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Pricing – Look Before You Leap

Do you ever feel like you’re at the edge of a cliff? Wondering whether you should cut prices to react to new market realities or stand pat and maintain gross margin. It’s a difficult position to be in especially when volumes are shrinking and sales people are screaming about bonuses.

Pricing should be synonymous with value. Unfortunately, tracking value creation over time can be complicated and requires a disciplined process. In the internet age, many industries are looking online as an information source. The key is to ensure you understand what you are looking at.

In the restaurant industry online reviews should be representative of customer value. We know the individuals writing the reviews have actually made a purchase and are committed to communicating their preferences. Moreover, these reviews can be easily tracked over time in an automated manner using websites such as Yelp, Chowhound and Urbanspoon. Compellingly, Michael Luca from Harvard Business School recently published that a one-star increase in Yelp rating leads to a 5 to 9% increase in revenue.

So if you see you see your ratings trending negatively does this mean you should respond with price? Not necessarily.

“This place is unorganized! There were multiple dishes waiting to be served and no waitress to be seen…my food took over 30mins to come out. I ordered the Turkey burger and it was dry and tasteless….felt like I was eating mystery meat, not worth the price! “ (Source: April 2011 Yelp Review)

The above review contains the word price however it’s easy to see that price is not the issue at all. A web scraping tool may not be sophisticated enough to identify this subtlety. When dealing with pricing, the opportunities / issues are usually found in the granular details.

What if online ratings are truly decreasing due to price perception, then should you respond with price?

It depends.

“The salmon was good but overpriced “ (Source: January 2011 Yelp Review)

Restaurants are not uniformly impacted by online reviews. Michael Luca’s study also highlighted the fact that perception of independent restaurants is heavily influenced by online reviews whereas online ratings do not affect restaurants affiliated with chains. Given this fact, Yum! Brands should be paying more attention to in store quality surveys, marketing activities and demographic shifts to assess how pricing should be adjusted. Mike’s Diner on the other hand may want to begin considering a discount, promotion or price decrease.

Tracking customer value is important from a pricing perspective. This ongoing tracking is greatly aided by establishing fixed benchmarks for value creation. When evaluating value benchmarks be sure you are tracking relevant metrics, know how to interpret them and understand their impact on your business. Before you take the leap of changing prices you want to ensure a soft landing below.

Avy Punwasee is a Senior Consultant with Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Pricing Solutions publishes a monthly pricing column in the FP Executive. They also write for the Pricing Solutions Club.

Financial Post Oct 6, 2011