Thursday, February 20, 2014

Psychological Pricing and Your Restaurant

By Kyle Reyes

Ever hear about the theory on psychological pricing?  It's the reason why you see so many retail prices with odd numbers - like $19.95.  The psych behind it is that consumers perceive these prices to be significantly lower than they actually are...tending to round down instead of up.  The idea is that it increases demand and boosts volume sales.

Don't believe me?  Look around.  Start with the gas stations.

Some retail establishments use a version of this to set aside clearance or discontinued items.  Look at Costco, for example.  If you see a price ending in a 7...i.e. $19.97 - you'd better scoop up 15 of them.  Because the end is near.

There was a study done in 1997 by Kaushik Basu which essentially found that an individual seller can charge the larges possible component of cents - .99 - without impacting consumer behavior.  The study was supported with testing by Ruffle and Shtudiner in 2006...comparing this pricing structure against other seller prices.

But does the same concept translate when it comes to food?

Let's look at Wendy's vs. McDonalds.

Wendy's started with the 99-cent menu.  McDonalds...the dollar menu.

Both have since all but disappeared.  Wendy's changed it's menu to "Right Price Right Size".  The portions went down...the prices went up.

McDonalds just went through a rebranding campaign - "The Dollar Menu & More".

Hardly a scientific study.  But it's important for restaurants to look at industry and psychology trends when pricing menus...because it has a direct impact on their bottom lines.

When the restaurant consulting division of The Silent Partner Marketing works with our restaurant clients, we look at these studies and many more.

For example, look at the study that Cornell University researchers did at St. Andrew's Cafe.  They offered three types of menus - one with the price with the word "dollar" spelled out...another with a price with a dollar sign...and a third listing a dollar sign in front of the numerals.

The study found that when the word "dollar" was spelled out...sales dropped tremendously.  And when the dollar sign and word were absent, customers tended to spend more.

Another study found that the flat dollar amount vs. the dollar amount with a "cent" reduced on it ($5 vs. $4.99) changed the perception of diners about the value.  Consumers found that while there was more VALUE in the lower price...they associated significantly more QUALITY with the higher price.

Now what about item placement on your menu?  Are there ways to track eye movements to maximize profit margins for restaurant owners?  You'd better believe it.

But we can't give away all of the tricks of the trade.  Instead, we'll leave you with this.

Consumers - next time you look at a restaurant menu (specifically at a larger restaurant with a national chain)...take note of how the prices are listed and where certain menu items are placed.

Restaurant owners - you know what to do.  Hit us up.  We'll help you sort it all out and find that missing money.  Email us today for your complimentary consultation.