Apply these 3 steps to increase your gross margin through pricing.
One part of pricing in QSR is the art of balancing margin, transactions and costs. As a regional QSR, sometimes you need a quick and simple, yet proven, method to find your optimum pricing.
Below are 3 steps that can help you:
1. Clearly establish your goal.
A typical pricing scenario starts with looking at food costs, then setting the price to achieve a margin goal that will be deemed acceptable by management.
However, you must first decide how you want your price to affect your customers’ behavior.
Do you want to maximize single transaction margin, or do you want to maximize repeat purchases over a set time period and greatly increase your total margin? You may be able to do both. But you’ll be more profitable to start with the goal of repeat purchase.
2. Use a pricing methodology such as the Van Westendorp model to help you set your price.
Van Westendorp’s Price Sensitivity Meter is a direct technique to research pricing. This model is based on the responses to 4 simple questions:
Q1: At what price would you consider the product/service to be priced so low that you feel that the quality can’t be very good?
Q2: At what price would you consider this product/service to be a bargain—a great buy for the money?
Q3: At what price would you say this product/service is starting to get expensive—it’s not out of the question, but you’d have to give some thought to buying it?
Q4: At what price would you consider the product/service to be so expensive that you would not consider buying it?
Once plotted on a graph, or “price map” (shown below), you can see an acceptable range of prices.
As you can see in the above map, you are plotting the cumulative percentage of responses to each price point. An excellent article by Mike Pritchard, called Van Westendorp Pricing, provides details for this methodology.
3. Test the price points for purchase intent.
With a simple online survey or customer intercepts at your stores, you can test the level of purchase intent at the different price points identified via the Van Westendorp survey. Use a Likert Scale when measuring purchase intent—which would look like the question and answer choices below:
How would you rate your likelihood of purchasing this product at this price? Would you say you are:
- Very likely
- Somewhat likely
- Somewhat unlikely
- Very unlikely
Now ask each respondent how often they visit your restaurant each month, and you can begin to model how profitable each price point might be.
There are no absolutes. But if you follow this methodology, you’ll go to test market with a much better chance of success.