How can we innovate when everyone is just looking for a lower price?
Q: We now have a chain of four food stalls and aiming for a fifth next year. All stalls are in food courts in major Metro Manila shopping malls. We don’t know if what we did in our menu items can be called innovations. We have mostly rice toppings of pork, chicken and beef. Customers have a choice of either shredded or little square chunks of the three. In terms of revenue share between these two choices for toppings, it’s almost 50-50.
Over the past three to four years now, in all the food courts where we are, competition has increased and we noticed that we tend to lose customers to food stalls that offer lower and lower prices. We’ve adjusted our prices twice but because of decreasing margins, we’ve shifted to reducing instead serving sizes. Because of customer complaints, we went back to near original serving sizes with very substantially reduced margins. This is also what’s threatening our putting up a fifth food stall.
So we ask: “What sort of innovation in our rice toppings can we possibly do when all customers are now just looking for lower and lower prices?” Is there such a thing as innovative pricing aside from lowering it?
A: As long as your rice toppings are different from competition and offer a value to customers for which they are willing to pay, that’s an innovation. The debate will probably be more on the question of whether this is product innovation or process innovation. Because it’s really the same product, namely, rice toppings, and what you’ve changed and what’s different is in its preparation and presentation, it’s more a process innovation than a product innovation.
You have a good reason for being concerned about decreasing competitive prices. But that’s the manager side of you that’s worrying. However, a threat can also be seen as an opportunity. The entrepreneur side of you will think that way. So park your manager side for a while and shift to your entrepreneurial thinking. You need to do this because it’s the entrepreneur in you who thinks innovation. It’s his tool. It’s his tool for turning a problem into an opportunity.
Let’s take a closer look at your pricing situation. You can’t lower price anymore because your margin will suffer too much. But remember, margin is the difference between price and cost of goods (COG). So if you can lower cost of goods, then you can still lower price and maintain or even raise margin.
So the innovation you’re looking for is in how to lower COG. For your rice toppings, COG is most probably largely the cost of the pork, chicken or beef shredding or square chunks. How do you lower these costs?
During those years when we were still very active in helping QSRs (quick service restaurants) or fast-food restaurants, everyone knew that lowering the COG meant for the most part resorting to “substitute materials,” that is substitutes for the real pork, chicken or beef. The most popular and most used substitute material is the TVP or textured vegetable protein.
Way back in the ’60s and the first half of the ’70s, restaurant owners and customers alike looked down on TVP. Many regarded it with contempt especially when it became known that it was served in the US as substitute meat for prison inmates.
This was true until the mid- or late ’70s, TVP gained approval for use in US school lunch programs. And today, TVP is bought and used for its many nutritional and health benefits.
What exactly is TVP? Textured vegetable protein is actually a by-product of extracting soy bean oil. It’s a defatted soy flour product. It’s known as a “meat analogue” or a “meat extender.” Its protein content is equal to that of the meat whose juices it absorbs during cooking. Dehydrated, its shelf life is more than a year. In its flaked form, it becomes a versatile substance useful for making “vegan” versions of such meat dishes like burger, chili con carne, tacos, burritos, or spaghetti Bolognese. It tastes like meat and has the exact texture the meat it “copies” but without or very much reduced fat and cholesterol. How much does it cost? It’s less than a third of the price of ground beef.
So here’s your COG innovating opportunity: Use TVP for your pork, chicken or beef shredding or square chunks in your rice toppings. Or else search and use any other substitute material that’s just as versatile, healthy and cost-effective. This is how to be innovative even when everyone else is after lower and lower prices. You can call this as your price innovation or, more accurately, your COG-based innovation.
For the required execution, get down from your entrepreneurial mindset and proceed to your parked managerial mindset. Put that mindset on. It’s this mindset that will help you now in organizing, directing, controlling and re-planning the execution.
To discover how to get mentored by Dr. Ned, visit www.NedMarketingAcademy.com
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