How can we price ‘where the market wants?’

Q: We’re three partners who own and run a chain of fast food shops.  The three of us were  your ME (Master in Entrepreneurship) students some eight years ago.  In our marketing class you always told us to be market driven and centric especially in our pricing decision.  We all remember well your quoting Henry Ford’s pricing rule: “Set the price where the market wants it.  Let the market force the costs down instead of costs forcing the price up.”

In our pricing problem and decision-making, we applied your rule according to the price sensitivity testing you the taught us.  But that’s a survey based research and it was expensive.  We did that only once and never did it again.

Now, we have a pricing problem with our no. 1 menu item.  Do you have a DIY cost-effective version of that price research that we can do ourselves?  If you have, do you mind sharing it with us and  your readers?  We know pricing “where the market wants it” is a continuing problem of all us marketers and sales people.

A: If you were my ME students eight years ago, then you missed my DIY (do it yourself) version of the price sensitivity testing that you and your two partners found expensive.  Let me illustrate this much simpler and quick but clean almost costless research.  I’ll refer to a concrete example to explain.  My MBA students worked out this example.  Follow the example’s research process and you’ll be helped just like clients who mainstreamed this technique into their price adjustment system.

It’s a simple, quick, clean and practically costless research because the data you collect and analyze are “price lists.”  There’s no need for interviewing customers which is the really expensive research portion.  The example I’ve picked is about a popular fast food store menu item so you can immediately relate to it.  It’s the 1-piece chicken meal.

The price lists for this meal across the competing fast food stores are readily available to anyone.  Those prices are displayed in the menu board right above the store’s counter.  An innocent photo taking excuse is all you need to get those price lists from one fast food store to another.  Thank God for the cell phone camera.

I’m often asked why I regard these prices from the fast food store menu board as market driven or as the prices that the market wants.  Both alert clients and students point out that because those prices are what are in the menu board, they are prices that are more marketer-driven than market-driven.  I have been quick to clarify this confusion.

While it’s true that those prices were what the store marketers posted, posting does not necessarily mean they are totally marketer driven.  It should be clear that those prices were also what the customers wanted for as long as those menu items with those price tags were bought and continue to be bought.  In the discipline of micro-economics, a market price is where “supply and demand intersects,” or where the seller and buyer agree.  It’s market driven.

Once those prices are gathered, prepare and edit those prices for analysis.  The first step is to arrange the gathered prices from lowest to highest and identified by their fast food stores.  The second is to convert each price into an “index.”  Do this by dividing each price by the lowest price.  For example, in the 13 prices that my students gathered for the 1-piece chicken meal from 13 fast food outlets, the lowest price was Jollibee’s.  Dividing all the 13 prices by Jollibee’s resulted into the following price index set:

Jollibee = 1.00;  Tropical Hut = 1.03;  KFC = 1.03;  McDonald’s = 1.06;  Greenwich = 1.07;  Chow King =  1.09;  Wendy’s = 1.10;   Burger King = 1.13;  Tokyo-Tokyo = 1.13;  Shakey’s = 1.48;  Mang Inasal = 1.50;  Max = 2.13;  Kenny Rogers = 2.47.

The price conversion into a price index facilitates comparison, the first step in the analysis.  Consider what’s next to Jollibee in pricing (Tropical Hut) and the farthest (Kenny Rogers).  Tropical Hut’s price index clearly says Tropical Hut’s 1-piece chicken meal is 3 percent higher while Kenny Roger’s is almost 2 and a half times more.

Go further now into the comparison.  You can see that the indexed price data challenges some of our market assumptions that we’ve taken as given about fast food stores.  For example, many have the impression that it’s Mang Inasal that’s the cheapest and that McDonald’s is high-end.  Of course, these are corporate brand images.

The indexed data are about product brand images.  Consumer positioning of a product brand can be different and sometimes very different from corporate brand positioning.

The much more insightful analysis comes from drawing out from those indexed price data the market’s price segmentation.  So re-familiarize yourself with “behavioral segmenting.”  From the indexed price data, you can understand that customers who buy a 1-piece chicken meal from fast food stores whose prices define a “band” of neighboring prices constitute a market price segment.

Looking closely, our 13 prices can be sorted into defining four such “bands:”

(1) a 9-store band with indexed price range of 1.00 to 1.20, that we’ll label as “the sub-economy price segment;”

(2) a 2-store band with indexed price range of 1.40 to 1.50, which we’ll call “the economy price segment;”

(3) a 1-store band with indexed price range of 2.00 to 2.20, that may be labeled as “the premium price segment;” and

(4) again, a 1-store band with indexed price range of 2.40 to 2.50, which we will refer to as “the super-premium price segment.”

There must be intense competition in the sub-economy price segment where nine stores are participating.

Therefore, it’s most difficult to grow business there.  But it’s clear from the preceding that business-growing opportunity is in joining Shakey’s and Mang Inasal in the 2-store economy price segment.  The widest opportunity is in the 1-store premium and super premium price segments.

A critical issue here is this: “Do you participate in those three price segments via the same brand or by another brand?”

That’s an issue for another or next MRx column.  But the foregoing provided the answer to your question and request.

Keep your questions coming.  Send them to me at [email protected].