A Simple Pricing Strategy That Attracted Groups
I love exploring different pricing techniques, tooling around with price to attract new clients. Pricing is just like any other piece of equipment in an operation, its a mechanism, a component of strategy.
In 2005 my brother and I, along with a group of investors bought a restaurant in San Diego. It was a brewery with 7,000 sq ft and served American food and in addition, had a sushi bar. I immediately started experimenting with new pricing strategies. I found an opportunity in our beer. Being that this was a brewery, it attracted a lot of beer lovers. I wanted to build a pricing model around this.
At the time, our average pint of beer cost .25 to make and we sold pints for $4. Typically, you rarely want to discount your high margin, destination driven items but I had crafted a plan that focused on corralling new customers and volume selling. I came up with an offer: Receive a free pizza with the purchase of 4 pints. This sounded crazy at the time, as if I was giving away too much. However, the answer lies within product cost versus revenue plus new traffic plus frequency of sales.
If a pint costs .25 to make, then 4 pints would equal $1 (duh). A basic pepperoni pizza cost $1.50 to make. Total food cost was $2.50 and we would collect $16 (4 pints x $4= $16 in total revenue). Effectively, this was a 16% food cost. I could sell this pricing scenario all day everyday and even on Christmas and not ever loose money (for argument sake, I am aware of opportunity cost of discounting people’s willingness to pay, however when viewed as method of new client conversion this situation proved to be profitable). So this campaign penciled out very well. But it was never just about selling 4 pints and pizza with a “thank you and come again” at the end. Why?
The average person who agree to this offer would likely not consume 4 pints and a large pizza all by their lonesome. What do they do? Answer: Bring friends. That’s right. Most people would bring their friends in to redeem this offer. It created a gathering effect. This cascaded into additional sales (not to mention, the busier the restaurant, the more people feel validated in their choice to walk in, it’s a herd mentality we possess as humans) When customers feel like they are getting extreme value, it creates a higher propensity to consume additional units in an environment like a restaurant. Sort of like a captive audience corralled in an experience. The longer they are inside, the better the odds of them generating a larger bill. Larger bill, higher gratuity, happier employees (an example of positive externality).
This pricing technique was a hit in my restaurant. The staff thought it was crazy at first. However it proved to be very successful with minimal downside risk and was always profitable.
We didn’t just create a new pricing strategy, we created a conversation piece. We got people in the door, and they brought their friends who told their friends who told their friends that they saw Ferris Bueller leave 31 Flavors to come try our offer.
To summarize the after effect, the offer of a free pizza with the purchase of four pints attracted new patrons to the restaurant. Beer lovers, in particular, were enticed by the deal, which helped increase foot traffic and expand the customer base. These new customers, drawn in by the promotional offer, had the potential to become regular patrons if they enjoyed their experience.
The offer encouraged group visits. Since it was unlikely that a single person could consume four pints and a large pizza alone, customers often brought their friends along to redeem the offer. This created a social gathering effect, fostering a lively and convivial atmosphere in the restaurant. As more people visited and dined together, the likelihood of larger orders and increased sales grew.
The perceived value of the offer enhanced customer satisfaction. By providing an attractive deal that appeared to offer significant savings, customers felt they were getting extreme value for their money. This positive perception often resulted in customers being more willing to explore the menu beyond the initial promotion. They were more inclined to try other items, such as appetizers, desserts, or additional drinks, which further increased the overall revenue per table. The extended stay of customers inside the restaurant led to higher spending. As customers felt they were getting a great deal, they were more likely to spend more time enjoying the atmosphere, trying different items from the menu, and engaging in conversations with their friends. This longer dwell time increased the opportunities for additional orders and boosted the average bill size.
The success of this pricing technique demonstrated that strategic pricing can go beyond simply maximizing profit margins on individual items. By analyzing the cost structure and leveraging the appeal of certain products, it’s possible to design promotions that attract new customers, foster a sense of value, and encourage increased spending. This approach requires a careful assessment of the costs and revenues associated with each item, as well as an understanding of customer behavior and preferences.
This proved to be a creative and profitable move for in our restaurant. It showcased the importance of considering the broader impact of pricing decisions and how they can contribute to the success of a business. Getting people in the door is important, as long as your systems, staff, and product is top notch then you can expect nothing less than growth to occur in the operation. What I loved about this scenario is we created a deal (or offer) that started a buzz (joke: you especially got a buzz if you were one of the outliers than drank the 4 pints yourself) as it brought more people in the restaurant. However, at no additional expense to the restaurant (like a loss leader campaign, which looses money to acquire customers). We generated a profit for each unit sold under this deal and wee did not loose any money.
On the flip side, I am reminded of another pricing scenario from a book I read years back called “Contagious- Why Things Catch On”. The author, Jonah Berger, describes this story about a restaurant that launched a newsworthy price tag by creating a cheesesteak which sold for $100. There isn’t much to a cheesesteak, they used the best bread, Kobe beef, and sauces. The sandwich was a hit and the response was incredible. People bought it and rushed to tell others to have the story telling rights. It created a unique flavor of social currency.
