Pizza Price Wars: Will the competition keep falling like Domino’s?

In the winter of 1999, a large Eagle Boys pizza for $5.95 was everything that a fresh-faced undergraduate business student could ask for to celebrate the end of the week.   While the price of an equivalent pizza would rise over time, stiff competition in a “pizza price war” with other franchise chains Domino’s Pizza and Pizza Hut would eventually see it fall again to $4.95. Sadly for Eagle Boys Pizza and its franchisees, the firm was placed into Voluntary Administration in July 2016.

As demonstrated by Eagle Boys’ demise, price is a major business consideration, not only to attract customers but also to obtain value back from them to hold some prospect of sustainable success.

Why is price important?

Price is the only one of the “4 P’s” of marketing (including promotion, place and product) that provides a genuine mechanism for obtaining value back from customers (Iacobucci, 2014). It’s easy to change product prices but it can be hard to get the price right. In fact, pricing for competitiveness is often seen as the primary problem facing marketing managers (Ducoffe & Tucker, 2004).

According to Kotler & Armstrong (1999) when modifying prices, marketers must anticipate likely responses from competitors and customers. Pricing is about finding the sweet spot where customers see value in a product but at the same time, where a firm can make a profit from selling at that particular price point.

Supply and Demand

Free market economics suggests that when the price of a pizza rises, consumer demand will go down. This equation gives a downward sloping demand curve and when we add a supply curve where a firm’s willingness to supply pizzas increases when price increases, the intersection point is the free market price.

Stretching the Demand Curve like Mozzarella

The demand curve though isn’t simple as the model above when you account for price elasticity, or price sensitivity. Because price is not the only determinant of demand – other factors such as customer loyalty, tastes and preferences and convenience also come into play – it isn’t simple to model demand fluctuations in response to price changes.

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While the most demand-inelastic products are necessities such as prescription medications, elasticity scenarios also apply to the pizza industry. A customer who loves premium pizzas from their local restaurant is less likely to visit Domino’s for a low price deal or if the local restaurant raises prices. For these customers, the demand for pizzas is relatively price-inelastic. On the other hand, customers purely seeking the lowest priced pizza will order from any chain. Their demand is as elastic as a stretchy piece of mozzarella cheese.

Some Recipes for Pricing Strategies

Different firms have varying costs to account for when determining prices but fundamentally each has to find a price point to first breakeven to cover costs and then make some profit. At the most basic level, there are three typical pricing strategies (Iacobucci, 2014). Let’s consider examples of each:

Pricing Strategy

Type of Business

Pizza Product Type

Strategy Description

High End
Gourmet Pizza Restaurants
Authentic Woodfired
Competing on quality, not on price.
Middle
Local Takeaway Pizza Business
Medium Quality
Prices based on local competition, adjusted for business costs.
Cost Based
Domino’s, Pizza Hut (Franchise Chains)
Lower quality using mass-purchased ingredients
Competing on price to attract the masses. Prices are cost plus small markup.

While pricing is one of the most responsive mechanisms to influence profits, it is not just about making money (Iacobucci, 2014) and pricing strategies also must consider consumer psychology and product positioning, branding and image.

Dollars and Sense: The Psychology of Pricing

While economics and profitability are important, pricing can also factor in consumer perceptions (Kumcu & McClure, 2004). As shown in the Domino’s coupons below, multiple pricing points are offered, including mainly near-pricing. This, according Wieseke, Kolberg & Schons (2015), is purposeful as convenience-conscious individuals perceive round prices as more attractive than just-below prices (e.g. $6.95) whereas this is less likely for individuals who place a lower emphasis on convenience.  In fact, it has been found that firms are likely to use more round prices for higher quality products (Stiving, 2000).

There are also socially and psychologically significant experiences, feelings, and meanings for customers and firms in the product exchange (Darke & Dahl, 2003), so getting pricing right is vital.  Customers pay a lot of attention to price and will often pay a higher price for goods in order to obtain “prestige” and when this occurs, the relationship between price and objective quality is irrelevant (Hennig Hanf & von Wersebe, 1994).  Price unfairness (paying an unreasonably higher price than others) can also jeopardise the customer experience and lead to retaliation (Gelbrich, 2011).

What’s on the menu of the Australian pizza industry?

As outlined in the diagram below, the Australian pizza industry comprises several large chains competing for about half the market, while small independents occupy the remaining half.  This suggests that the pizza chains are really competing with themselves.

Given the existing low prices amongst the pizza chains in Australia fuelled by price wars, chains would be well advised to stop cutting prices and instead focus on customer experience as a key differentiation point (Wieseke, Kolberg & Schons, 2014).

Maintaining or marginally raising prices while providing better benefits and new products seems the most sustainable economic and marketing model for the industry. Mathe-Soulek, Krawczyk, Harrington an Ottenbacher (2016) found that new product promotions can have a significant and positive effect on same store fast food sales, whereas price-based promotions tend to result in lower same-store sales and the unpredictability of fluctuating stock prices.

As Eagle Boys found out the hard way, competing primarily on price alone makes your product primarily a commodity.  In times when customer loyalty and repeat business are essential ingredients for success, marketing strategies must consider more than just price-points to attract and retain customers.

References:

Darke, P & Dahl, D 2003. ‘Fairness and Discounts: The Subjective Value of a Bargain’. Journal of Consumer Psychology, vol. 13, pp. 328-338.

Ducoffe, S & Tucker M 2004. ‘Is the Price Right? A Marketing Exercise in Setting a Selling Price’. Marketing Education Review, vol. 14, pp. 13-19.

Gelbrich, K 2011. “I Have Paid Less Than You!  The Emotional and Behavioural Consequences of Advantaged Price Inequality’. Journal of Retailing, vol. 87(2), pp. 207-224.

Hennig Hanf, C, & von Wersebe, B 1994. ‘Price, Quality and Consumers’ Behaviour’. Journal of Consumer Policy, vol. 17 (3), pp. 335-348. 14p.

Iacobucci, D 2013. MM4 (with CourseMate, 1 term (6 months) with Career Transitions 2.0 Printed Access Card) (New, Engaging Titles from 4LTR Press). 4 Edition. South-Western College Pub.

Kotler, P & Armstrong, G 1999, Principles of Marketing, Eighth Edition, Upper Saddle River, New Jersey: Prentice-Hall.

Kumcu, E & McClure, J 2003. ‘Explaining prestige pricing: an alternative to back-bending demand’, Marketing Education Review, vol. 13, no. 1, pp. 49–57.

Mathe-Soulek, K, Krawczyk, M, Harrington, R & Ottenbacher, M 2016. ‘The impact of price-based and new product promotions on fast food restaurant sales and stock prices’. Journal of Food Products Marketing, vol. 22(4), pp. 100-117.

Stiving, M 2000. ‘Price-Endings When Prices Signal Quality’, Management Science, vol. 46 (12), 99. 1615-1628.

Wieseke, J, Kolberg, A & Schons, L. 2016. ‘Life could be so easy: the convenience effect of round price endings’. Journal of the Academy of Marketing Science, vol. 44(4), pp. 474-494. 

 

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