Marketing, Pricing, and Entertainment in the Restaurant Industry

Introduction: Restaurant Marketing and Market Segmentation

Creating an increasingly fragmented market while capitalizing on its many audiences, restaurant marketing has driven the micro-segmentation of markets on demographic and psychographic criteria more than ever before. The level of differentiation required in geographic areas of high restaurant density forces many establishments to adopt highly differentiated, niche-oriented approaches to defining their core value propositions. What has become abundantly clear from much of the research, however, is that for any restaurant to survive, it must establish a highly unique differentiation and a well-crafted unique value proposition or overarching vision. The role of advertising and marketing in creating that vision is analyzed throughout this review.

Pricing as a Differentiator

Research completed by McKinsey and Company shows that the impact of pricing strategies on profitability is far greater than that of differentiation alone. Preslan discusses the need for pricing execution, pricing enforcement, and pricing optimization throughout restaurant and broader retail operations, noting that requirements vary according to the need for pricing accountability based on the business model used. In the case of franchised operations, the highest levels of pricing enforcement are critical for sustaining profitability and enabling franchisees to cover their operating expenses and franchise fees.

Research into pricing has also demonstrated the need for a more integrative approach to managing identity and differentiation—one that makes pricing an integral component of an overall pricing management strategy. While many franchise operations employ analysts and managers who specifically focus on pricing's role in the total brand mix, many independent restaurant operators treat pricing as an isolated variable in the marketing mix. Langdoc and Newmark (2004) defined a retail pricing model that addresses the challenges of making a total pricing strategy work, illustrating the integrative aspects of pricing on the business model within the broader context of marketing strategies.

Considerable research has been completed in the hospitality industry—and in restaurants specifically—on the price-quality relationship, including conceptual models and the role of service in relation to price (Kim, Lee, & Yoo, 2006, pp. 143–164). Their model of relationship quality is noteworthy for its focus on how pricing is just one of many intangible factors influencing a customer's perception of relationship quality with a restaurant. Other intangible factors include employee customer orientation, communication, relationship benefits (which may also be understood as trust in the server and in the restaurant's ability to deliver consistently high levels of service and food quality), and the perception of price fairness.

The principle that a restaurant customer's perception is their reality—a concept discussed extensively by McKenna—is confirmed by the model of Kim, Lee, and Yoo (2006, pp. 143–164). Drawing on the work of Langdoc and Newmark (2004) and Kim, Lee, and Yoo (2006), the role of pricing in the total product mix is not isolated; it is integral to both the perception of value and, most importantly, to profitability. The powerful combination of pricing perceived as reasonable and service that is genuinely customer-centered helps many restaurants secure repeat customers, which are critical for long-term growth (Mattila, 2001).

Product Differentiation and Uniqueness

In summary, pricing as part of the broader marketing mix for restaurants is undergoing a significant revolution, driven in large part by its integrative relationship with all other strategies affecting restaurant performance. A comprehensive literature review on pricing alone would also capture such critical aspects as the role of bundling, the effectiveness of coupons on the perception of product quality, and the pricing of new offerings and services.

Of all segments within the restaurant industry, the most product-competitive area is that of Quick Service Restaurants (QSR). Product strategies in this market are driven primarily by the increasingly hectic lifestyles of people in westernized nations and the fragmented approaches families are taking to the evening meal. Given the demanding schedules of so many families, time is their most precious commodity, with the majority not planning more than two hours ahead for dinner (Domino's Pizza, 2005). A countervailing trend has been the growing focus on health and dieting and, according to Roper (2005, 2006), the ongoing tension between diet and convenience.

Another dimension of product definition is menu mix planning, in which the gross margin of individual menu items, categories of menu offerings, and meal periods by business category are assessed (Bayou & Bennett, 1992, pp. 49–55). Their analysis focuses on food-cost percentage, contribution margin, weighted contribution margin, and the Hayes and Huffman approach to defining profit-and-loss statements for menus. This framework highlights how menus must be aligned precisely with the financial objectives of the restaurant—specifically the standard costs attributable to each item and the resulting contribution margin. From this foundation, the authors derive a total cost, total contribution margin, and cost-percentage analysis. These researchers provide an in-depth approach to menu planning and to aligning those decisions with costing structures. In a survey of managers at 103 table-service restaurants in southeastern Michigan, they found that 72% break down their costs into variable and fixed costs, and 55% use a direct-cost approach to menu planning.