Are you charging too low a price?

If you look at a pizza ad in the newspaper, you're almost bound to see a coupon or a featured price discount. If consumers perceive that a chain like Dominos, or a local operator trying to compete with Dominos, can always be bought on deal, then they aren't likely to be willing to pay regular prices for the pizza because the discounted price has become the regular price. Much like Chrysler did to the automobile industry in the 1980s, Dominos, Pizza Hut and others have done the same to the pizza business in the 1990s. Customers have been programmed to look for price deals before they will buy.

If you are one of those chains or establishments operating mostly on deal, and maybe even if you aren't, you probably get customers frequently beginning their orders (particularly on the phone) with: "What do you have on special?" This kind of customer mentality may help increase efficiency by focusing production on identical orders (e.g., large one-topping pizzas), but it does little to help differentiate and separate your pizzeria in the minds of consumers. The key to developing a long-term sustainable advantage in this market is to develop a unique marketing position in consumers' minds. The problem with trying to be seen as the low-price leader is that there can be only one. And that one will be the one with the lowest costs.

So, unless you are positioned to be the low-price leader, you need to find a way to differentiate your product and place in a way that will make consumers focus not on price, but on some other attribute or characteristic in which you excel. Interestingly, there are many times when consumers are not even interested in the lowest price. The key is in understanding when consumers are less concerned about price and positioning yourself as the logical alternative in that context.

Occasion Price Paid Difference
Nonsocial $2.47 +47%
Social $3.63
Functional $2.76 +14%
Hedonic $3.16
Low Brand Conscious $2.40 +4-%
High Brand Conscious $3.36
Low Brand Conscious
Nonsocial/Functional $2.31 +79.2%
Social/Hedonic $4.14

The research I've conducted over the past few years indicates that consumers are significantly less price sensitive when they are involved in (1) hedonic consumption, and when they are in (2) social situations. Hedonic consumption just means that they are out for fun, enjoyment and pleasure, rather than some functional purpose, such as just getting a quick lunch. By social situations, we mean that consumers are eating with friends, family and others, rather than eating alone or in private.

To give you an idea of just how much a difference these situations can make, examine the results from a study currently in progress. This portion of the research focuses on pizza purchases made in the frozen food section of grocery stores. We had workers posing as stock persons at a local grocery store. After an individual made a purchase, they were asked what price they paid and the actual price of the pizza was recorded. These consumers were then asked about the situation in which they planned to consume the pizza they just put in their basket.

As you can see, shoppers were willing to pay nearly 50 percent more in situations that were expected to be social in nature. Even when adjusting for the size of the pizza purchased, we still found that they were willing to pay 14 percent more per serving in the social setting than in the more private setting.

Perhaps most interesting is what happens when you combine these situations. Even people who aren't particularly brand conscious will pay over three-quarters (79.2 percent) more for pizza when they are consuming the pizza for fun in a social setting. People who do care about which brand they buy will spend significantly more (53-80 percent more; not shown in chart) on a pizza whenever they are with friends, out for fun, or both-than when they are alone just eating a pizza.

So, what's the bottom line? If you can position your pizzeria as the place to go when customers want to go out for fun with their friends, then they should be willing to pay a higher price. Furthermore, if you can establish your place and your name brand as being perceived as high quality, then you can charge an even higher premium*.

Doing all of this isn't easy. In the next issue of PMQ, I'll outline specific ways you can reposition your establishment so that you can charge a higher price, increase your margins, and draw more traffic at the same time. PMQ

*Footnote: This is just for frozen pizza. I suspect that the effects for dine-in and carry-out pizza to be similar, if not larger, given the contexts.