News for the Hospitality Executive
David K. Hayes Ph.D., Allisha A. Miller, and Joshua D. Hayes, MA, Peggy
In any service industry, if sellers begin to use the word value interchangeably with the words higher quality, significant problems for the business will inevitably result. This is especially true for food and beverage sales in catering and dining room settings and for hotel room sales.
Hospitality professionals, more so than the average person, know that it is absurd to believe the quality of all food and beverage ingredients are the same. In fact, the quality of most foodservice products varies a great deal. The difference between high quality cheeses and wines and their lower quality counterparts is just one excellent example.
Seeking to sell these highest quality products at higher prices based on their quality characteristics; rather than their value levels, makes little sense. But it happens a lot. It is also an area where those in F&B sales can learn something from professional revenue managers.
Experienced revenue managers know that strategic pricing is the application of data and insight to effectively match prices charged with individual buyer’s perceptions of value and their willingness to pay. Certainly the specific food and beverage products sold in an operation should have some direct impact on value perception and some guests’ willingness to pay. And sometimes they do. For example, a 20-year old Scotch should demand a higher selling price than a 5-year-old Scotch. In the same manner, USDA Prime beef steaks will typically command a higher price than USDA Choice or USDA Select beef steaks.
What revenue mangers recognize, however, (and what too many responsible for F&B pricing do not) is that the increased quality of these products is not synonymous with increased value and customer willingness to pay. The 20-year-old Scotch and Prime steaks will continue to be superior quality products regardless of the price at which they are sold. They will also continue to be quality products regardless of the degree to which customers value their higher quality. If pricing is perceived as excessive, then these products will not provide good value, nor will potential customers be willing to pay for them.
Understanding this is a key point in better appreciating the restaurateur’s common lament that “my customers don’t want to pay for quality.” Customers do not pay for quality. They pay only for value. Note to readers: please read those two sentences again!
For many, and perhaps most, foodservice customers, knowledge of the quality differences in food and beverage products is simply too limited to be the main factor affecting their view of foodservice value. Foodservice operators, who are often justly proud of the products they choose to sell, may find that hard to accept.
To prove it to yourself, however, simply ask a non-hospitality friend or colleague to tell you the difference Roquefort and Blue cheese. Or between Prosciutto and a sugar-cured smoked ham. Or between Parmigiano-Reggiano and any other cheese labeled “Parmesan.”
Or between Choice and Select beef. To make things really interesting, try throwing the words “Angus” or “Certified” in there somewhere as well and see just how confusing these meat-related terms are for most people!
In asking questions such as these, you will quickly find that your friend, as well as the average American diner is buying many things. These include such things as convenience, speed, unique products, social setting, escape, and even romance. All of these factors impact their perceptions of value received for the prices they pay. But most simply do not choose a restaurant based on their vast knowledge of variance in the quality of raw ingredients used to prepare the menu items they will buy.
In fact, fully discerning the quality and cost differences in purchased food and beverage products may be as alien a concept to the average American diner as the intricacies of those diners’ own various businesses would be to the foodservice operator. If you, as a foodservice professional, also understand precisely why your television signals are generally more reliable during light snowfall than on a clear summer day, then you are as uncommon a television viewer as the diner who understands the difference between Roquefort and Blue cheese; (in case you were curious, all telecommunications are more reliable in colder weather than hotter weather because of the physics involved in molecular motion.)
While the fact that many consumers lack in-depth product knowledge may be somewhat upsetting to restaurateurs who are passionate about the quality of food and beverages they serve, it is a reality that must be addressed by those in charge of pricing food service products.
Experienced revenue managers working in hotels already know this. For example, they know they will not be able to increase their room rates significantly simply because the quality of the carpets in the rooms they sell are vastly superior to the carpets of their similar competitors. Or that the artwork adoring guest room walls in their rooms cost the hotel twice as much as the artwork on their competitor’s walls. Because they accept that fact, skilled revenue managers can often more easily point out how creative pricing could be implemented in a foodservice operation than the operation’s own food and beverage production specialists.
The simple truth is that foodservice customers do assess value delivered. Most simply do not use product quality or ingredient cost to do so. Accepting the premise that many factors other than food and beverage quality are the major determinates of value perception for foodservice customers requires a significant change in thought process on the part of some restaurateurs. And change is usually difficult. It has been said that only babies like a change! Nonetheless, embracing positive change is a necessary skill for any professional that wants to improve their operation.
Ultimately, the worth of any product or service can only be equal to the amount informed buyers are willing to pay for it. The actual determination of selling prices in the hospitality industry, however, is a nuanced process and it is highly influenced by the perspective of sellers and buyers.
What food service operators need to remember is that most buyers are not nearly as well informed about product quality as their sellers are. After all, they are not the buyers’ products. They are yours!
It has been said that education is learning what you didn’t even know you didn’t know. When it comes to pricing food services operators need to be careful. Basing selling prices solely on factors most customers do not understand makes little sense; yet many operators persist in doing it. There is a better way and it is called differential pricing; the pricing of products and services based on the value they provide to customers, not on their cost…or even on their quality.
Can differential pricing successfully be applied to foodservices? Will it have significant benefits to a business, its customers and its profits? The answer to all four is a resounding yes! It is not a question of using or not using differential pricing, but rather how you use it most effectively.
About this Article:
This article is based on information in Revenue Management for the Hospitality Industry by David K. Hayes and Allisha A. Miller. © 2011 John Wiley & Sons, Inc. All rights reserved. To purchase this book or obtain information about bulk sales, please contact [email protected]
About the Authors:
Dr. David K. Hayes and Allisha A. Miller operate Panda Professionals Hospitality Management and Training (www.pandapros.com) where they create and deliver innovative and practical educational materials and pricing-related seminars exclusively for those in the hospitality industry. Joshua D. Hayes, (MA Stanford, 2011) is currently enrolled in a doctoral program at the University of California Davis and is a Panda Professionals consulting author. Peggy Hayes is co-owner of Panda Pros and Director of Editorial Services.
For more information about products and services offered by Panda Professionals Hospitality Management and Training, please contact [email protected].
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