This Motley Fool article nicely describes the what and the why of Chipotle’s price increase, but what lessons should you take away for your business?
Why are they raising prices? The article gave us three reasons: increasing costs, need to raise same-store revenue, and demand (because they can).
As the article pointed out, they are considering raising prices more than what is justified by the cost increases. However, increasing costs is the single best (if not the only) excuse your customers will accept for price increases. It should be part of every price increase strategy.
The second reason is they need to increase same-store revenue. Chipotle already serves such large portions to each customer it will be challenging to increase the amount or number of items a customer purchases. To increase in-store sales they need to find ways to raise the average purchase price over the current $9 per customer. One way to do this is through a price increase.
Although this is a reason, it’s not a very good one. This is based on inside-out thinking, meaning what does Chipotle need? This is not rooted in what the market is willing to pay. There is nothing wrong to set increasing same-store revenue as a corporate goal. However, it is not justification for a price increase. Price is just one tool they may use to achieve that goal.
Finally, the third reason is the best one: because they can. Chipotle has long lines at meal times and they feel it is very unlikely that they will lose many customers due to a price increase. This is pricing power, the ability to raise prices without a big hit on demand.
We should always base our pricing on what our customers are willing to pay. The high demand and long lines are indicators that Chipotle customers may be willing to pay more. Hartung, Chipotle’s CEO, said, “We’re currently reviewing our menu price on a market-by-market basis compared to competitors and based on our analysis.” This is the right way to think. Different markets likely have different willingnesses to pay.
Finally, here’s a piece of pricing advice for Chipotle (in addition to the general price increase). Offer a discount during off-peak hours. If they have long lines at lunch time but not dinner, offer 10% lower prices after 2:00. This way price sensitive buyers with flexibility will come after the peak time, making the lines a little shorter during peak hours so fewer people will see long lines and walk away.
Your 2 key takeaways:
1. Use cost increases to justify price increases.
2. Price based on willingness to pay, not internal corporate goals.