Pricing to stay in business

How much does a single donut at Dunkin Donuts cost?  Calling around to a few stores I received the following 4 answers: $0.50, $0.69, $0.99, or $1.29? Are the stores charging $1.29 overpriced? Are the stores offering it at $0.50 discounting too much? The answer is “yes, it depends”. This same question applies across the QSR spectrum.

A thorough analysis of all transactions and an understanding of the locations is required to best answer the question. Using economic principles with the results displaying graphically, a business owner can make a more informed decision.  By understanding the local demand through the use of data insights techniques, he can work to maximize marginal profits. Typically this improves bottom line profits by several percent.  In a world of compressing margins, knowing where you can and can’t pass higher commodity costs to the consumer could mean the difference between staying in and going out of business.

2 thoughts on “Pricing to stay in business

  1. Scott,

    Fascinating that prices can vary so widely on a simple donut. You know, a friend of mine who was a statistician at Blockbuster a few years ago ran tests where he varied the price of a single movie rental– between $2 and $10 for one night across a range of locations. He found that consumers were highly price inelastic, leading to Blockbuster raising prices and increasing earnings overnight. For Dunkin Donuts, there is likely more price elasticity, since if you have taken the effort to drive to a Blockbuster and select something, you’re already committed– versus you walk by a donut shop and decide if you want a donut or not.

  2. Very good insights. One thing that many firms often fail to take into account it when running these types of test is long term price elasticity. While most consumers on a single transaction are highly price inelastic, they in fact exhibit elastic behaviors over the long run. Think gas prices. As they have risen we don’t change our behaviors instantly, but more and more people are finding ways to use less.

    Has anyone noticed that the listed price of seeing a movie has gone up, but effective price after discounts has gone down? In the long run consumers behave in rationale ways.