A price increase is the answer, not a delivery fee

Aug. 13, 2002

Hardly a news Web site hasn't picked up the recent wire stories about Domino's Pizza widening its $1 delivery charge test from 100 to 350 U.S. stores.

Well, I say it's about time, Domino's. Your company and every other pizza company should have done it long ago.

And while you're at it operators, raise your prices, too. You're long overdue to do that as well.

Steve Coomes, Editor

What's that you say? Your customers will leave you if you raise prices or charge for delivery?

Is that so? Then maybe they're telling you something: They like your prices more than your products.

You deserve it!

Who doesn't grit his teeth every time he pays $1.50 for an ATM transaction, the same transaction that once was free?

Despite that, who among us has changed his banking habits?

Not many, it appears.

ATM fees have become a key revenue source for the banking industry, when only a few years ago the machines were eyesores on balance sheets.

Why that has changed is fairly simple to understand:

Decades ago, most folks stored the bulk of their cash in banks, and bankers were more than happy to invest that capital elsewhere for better returns.

But as non-bank investments such as mutual funds, 401ks and IRAs became more attractive and available to average Joes, they moved their money into those and forced banks to find ways to replenish their cash resources.

Those losses also led bankers to scrutinize every expense, and as they did it became clear that ATMs were costing them dearly. Not only were the machines not cheap, the banks and other financial institutions using them had spent billions knitting together the electronic networks that today enable customers to retrieve cash virtually anytime, anywhere.

Bankers knew well that customers couldn't live without ATMs, but they also knew they couldn't afford to run them at a loss. So they began charging transaction fees.

Catch on, pizzeria operators

The pizza industry, on the other hand, is largely at fault for its current cost woes because it has told itself for years that market share is won or lost on price first and product second.

Consequently, pizza prices have been stuck on the launch pad while prices of many other food products and restaurant meals have skyrocketed.

To make things worse, operators became hooked on two-for-ones and every coupon deal under the sun, and at every turn, it seemed, pizza companies were saying to customers, "We'll bleed to get your business." And bleed they have.

Instead of asking for what it deserves -- a fair price for good products and services -- the industry has focused mostly on cutting costs, and often at the expense of its core product.

But now the door is cracked, and the entire industry has the chance to follow the lead of the two largest pizza companies (Pizza Hut has charged 50 cents for delivery at all its U.S. stores for some time now) in the world by charging for delivery.

If done en masse, the industry could seize the moment and make delivery charges standard.

So how much should operators charge? Pizza Hut never has nor ever will ask me for financial advice, but 50 cents hardly seems worth it. Domino's dollar charge, on the other hand, makes things interesting. Consider this example derived from some numbers I've collected from some operators I talk to regularly.

Take the average U.S. pizzeria's annual sales ($550,000), and divide that by the average cost of a pizza ($10). If that pizzeria is open six days a week, that would spread the sale of 55,000 pizzas over 312 days of operation, which factors out to 176 pizzas sold each day.

Now, let's say 80 percent of a pizzeria's business is delivery; that would have our pizzeria's staff delivering 141 pies a day. And say that only 50 percent of those delivery runs are for at least one pie (141 x 50% = 71).

Based on a fee of $1 per delivery, that's 71 more dollars per day our hypothetical operator would pull in, which over the course of a year would pan out to $22,152 dropped straight to the bottom line.

If done en masse, the industry could seize the moment and make delivery charges standard.

Not bad, eh?

But before you get too excited about the potential extra cash, consider the potential risks. Some customers are bound to complain, though the dozens of operators I've talked to say it's rare to see them switch brands because of the assessment of a delivery charge.

However, both operators and drivers I've talked to say driver tips are hurt -- even disappear -- when delivery fees are tacked on. And if that's true, then driver ranks would thin if fees were widely assessed, and operators ultimately would struggle to deliver at all.

So raise prices!

That's why I believe a regular and incremental price increase is the answer to widening profit margins (remember, making money is why you got into this business). I seriously doubt that Pizza Hut's customers would have realized or even cared if the chain had simply raised pizza prices 50 cents as opposed to assessing a delivery fee.

And what if Domino's had raised its prices 25 cents every year for four years straight instead of testing its dollar fee? Outside of products priced at or near the much-discussed but arguably-real "$10 mental price barrier," I can't imagine too many customers would scream about paying a quarter more for a product they like.

So, c'mon, operators. Raise prices. It'll do your bottom line some good.

Topics: Commentary

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