Case Study: Recovering from a Damaging Price Increase

The Challenge

A QSR chain had completed a menu price increase and soon after saw rapid transaction erosion. The brand then quickly reversed the price increase to try and stem the traffic erosion, but didn’t experience the desired effect. Personica was asked to analyze the initiative and recommend the best way to proceed.

The Solution

Personica provided a two-pronged solution:

1. Differential Pricing by Location – Personica’s analysis revealed that the chain’s single-tier pricing system was resulting in a “compromised” price across the system — some locations were underpriced and others were overpriced for their respective trade areas. We then analyzed the trade area and location-specific factors that lead to higher and lower pricing power and created a tiered pricing system that allowed our client to increase prices where it was feasible and maintain pricing or use very selective targeted increases in other locations.
2. Price Strategy and Specific Product Pricing – An in-depth analysis was conducted to calculate the category and product price elasticity, cross elasticity, and product correlations in order to isolate a way to increase prices with a) the least potential risk of transaction loss and b) the greatest probability of mix shift to higher profit purchases. Once our analysis was complete, we provided our client with multiple impact scenarios demonstrating the risk and potential reward of each and executed a market test at select locations. Upon completion of the test period, projected impacts were confirmed, minor adjustments were made, and prices were rolled out to the full system.

The Results

The tiered pricing system resulted in a profitable and lower-risk approach to pricing that also allowed for additional flexibility for future price initiatives, by setting clear standards for the conditions in which stores should or should not increase prices, and by what amount. Additionally, the new pricing was transaction neutral and resulted in 100% flow through of price increase to gross profit.