Price Optimization: A Key Ingredient for Success in Every Restaurant
Like most Australians, one of my favourite pastimes is enjoying a meal out with family and friends. Living near the famous beachside suburb of Bondi provides numerous options for Italian cuisine. Pre-2023, Italian dining in Bondi ranged from mom-and-pop pizzerias with $15-$20 pizzas and pastas to more upmarket white-tablecloth restaurants serving cocktails along with traditional three-course meals with primi and secondi dishes for $25-$30.
In 2023, we witnessed a year marked by increasing inflation and interest rates, signified by 13 consecutive interest rate hikes from the RBA. A nearly equivalent number of interest rate increases were passed on from banks to consumers and businesses. For some enterprises, raising prices became imperative for survival, covering additional funding costs, expenses from suppliers, and, in some cases, heightened labour costs. However, many small businesses either followed the trend or adjusted prices to meet market standards.
Over the past 12 months, I've observed that the cheaper options increased prices more significantly than the premium restaurants. Pizzerias now charge $25-$30 for a main, while fancier restaurants may charge $29-$35. The pricing gap has narrowed. So, how has this affected my choices in Italian restaurants?
In recent months, I've frequented the premium Italian restaurant and hardly returned to the local one. The reason is that I perceive better value in the premium option. Not only did the restaurant introduce Monday, Tuesday, and Wednesday specials priced at $29, including a glass of Chianti, but it is also much more accessible with its regular team of staff going out of their way to make tables available for locals. In contrast, the "cheaper" Italian restaurant doesn’t take bookings, leading most people to queue for 40 minutes. Their pastas, costing between $25 to $29, feature more classic flavours and are less refined. If I order a glass of wine with my meal, my total bill comes to just under $40.
Has the "cheaper" Italian restaurant overlooked what their customers value? Perhaps they just don’t care about local patrons? I think this is a classic case of opportunistic pricing. It seems the cheaper restaurants are pricing to their capacity to meet an increased demand from passing tourist trade. The cheaper restaurants seem to have an edge in attracting the tourist trade, and it seems that this is because the tourists aren’t doing enough research into the alternatives. I don’t see locals queuing up for these venues; they have moved to the premium restaurants nearby where they will get a seat and a way better value experience.
Price optimization is what is happening here. Understanding how your target customer base values features of your offering compared to your next best alternative. Are you charging the right price? Have you considered everything your customers value when making a choice? Or do you have an entry-level product, like the Weeknight Special, which includes a glass of wine?
The cheaper restaurants are pricing to their capacity to serve patrons who are not discerning in the dining experience. They have traded away the loyalty of their local patrons in the meantime; a conscious and expedient choice, no doubt. Meanwhile, the premium restaurants have developed simpler menus, maintained their quality of food preparation and presentation, and made dining sessions available outside of their traditional evening slots. Both have recognized times have changed and responded effectively. I started visiting that premium Italian restaurant more frequently on weeknights, so when I had friends visiting me from overseas, my automatic choice was the premium Italian. Like many other locals, I know who I’ll be giving my business and my loyalty to for the foreseeable future.
At Monetyse, we offer structured approaches to defining customer value for businesses of any kind focused on organic revenue growth. We will help you optimise your product design to suit different target segments and, finally, design the monetization strategies that will incrementally enhance enterprise value for your business.
