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Business Trends: Adding (up) value
Pricing by value, rather than margin, requires fresh look at time-honored model
By Joanne Friedrick
December 01, 2010
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
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
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
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
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
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
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
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
Contributing Editor Joanne Friedrick lives in Portland,