A differentiated pricing policy based on monitoring competitors’ prices is a very effective way to maintain stable financial performance in today’s market. Previously, we discussed the pace of recovery in the food service industry after the pandemic and what awaits it in the next two years; despite the optimistic situation, it is necessary to consider risks and take into account factors that have the potential to restrain positive dynamics. The most important of these are rising consumer prices, and the declining purchasing power of the population in the United Kingdom.
According to the Office for National Statistics, the annual inflation rate for food and non-alcoholic drinks remains at 19%. Income growth lags behind inflation, and consumer purchasing power is declining. Real household disposable income is expected to fall by 2.6% in 2023, following a fall of 2.5% in 2022. According to the Meaningful Vision Price Intelligence Tracker, prices in major fast-food chains are rising by 15%, which is slower than the rise in food prices in retail chains.
Large food service chains have more resources to control price increases than independent stores and restaurants. For example, major market players can increase overall traffic to their locations by running nationwide promotion campaigns and combo offers. However, even they are forced to raise retail prices due to food and energy cost growth.
Restaurant visitors react to price increases in various ways:
- Visiting restaurants and fast-food outlets less often
- Purchasing fewer items, skipping snacks and beverages
- Ordering cheaper items
- Choosing cheaper places
- Replacing delivery with takeaway
Against a backdrop of declining purchasing power, consumers are reacting by comparing prices at different food establishments more often. A significant difference between prices can even cause a chain to lose customers. In such conditions, it is essential to answer the following question:
How to remain relevant and affordable to your customers?
- By knowing your competitors’ pricing strategy
- By maintaining reasonable gaps with competitors’ products in each specific region
- By implementing specific pricing methods, including variable regional pricing
What does regional variable pricing mean?
Our data on restaurants demonstrates that many players in the food service industry maintain different price levels depending on regions or locations. On average, for those chains that employ this pricing approach, the price level for the same menu item in restaurants can vary by 17%. Interestingly, the price for the same burger can differ by up to 25% from one restaurant to another. Salads and sides follow with price differences of over 20%.
Why can it be effective during the cost-of-living crisis?
Let’s consider a situation where Chain X operates in Locations A and B.
In Location A, consumers have below-average per capita income and are, therefore, more sensitive to price changes. If the prices of the popular products in one chain are either higher or increasing more rapidly in one than in another, then there is a high probability of losing customers.
Now let’s look at Location B, where the average income of consumers is 2.5 times higher than the national average. Customers in this area are less sensitive to price changes of a few pence or even pounds for essential menu items. In this case, the price difference with competitors can be slightly higher, especially if other chains do not employ a differentiated pricing approach. Thus, the chain can set higher prices and increase overall profit.
Pricing intelligence is a vital tool in the current market environment. Meaningful Vision will help you develop your pricing strategy and keep you updated on the competition in your regions in real time.
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