The price is right is not just a game show, it is a game you should play with your own products. Charging the correct amount for your bakery products is a conundrum bakers have faced since first opening up shop.
Almost every baker has his or her own formula for calculating the price he or she should charge, and modern technology has made that easier to figure out. But many bakers will tell you that what they should charge is not always what they do charge.
Most bakeries have at least one or two loss leaders–products that they have to offer at a cheap price or they risk losing customers. But what about the other products? What role does perceived value play in the pricing game?
This summer, when I spoke to Rick Boone, owner of Rick’s Bakery in Fayetteville, Ark., for his Leadership Award for profitability (July 2010), he said something that blew me away. He has established a certain amount of sales that each product needs to contribute to stay in rotation. And before he removes a product from the bakery’s lineup, he raises the price by 25 percent. OK, I guess I could understand that–might as well try to make more money before you ditch the product completely.
But what really shocked me was that four times out of five the product increased enough in unit sales for the bakery to continue selling it. The higher the price, the more customers bought. It’s all about perceived value, he told me. You have to make the customer understand that what they are buying from you is better than the product down the street that sells for a dollar less. Believe in your product enough to make your customer believe in it, too.
This really comes into play with trends that are hard to put a price on, such as locally sourced ingredients. Customers say they want products made from local ingredients, but will they pay for it? Apparently so, as long as the price is in line with what they perceive the value to be.
A study by the Penn State School of Hospitality Management tackled the question of whether consumers would really purchase food made with local ingredients when given the option. The student-run restaurant offered two versions of the same dish, one made with local ingredients and the other made with non-local ingredients. When both dishes were offered at the same price, customers didn’t have a preference, purchasing the non-local and local in the same number. However, when the price of the local-ingredient dish was raised by $1, 18 percent more customers purchased the local dish.
The price increase acted as a value cue–if it costs a little more, it must be worth a little more, according to Amit Sharma, assistant professor at Penn State. However, perceived value has its limits. In the study, when the local dish went up an additional dollar, sales dropped back down.
Bakers should take a look at their products. What’s their perceived value? Are you charging what customers are willing to pay?