News

First person: Pricing and perceived value

September 11, 2005

Perceived value is how customers value your products relative to their price. The perceived value of an item is revealed in the answer to the question, "Is this a good deal?"

I learned a lesson about perceived value when I was a young man. I frequently purchased a double cheeseburger at a local McDonald's for $1.29. Compared to the Quarter Pounder with cheese, which cost $1.69, I perceived the double cheeseburger as a better value.

When that McDonald's had a 99-cent sale on double cheeseburgers, I started buying them more often. But when the sale ended, something interesting happened. The $1.29 I once perceived as a good deal, wasn't such a value anymore. Worse for the restaurant, not only did I not shift my orders to Quarter Pounders, I just stopped going there completely.

That was almost 15 years ago and I have not paid $1.29 since. Apparently I was not alone, because McDonald's permanently changed the price to 99 cents.

My point: When making similar pricing decisions on your menu, weigh the temporary order frequency increase against the possibly permanent decrease in perceived value.

Mega confusion

I did just that when the Mega Deal phenomenon came to Domino's Pizza. For those who might not know, the Mega Deal is "Any Pizza, Any Size, Any Toppings for $9.99." The attraction of this still widely used special is multifold.

Its benefits were not lost on me years ago, when I was attempting to win Manager of the Year for Domino's. The previous winner had used the Mega Deal to turn in staggering sales increases — despite running a single-digit profit percentage on those sales. That year I had run a higher profit-dollar than he had, but with much lower sales. Suffice it to say, no one noticed unless you achieved your marks with Mega Deals.

The Mega Deal wasn't a bad thing; it was a useful means of boosting sales quickly. But with such low-price, high volume deals come some risks. As an area manager, I was challenged to motivate managers to put the same amount of food on a $9.99 item for which they used to charge upwards of $15.99.

Customers had the reverse problem in areas where the Mega Deals were limited-time offers. Before the offer they willingly paid $15.99, but once they got used to paying $9.99, reverting to the original price was next to impossible. In their minds, we'd lowered the perceived value of our product and couldn't reclaim the price point we once enjoyed.

Volume deals also increase the risk of product degradation. That worried me, and in the end, I stayed away from Mega Deals, and the franchisee I worked for eventually followed suit.

Am I saying this type of price structure is bad for everybody? Not at all. I am, however, warning that you should consider the long-term implications of such a move before making changes to your prices.

Jim Moran is a pizza and restaurant industry veteran, and an industry consultant and speaker with Restaurant Trainers, Inc.