Should I raise my prices? - a strategic thinking case study
July 25, 2014
We were called in to work with a major F&B chain who were grappling with the decision of whether to raise prices or not. Indeed, this is not an easy question and the impact to the future is huge. It is a highly strategic decision and we apply our Strategic Decision Making process to help the CEO and his management team answer the question, "Should we raise our prices?". Here's the summary of their discussion, from their point of view.
Raw material prices have risen significantly over the past 12 months. As such, we have had to source for ingredients further and further afield as we try to mitigate the price increases by our regular suppliers. But this has caused us to have wavering food quality. There were several shipments that had to be rejected due to quality issues, thereby causing a huge shortage of the ingredient. That brought about a front-end shortage; and customers are not happy. We are seeing that our efforts of finding alternative source, while important, is causing short-term price spikes and supply shortages, and this is hitting our bottomline. As our main suppliers are now informing us that they may have to further increase their price, it becomes untenable to maintain this price for long. Of course, increasing price might just see our customers fleeing to our competitors, thereby causing a drop in topline growth. With increasing costs, our bottomline growth is also affected.
So, our Decision Question is: "Should we raise prices?"
As we worked the intent using the 5 Why's, the team initially identified it as maintaining margins. However, as we dug deeper, it became to meet customer needs; after all, what was worse than having thinner margins was a chain of restaurant with no customers! Or dissatisfied ones! So, their intent was articulated as, "What is the best way to meet customer demands for our food."
The success factors are:
1. Less than 1% of covers result in a negative feedback
2. Increased taking per cover
3. No drop in margins
4. Less than 3% of all covers has one item or more ordered unavailable
1. Raise prices
2. Upsell and cross-sell special menu items
3. Increase touch points
4. Create special items each week
5. Create a buffet menu (what you see is all there is)
Thinking in time
Apart from the situation update earlier, here are some of the significant events/decisions:
1. We have always been committed to be the 75th percentile in terms of pricing for a basket of items. This has helped us to maintain market share, grow our business, and even increase margins. It is hard to think about doing this differently if it has worked for us. So, if we do any price increases, we must ensure that we do not go past the 78th percentile.
2. We are known for being innovative. Most of the processes that are being used in the market have been developed by us. Hence, we always have first mover advantage in most of the things we do. The most interesting thing we have noticed is that the market won't move until we do. The implication of this is tremendous. We have been hesitant about other things in the market before but have come to see that most of our fears are unfounded. Perhaps it is so again?
Provided that we can:
maintain or improve customer satisfaction
ensure that staff have the right skills for whatever new initiative
balance between cost of ingredients and quality
meet minimum profit margins for all outlets
execute the decision within 3 months
mitigate any competitors' counter-moves
We are the only ones facing this issue
Our competitors have better supply chain management system
Customers will be greatly affected by the increase in price
If we increase price, profit margins will drop
Technique #1: Offer higher end dining experience? Tea house?
#3: Eat & shop (have an e-shopping app linked to each outlet);
#4: Screening a movie? Serving in a cinema? Selling art? Product launches?
#5: Offer higher end dining experience?
#6: Cinema company tie-ups? Art house tie-ups?
#7: Feeling of being transported to another land
Interesting cost-effective ideas are:
Higher end dining experience
Feeling of being transported to another land
Balancing options with constraints
After balancing, the top two options are: increasing price and specialty menu for higher margin.
We realise that we can do both options, rather than just one of them. There is a need to stagger their execution so that customers don't associate one with another. We opt to increase prices first so that we can see how the market reacts, and in 6 - 9 months, to then do the specialty menu. In the meantime, we will engage A I Training & Consulting to plan a special training program for the staff so that they know how to handle questions from a varying menu, as well as to learn to upsell and cross-sell without coming off as pushy.