Added On: Wednesday, January 09, 2008

Pricing for Profits and Growth

It’s as Easy as Early Bird, Regular, and Chef’s Table
Example: The Multi-Price Mindset at Gourmet Restaurants

My good friend David Straus recently called me to discuss how to set prices at his new upscale restaurant. Like many of you, he viewed pricing as a search for the “perfect price” for each of his menu items. He was pondering whether his strip steak with morel mushrooms should be priced at $18 or $31.

As I do with every company I meet, I shared the key epiphany to pricing for profits and growth: for any product, different customers will have different valuations (hence prices they will pay). For Dave’s restaurant, I noted that budget minded young couples with a mortgage and kids who want to celebrate their anniversary with a fancy dinner can’t afford to pay as much as the well-to-do who delight in dining at the best restaurant in town.

The downfall of searching for your product’s perfect price is that you always end up in a pricing Catch 22. Even if you could find this mythical “perfect price,” you’d have hidden profits. This is because no matter what price you set, some people would have paid you more. Conversely, a lower price would have attracted more customers.

The key to breaking out of this pricing Catch 22 is to adopt a multi-price mindset. A multi-price mindset is a series of strategies designed to capitalize on the simple fact that different customers have different valuations for your product.

After an hour of discussing Dave’s business, goals, and potential customers, we designed a set of pricing strategies for his restaurant. They included early-bird specials, senior citizens’ discounts, regular menu prices, $200 annual charter memberships that provided a 25% discounts on all meals for a year, a lower priced bar menu, and a premium-margined chef’s table seating.

Of course, the restaurant will make lower profits from those ordering early-bird specials compared to the margins gained from high rollers willing to pay for the privilege of sitting at the chef’s table and hobnobbing with the creative genius behind the meal. But this is exactly what pricing for profits and growth strives to accomplish. The right set of pricing strategies enables companies to serve (and profit from) as many customers as possible.

When I visited Dave six months later, he was beaming with pride at how well his restaurant was doing. As I looked around the packed dining room, I was happy for my friend. Dave had done a great job of pricing for profits and growth. Profits were being enhanced by options like chef’s table seating, and the early-bird specials were growing his customer base. Think about all the hidden profits Dave would have missed out on had he viewed pricing as an $18 or $31 decision

What hidden profits are you missing out on because you are searching for your product’s “perfect price?”

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