Alternative To Unbundling The Sandwich

In my work on unbundled pricing, I wrote about how restaurants can manage drop in customers and their willingness to pay by unbundling their pricing and charging separately for the many extras they provide. There were instances of restaurants charging separately for salad dressings and restaurants accepting cash only to save on credit card interchange they pay to banks.

Of course the other options I left out are more about maintaining price premium which include  multi version pricing, price increases, better marketing to convey value and applying consumer behavior principles to drive profit. One restaurant that is successfully applying all these is Panera bread which delivered 28% increase in profit. The net is Panera bread is practicing the three components of effective price management to drive profit without resorting to unbundled pricing.

1. Value-add to Segments: On the macro level they are targeting those who are employed and eat lunch outside. Specifically they are targeting those with spending power and making a relevant value proposition.

Panera’s target customer is 25 to 50 years old, earning $40,000 to $100,000 a year.To give those customers a reason to return, Panera has been touting new products with fresher ingredients. (WSJ)

2. Incremental analysis: When almost every other restaurant is slashing prices and sending coupons to attract customers Panera decided to keep prices steady. As other restaurants found out the promotions came at a very high price and did not generate sales as expected. We can infer that Panera’s decision was based on their analysis of their demand curve and incremental profit from price promotions.
3. Customer Margin: They do have lower priced options, but make higher total margins on incremental sales. For instance customer tab runs to $9.72 including drinks and other purchases.

One additional thing they are practicing is taking a lesson out of consumer behavior – offering a sandwich priced at $16.99 while most sandwiches are offered at much lower prices. The presence of $16.99 helps to set higher reference price in the minds of customers and helps to sell other sandwiches that are priced at $6.99. Not many may order the most expensive version but are nudged to order the versions that are priced in the middle.

When every other restaurant was dropping prices based on“conventional wisdom”, Panera ran in the opposite direction based on analysis. No wonder their profit movement is in the opposite direction to the rest of the category.