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« December 2010 Table of Contents

Business Trends: Adding (up) value

Pricing by value, rather than margin, requires fresh look at time-honored model

Whether done on paper or through a computer software program, many businesses subscribe to the formula of marking up costs to set their prices. With an average 30 percent margin in mind, business owners then work out what to charge for their products. Markups can vary by industry, from 12 to 15 percent for grocers and food wholesalers to 100 percent or more for retail clothing.

This approach is effective, but according to author and consultant Rafi Mohammed, it can also mean leaving money on the table, or losing sales because of a lack of growth.

Mohammed, who founded Culture of Profit LLC in Cambridge, Mass., and is author of "The 1% Windfall: How Successful Companies Use Price to Profit and Grow," says value-based pricing is a better model with which to work. Profits can rise by an average of 11 percent if companies just increased prices by 1 percent.

Consumers value products differently, depending on the message attached to them. While in Florida, Mohammed saw a sign for locally caught wild shrimp, something he says would likely make him pay more than the going rate for imported farmed shrimp.

Similarly, he says, customers put a higher value on labels such as "made in America" or on the different points of origin for gourmet coffee.

"Customers make purchases based on value," he says. "So don't be modest, brag about it."

Creating a value statement, he says, helps customers 
understand why they should buy one product versus another. In the seafood industry, this often is tied to the origin of the species, its limited availability because of seasonality or how it was caught or farmed.

Even during a rough economy, Mohammed argues for value over discounts, and he urges wholesalers, retailers and restaurateurs to instill this value orientation with employees. If giving a discount makes an employee look like a good guy, they will do it, he says. But what they should be looking at is how to reach each type of customer at their comfort level.

Different customers have different pricing needs, so why approach them with a one-size-fits-all markup model? Instead, he says, give them options. Under the pick-a-plan model, customers have choices and can go with what works best for them. With a car dealer, it's buy versus lease; in a seafood restaurant, it's a single entrée versus an all-you-can-eat buffet.

Sometimes it's different versions that appeal to consumers, often referred to as good, better and best. At the restaurant level, it could be an early-bird special, the regular menu and an upscale chef's table. Those looking for a bargain come in early, says Mohammed, while those more interested in the experience than the cost would opt for the chef's table.

At the retail seafood counter, he says, this is often reflected in different sizes of shrimp at different price points, or farmed versus wild salmon.

Discounting, which falls under the area of differential pricing, can work, says Mohammed, if customers can be identified through the use of hurdles, such as coupons. Rather than offering a discount to everyone who walks through the door of a store or restaurant, instead they are required to identify themselves by clipping a coupon, or responding to a Twitter message about a one-time deal. At the wholesale level, the hurdle could be requiring customers to place holiday orders before a certain date to get a discounted price.

Paul O'Connell, chef and proprietor of Chez Henri, a French-Cuban fusion restaurant in Boston, says while he typically works on keeping his food costs below 30 percent when setting menu prices, he has tried some different pricing options.

The restaurant has a fixed-price menu, which offers three courses for $39, as well as an 
à la carte version.

In July, Chez Henri participated in Groupon, an online coupon deal. Offered for sale for one day only, shoppers could purchase a $40 coupon for $20, limited to one coupon per table of four when used. The promotion sold 4,856 coupons. This was O'Connell's first experience with Groupon.

The promotion was timed for the summer when business is slower at Chez Henri, says O'Connell, although purchasers have a year to redeem it. "We had a big jump in the first two weeks [following the promotion]," O'Connell says, "and it exposed a lot of new young people from Boston to the restaurant. We went from doing 30 to 40 dinners a night to more than 100 a night."

About half the coupons had been redeemed by late October. And although they weren't tracking whether it generated repeat business, O'Connell says, "It added some value in a marketing sense."

When pricing seafood, O'Connell says it can be difficult because prices fluctuate more than they do with other proteins. As a rule, he says if his cost per pound goes beyond $12 or $13 for certain seafood, he won't offer it. And some higher-priced seafood is menued at 5 ounces instead of 6 or more.

O'Connell agreed it is possible to use value pricing when marketing the cachet of certain seafood. He recently 
began carrying Black Pearl Shetland organic salmon, and sees this product as falling into that category.

Although he's never done an early-bird special, O'Connell says a recent visit to San Francisco has him thinking about a happy hour deal. "Everyone in San Francisco was doing happy hour oysters, even in the fine-dining restaurants. I think there's been a stigma with that here [in Boston], but it seems like a trend out there," says O'Connell.

There is a lot of opportunity in the seafood industry to explore value pricing, says Mohammed. "If you always think in terms of average margin, you may not try something new," he says.