11.5: Chapter Glossary and Notes

Glossary

Pricing Objectives. While the possible pricing objectives are numerous, they usually fall into four overarching categories based on an organization's goals related to: financial performance, amount of volume, competition, and desired image. All pricing objectives should closely relate to the company's organizational objectives. Thus, pricing, in many ways, is a large part of the means to the end.

Financial performance objectives. These objectives focus on financial areas of the restaurant operation such as the company's level of profitability, desired rates of return on sales and equity, and cash flow. Most large companies continually monitor these performance measures and, over time, find it prudent to use these measures as benchmarks or objectives. The closer one observes performance measures, the more clearly they can see the impact of price on financial performance outcomes.

Volume objectives. These objectives focus on sales and market share. These measures can be based either on the number of units sold or on the dollar amount of the units sold. The sales measure looks at the firm in term s of individual accountability, while the market share views the company relative to the competition. Volume objectives are particularly common in the early stages of the product life cycle, when companies are willing to forgo profits in exchange for building long-term sales and market share. It would also be wise to see that price competition stays strong in the maturity stage in an attempt to hold market share.

Competition objectives. Competition objectives focus on the nature of the competitive environment. A firm may want to maintain competitive similarity with the market leader, widen the gap between itself and market followers, or simply survive. If strong competitive forces or economies of scale are at play. There is typically a great deal of head-to-head competition in the hospitality and tourism industry. A change in price by one organization in the market generally sees reciprocation by other organizations in the marketplace.

Image objectives. These objectives focus on the organization's overall positioning strategy. Often, a restaurant operation's position in the market is a direct result of its 'price-quality' relationship as perceived by consumers. Price is the main segmentation factor useful to the restaurant to distinguish quick service (QSR), casual, upscale, and luxury categories.

Price-quality connection. Consumers use price as an indicator of a product's quality, especially when they do not have much experience with the product category. In such cases, consumers be less sensitive to a product's price to the extent that they believe higher prices signify higher quality. An example would be travelers who often use price as a gauge of quality because they lack familiarity with the travel products in a different city. This lack of information is one of the main reasons that consumers would use price as a signal of quality, along with the perceived risk of making a bad choice and the belief that quality differences exist between brands. Pricing perceptions related to the trading area is an important consideration.

Unique- value relationship. Consumers will be less price-sensitive when a product stays unique and does not have close substitutes. If a firm successfully differentiates its products and services from those of its competition, it can charge a higher price. Consumers must remain aware of the differentiation and convinced of its value in order to pay the higher price. In essence, the organization's strategy is to reduce the presence of substitutes in the mind of consumers, thereby eliminating the consumer's reference value for the product. Many fine-dining restaurants use this approach and differentiate themselves on attributes such as the chef, the atmosphere, and menu.

Customer substitutes. Customers will become more price sensitive when comparing a product's higher price with the lower prices of substitutes for that product. The prices for substitutes help consumers’ forma reference price, or a reasonable price range for the product. The restaurant operator should always be aware of the number of substitutes that consumers are aware of for different dining options. Substitutes tend to put downward pressure on price resulting in a relatively narrow acceptable range of prices for each different type of restaurant category. As such, price differentials were instrumental in creating the different restaurant categories so it is not surprising that there is little significant price difference between products in quick=service, casual and fine-dining categories.

Value of meal components. A product may represent only one portion of the total desired benefit. Consumers tend to evaluate the desired end benefit of their purchase and their price concerns for something that contributes to that end benefit. Specifically, in the restaurant industry, consumers are more price conscious when the cost of component (say an appetizer or dessert), represents a larger portion of the total cost than they perceive is fair. For example, while $20 might be acceptable for a pasta entree, $7.95 for onion rings and $9 for a slice of chocolate cake may appear high given the cost of an onion and cake mix. Said differently, although the restaurant operator has justification for charging certain prices, the consumer is under no obligation to agree with a restaurant's pricing structure. Income is an important consideration regarding price and end benefits from the consumers' perspective.

Price fencing. Price fences are a mechanism used to maximize profit potential based on demand factors and the aspect of controlling the duration of the customers’ restaurant experience. ‘Fences’ are designed to allow customers to segment themselves based on their willingness to pay, their behavior, and their needs.

Physical rate fences. Include the restaurant location; furnishings; the presence of amenities, or a spectacular view to name a few. Examples in a restaurant setting are table location, tables with a scenic view, or tables in a private room with fresh cut flowers as exemplars.

Non-physical rate fences. Include the day of the week (weekend dinners might cost more or meals consumed before 6pm might cost less). Another involves ‘transaction characteristics’ (customers who make a reservation over a month in advance might pay less). Buyer characteristics provide another example - frequent customers might pay less or get free extras) and ‘controlled availability’ (customers with coupons will pay less).

Duration control. Some restaurant managers try to manage duration by changing their service delivery e.g., speeding up the delivery process. For example, the ability to enact a certain amount of duration control is important to a popular operation with limited dining capability. It can also be an important element to use in staying off growing pains – growing in an initial location rather than having to expand to another site prematurely.

Demand-based Pricing. Most restaurants use demand based pricing such as happy hours, and early bird specials but they are reluctant to vary prices by time of day, day of week, or table location. The main reason – customers refuse to patronize companies that they perceive as unfair. Several demand-based approaches are possible:

• Differential lunch vs. dinner pricing,
• Differential weekday vs. weekend pricing
• Coupon pricing (including restrictions)
• Table-location pricing (e.g., charging extra for a table with a view).

Notes

Robert Phillips .2005. Pricing and Revenue Optimization. Stanford University Press.

Frank, Robert H. 2010. Microeconomics and Behavior, Eighth Edition, McGraw-Hill Irwin.

Chamberlin, Edward. The Theory of Monopolistic Competition: A Re-orientation of the Theory of Value. Harvard University Press.

Barney, J. 1991. "Firm resources and sustained competitive advantage". Journal of Management. 17(1): 99–120.

Sharp, Byron; Dawes, John .2001. "What is Differentiation and How Does it Work? Journal of Marketing Management, 17, 739-59.