Stop fooling yourself and leave price alone

When you run a business, or are responsible for one, there will always come a time when you are not at full capacity and let’s face it businesses were made to consistently pay a return. It is our responsibility as managers, leaders and/or entrepreneurs to maximise the return from any investment. Sure business is fun yet it’s a serious affair.

When, not if, you find yourself at 80% capacity (for arguments sake) there are always two avenues you can take. The easiest and hence the most common, is to hit the discount button and play with price – I would say you are actually playing with fire. The second and hardest (hence least chosen) is to analyse your business, its surroundings and your customer base and answer the most prominent of questions – why? Look at the empty space and ask yourself why?

If you have a restaurant that is open six days a week, why are you not full every day of the week? If your capacity is 100 people, are there not 100 people every night out and about ready to part with their money? Of course there are – and plenty more. But why are they not all in your restaurant. You can substitute restaurant with club, bar, clothing shop, bank branch, pharmacy etc – you get the idea.

So for the next week, 42 of the most renowned and most expensive restaurants in Lisbon have succumbed to the general belief of discounted prices. I wonder if this is a result of them not properly analysing their price corridor when they set their businesses up or whether they have given up on using the right side of their brain.

During May of 2009, most of the restaurants had already tried this tactic and not only did they fail, hence they are at it again, but they have managed to bully more restaurants into joining the same pointless crusade. Pointless because none can logically account for the ROI of the low cost menu bonanza that not only did little to gain new customers, but most probably ended up infuriating their existing ones – dining at a 60-100€ per head restaurant next to low budget customers has to be a new and undesired experience for the most tolerant of diners.

“During this week, university students with ripped jeans, loud groups and young lovers will invade for the first time, the tables of restaurants such as Eleven, Gemelli, XL, Mezzaluna and Cop’3. The offer is irresistible: starter, main course and dessert for a meagre 20€ in restaurants where the spend per capita can easily surpass 80€.”  i newspaper 8 October 2009.

José Borralha, director of TrypNetwork responsible for the initiative, claims a resounding success first time round and hence the increase in number of restaurants willing to gamble their success away in one week. He seems however reluctant to quantify this success. Was it a success for his business or for the restaurants involved?

Natalie Costa, manager and sister of the famous Olivier Chef and Olivier restaurants, demystified the whole concept with the following revealing quotes:

“We only have 10 places available for this initiative as we cannot disserve our existing customers…”

and in respect with easily identifying the low budget customers:

“When we tell them that we do not have a table for that day, they accept a reservation for any other day/hour. Generally, they don’t turn up or return.”

Borralha promises more. There’s a planned week of budget luxury meals (what a concept) in Porto from 21 to 31 whilst making his dream public of a future “national initiative”.

With fewer customers and each spending less in this recession, customer retention and maximising of their potential spend is or should be the objective. Not surprisingly, I would hazard a guess (no statistics available) that most managers/owners have little insight into customer retention rates, lifetime value and profitability of their existing customer base. Most probably do not know who all their customers really are.

Since it is five times more expensive to gain a new customer than it is to keep an existing one (Forrester Research), retention is key. So why would you target below your existing customer base, publically market this and subject your most loyal of customer to a taste of an inverted brand promise? All this to gain new customer that will never be your customers? Sounds insane doesn’t it?

Which brings us back to the question – why? Well achieving an increase in sales and customer retention has a lot more to do with the quality of the customer experience which correlates with retention, future purchase rate and positive word of mouth. Again, hard work…

Tagged as: budget, Customer experience, Customer retention, discount, jornal i, Lisbon, Olivier, restaurante, sale