Five, five, five-dollar footlong. Who doesn’t remember that jingle? During the last recession, Subway announced their promotion for footlong subs priced at $5.00. Now, nearly 10 years after they introduced it, Subway has ended $5.00 pricing on the big sandwiches. It is about time! It is also a good reminder that although we want pricing strategies to be durable, individual prices should change with circumstances.
During the last recession, many restaurant chains modified their pricing strategies and lowered prices in attempts to win back customers who had stopped eating out. Unfortunately, as I wrote in When Size Matters, most restaurants found that lower prices simply lowered their profits even more. Subway did not change their strategy and fared better.
Subway’s pricing strategy had always been moderately low prices on quick made-to-order sandwiches. Convenience and quick service were bigger components of their strategy than pricing. Rather than changing their pricing strategy and lowering prices broadly during the recession, Subway targeted a specific price-sensitive segment with low prices only on certain large sandwiches. Other prices remained unchanged. Subway’s customer traffic and profits increased.
Conditions have changed substantially in the past 10 years. Raw material costs, including labor have increased. Unemployment is down, and average income is up, reducing some of the price sensitivity. Customer food preferences have changed, and competitor offerings have also changed. In response, Subway has added new menu items. They also have raised the prices on footlong subs (finally), but they still compete with quick, efficient, moderately priced sandwiches. Their pricing strategy has not changed.
Why am I focusing on this? Too often I see companies who develop pricing strategies and prices that are appropriate for a specific set of circumstances, and those companies will only change prices according to a set schedule or they change prices broadly. Subway is an extreme example of sticking with a specific price too long on footlongs, but companies should be prepared to quickly adjust prices within their pricing strategy as circumstances change.
Walmart is a low-price competitor, and they change prices all the time. Some of their price changes are driven by changes in their costs, but more are driven by changes in competitive offerings and customer behavior. Similarly, Amazon prices can change multiple times per day, mostly driven by changes in customer actions.
Apple provides premium products at premium prices. When they introduced the iPhone X at $999, it seemed like a very high price. Demand was strong, and Samsung introduced their own high-priced offering. Now Apple has introduced even higher-priced iPhone XS and XS Max.
Airlines are another great example. Their pricing strategies are very consistent, focusing on identifying multiple customer segments and multiple streams of value with prices targeted to each. Their prices also change daily and sometimes change more than once per day. Similarly, prices change on Uber and Lyft adjust very quickly, within the framework of their existing pricing strategies.
The message for all of us is don’t confuse pricing strategies with specific prices. Whether you have a low, penetration pricing strategy or a high premium pricing strategy, be prepared to adjust your prices. Pay attention to when your customers buy and when they abandon their carts, when they buy the best vs. when they buy the good, how and when competing alternatives change, and how costs change for the industry. When volumes change, analyze whether those changes are across all products and price points, or specific ones. Each of those factors could be an indicator that it is time to adjust prices; and you can do so in a targeted way, without abandoning your successful pricing strategy.
Leave a Reply
Want to join the discussion?Feel free to contribute!