Add-On Pricing: Lessons from Chipotle
The great thing about pricing is that no matter how well run your business is, there are always opportunities to significantly improve profits through making shrewd pricing moves.
I think that Chipotle is one of those businesses that is well run and has a big opportunity.
I first went to Chipotle earlier this summer and since then I have probably been back a dozen times. They have a lot going for them; their product is very fresh, the ingredients are of very high quality and the food is tasty. More importantly, I like their pricing strategy. They are effective on three key issues:
- Price based on value
- Easy to understand pricing
- Interesting use of price points
They charge a premium price relative to other burrito chains ($8.19 at Chipotle which is around a 20% premium), but I believe the product is sufficiently differentiated to justify the price gap.
I also like that the pricing strategy is straightforward. Even though they serve different ingredients (e.g. Chicken, Beef, Pork), which presumably have different costs, they charge the exact same price ($8.19). It is easy to understand and keeps you focused on the product.
Lastly they use interesting price points. The $8.19 price point is non-traditional. For many businesses either $7.99 or $8.49 would make more sense, but in Chipotle’s case I believe the $8.19 price point is consistent with their image.
However, there is one component of their pricing strategy that would have me concerned if I were the president of Chipotle; I love guacamole, but I have never purchased it at Chipotle.
Why is that?
It costs around $2.21! That is exorbitant and even though I can afford it I feel like it is an extravagance I can do without. Other burrito restaurants typically charge $.75 and I notice almost everyone buys it (90%+ based on my unscientific observation).
So my question is, why does Chipotle charge a 200% price premium? I am sure that the Chipotle guacamole is superior, but that price premium is hard to justify!
I also believe that Chipotle’s guacamole sales are far below what is experienced at most other restaurants. Based on my casual observations the uptake at Chipotle is about 30%. That is a huge gap versus 90% penetration at other restaurants. And if I am right it means a lot of customers who want guacamole are not buying it because of the price.
So you are probably thinking that I would lower the price….right?
Wrong! Charging a 200% premium may be the correct strategy……although I have my doubts. No, if I were the President of Chipotle I would run a price test.
The restaurant industry is well suited to price tests and it would be relatively easy to test different price points ($1.91, $1.51, $1.21).
My guess is that Chipotle would see a significant opportunity to boost penetration and profitability, and customer satisfaction based on these tests.
If I am right, then they would adjust their pricing and I would be enjoying their guacamole on a regular basis!
Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Paul publishes a monthly pricing column in the FP Executive. He also writes for the Pricing Solutions Club.