are more than 100 million Amazon Prime members in the U.S. Many of you reading this are Amazon Prime members. There is no reason to go very deep on the impact of Amazon as a force in changing how people shop.

The real issue for our industry is the Amazon Go stores. Will these stores arise to be a competitive challenger for our business? My Dec. 13, 2018 Vending Times blog posting – "Is Amazon Go Planning To Compete With Our Micromarkets And Vending Machines?" – addresses this subject. You might want to read it if you are not familiar with the content. And another of my Vending Times blogs, posted on Oct. 18, 2018 – "Vending, Micromarkets and Amazon Go. What's The Difference?" – asked "Is Amazon Go simply an upgraded micromarket?"

Don't forget delivery – where shoppers can get multi-pack units (boxes or cases) of the very same SKUs we sell. Those per-unit prices will be lower than what we can offer to shoppers.  

In case you were not paying attention, there is a new and emerging player in retail shopping. You see evidence in rural areas, the suburbs and inner cities. What is it? It is dollar-store retail. What are they doing? (1) Small stores (2) Low prices (3) Limited selection (4) They're building a following with general merchandise (5) A likely evolution might be to add more grocery items.

There is controversy around the growth and increasing presence of dollar stores. Fresh produce is not typically on their shelves (not yet anyway). Thus, there is less availability of a balanced diet for dollar-store shoppers.  

Another critical reason to be aware of price-value is that we sell leading brands in the product categories we offer. Those brands and products are also available in retail stores – supermarkets, mass merchandisers, chain drug stores and more. You'll find those same products at convenience stores, too. We know that our prices are typically perceived as being higher than competitors' prices. Everyone knows the drill – sales tax is included in our prices, etc.

Pricing has changed in other ways. We are competing against smart and shrewd companies who innovate in every aspect of their business operations, including pricing and promotions. Bundled pricing or combination meals are a big part of the menu at fast food restaurants, convenience stores and other restaurants and retail venues.  

Do you know the origin of combo-meal pricing at fast food restaurants? Burger Chef began this practice in the late 1950s, according to Portable Press and its Fast Food Firsts webpage. One anecdotal report (from friends who called on the big QSRs) is that McDonald's (and the others) noticed that customers were buying a sandwich and fries but not a beverage.

As they investigated what was happening, they discovered that people purchased a meal and then went to a convenience store to buy a fountain drink. Think 7-Eleven's Big Gulp. That 32-fl.oz. serving was introduced in 1976. The price-value relationship of splitting the purchase at two stores was a better deal.   

Combination meals were introduced and marketed aggressively. Pricing was set to be less than what the total would be for each item sold separately. It worked. The convenience of not having to go elsewhere to get a beverage became a "good deal" when the price-value relationship for the combination meal was improved.

Today, combo meals have taken on new and different variations – especially in fast food restaurants. There are menu combinations for breakfast, lunch and dinner. You'll find LTOs – limited time offers, with meal deals at special price points.

During summer 2018, McDonald's announced a "2 for $5 Mix & Match Meal Deal." That let shoppers select two choices from Filet-O-Fish, 10-piece Chicken McNuggets, Classic Chicken Sandwich or the Big Mac.

KFC has four different $5 Fill Up items on its menu. Depending on your selection, you can get chicken or a pot pie or a "Famous Bowl." There are different sides or a biscuit depending on the main you choose, plus a cookie and medium soft drink.

There are lots of specially priced single-items on fast food menus. Some are at $1, $2 or $3. It's not easy to compete against those deals.  


What Should You Be Doing About Pricing?

Since we sell brands and products that are in broad distribution, you can expect that there will be differences in price and promotion activity in other retail venues. Pay attention to convenience stores and fast food restaurants. Don't forget chain drug stores and deli and take-out sections in supermarkets. Here is a to-do list:

1.    Depend on data and facts, not intuition, to plan your pricing moves.  That is why you want to track competitive pricing. You must be alert to pricing in competitive channels. When you are out of the office, be sure that you make some stops to do price checks. Write down what you see. Do not depend on memory. If you have a log book of pricing observations, you'll know that competitors have taken increases.

2.    Pay attention to promotions. Again, write down what you observe. The relative value of what you sell is impacted when competitors constantly discount the same SKUs you're selling.

3.    Key an eye on breakfast and lunch combination meal pricing and promotions at fast food restaurants. Even though we do not offer a Big Mac or a Whopper, the relative value is important for your shoppers. You'll want to know how your prices compare.

4.    Experiment with prices and promotions. For a vending location, maybe a nickel more will not have a big impact on units sold. For a micromarket, use penny price points more frequently. Why not? We won't get into it here – but there is proven research about which penny price points have a better value indication for shoppers.

5.    Use a high-priced product to set up your other prices as being more reasonable. Add an SKU at higher price versus your typical menu. Of course, it should be set at a reasonable value – just higher than the other SKUs. Think about how steaks are priced on restaurant menus versus hamburgers. If a restaurant used percentage gross profit margin, steak prices would probably be too high and would represent a poor price-value versus other menu items. Many restauranteurs use penny profit (it's more than just a few pennies) when pricing steak.    

6.    Be aware of the difference between (a) opportunities to increase prices and (b) when it is necessary to increase prices. By tracking competitive activities you'll be more likely to see when a price move can be made. You must know when it is important for you to increase prices. Supplier cost increases are obviously a cue to raise prices. But, there is a way for you to monitor your product portfolio. You should be tracking penny profit per unit sold and unit sales. Nearby is a slide we've used in presentations to demonstrate that there are times to focus on pricing action (look at Box #3).

 


There is no best choice to set pricing from the four approaches detailed at the beginning of this article. Which one should you use? It depends. You should try several variations. And be sensitive to competitive pricing too.   

If you can be more focused in proactively managing pricing, you will be taking another step on the path to selling more stuff and generating increased dollar sales and profits.





» PAUL SCHLOSSBERG is president of D/FW Consulting, working with clients to merchandise and market products in impulse selling environments, such as vending, onsite foodservice and convenience stores. Based in the Austin, TX, area, he can be reached by email at Paul@DFWConsulting.net, tel. (972) 877-2972, or visit DFWConsulting.net.