I am going for seconds on buffet pricing.
If you take the buffet itself, some people go for seconds, thirds etc, some load up on desserts, some on meat, some on salad etc. If the restaurant can offer a wide variety of food (10 types of soups, 25 types of desserts ….) it stands to attract a large number of people, each however attracted by a few that are important to them. Larger the variety higher is their fixed cost, but once they have scale there is no marginal cost per customer.
Buffet restaurants chose their pricing strategy as one fixed price for their offering. The buffet offers all these foods at one fixed price as a bundle. Bundled pricing delivers higher profit than a la carte pricing only if different customers value the components differently. There is only one major lever they have to control – price. There are many fine tuning knobs like drinks that are usually not included in the price and special occasion pricing. Ignoring those – there is only one price.
Previously I have written about multi version pricing and how the need for designing a version that different segments can self select themselves. Buffets allow customers to put together their own version (potentially infinite version) but at one price. Customers who prefer some of the variety and usually eat less and have lower willingness to pay will not be able to put together a version that they like because of the fixed price. Buffet pricing is hence “pure bundling”.
One way to serve these low WTP customers is to have mixed bundling, offer buffet and a la carte menu. But there are ways the buffet restaurant can serve these customers without straying from their “pure bundling” strategy. Can you think of one?
The simple explanation behind buffet pricing is capture value upfront (with a fixed price) and then sell food at marginal cost. For buffet restaurant, the marginal cost to serve one additional customer is $0. A moment’s reflection will convince you that once the raw materials are purchased and cooked into different menu items the cost is sunk and hence the marginal cost is $0.
Choosing a fixed price model like the buffet is a pricing strategy. The restaurant is committed to it and cannot change easily change. But does this commitment limit the total revenue and hence the total profit? No. There are pricing tactics the restaurant can employ to take advantage of short term opportunities.
Diwali is the Indian festival of lights (and more depending on who you ask). It is celebrated today. One of the Indian restaurants that usually offers buffet lunch and dinners at a flat price of $12.95, is promoting a special Diwali dinner for $15.95. I think this is a great pricing tactic, that fits with the strategy and is designed to increase profit.
It is arguable that the $3 is pure profit even though the restaurant is promoting an expanded menu with increased variety. The marginal cost is not going to increase from $0 and their total cost is not going to change significantly. Despite the increase in variety the average consumption per customer is not going to increase (limited stomach volume) and the restaurant can reduce amount of food produced for each menu item. In addition the special occasion and the attraction of increased variety in menu will also bring in more customers than usual generating additional revenue.
The net is an increase in short term profit from a pricing tactic that fits very well with the strategy. Committing to a strategy does not preclude you from capitalizing on short term opportunities and failure to do so is “the slowest route to victory”.
How do you manage your pricing strategy and tactics?