Coffee Shop Menus, Zomato and Price Targeting Strategies

Most of us order food from Zomato regularly. Zomato recently introduced the feature “Add tip for the delivery executive.” The tip feature allows users to add a small tip between INR 10 to INR 50 to the order, which is directly transferred to the delivery executive without any deductions from Zomato. This shows the willingness of a customer to pay extra if given a reason to do so. Now Zomato can develop an algorithm that considers this information and segregates the customers into two groups. The first group would contain people who can afford and are willing to pay more. The rest of the people fall into the second group. Zomato can now charge a premium from the customers in the first group under the disguise of “environmental charges/packing charges,” which wouldn’t affect their order size or frequency of orders in any way. And this is a type of “pricing strategy” that Zomato can use.

Pricing Strategies (or Price Targeting Strategies) refer to pricing a product or service by the seller to maximize his/her profits. Pricing strategies determine the price companies set for their products. The price can be set to maximize profitability from each unit sold or from the market overall. It is targeted at the customers and against the competitors.

There are numerous strategies that a company can engage in, depending on

• Product
• Company
• Competitors
• Customers

This blog will focus on how a company can price its products differently, keeping its customers in mind. There are three common strategies for segregating customers and pricing the products accordingly.

1. First-degree price discrimination/ Unique Target Strategy: This involves evaluating each customer as an individual and charging them according to how much they are willing to pay. This is the strategy used by real estate agents, car salespersons, and even Amazon (for some time, until it was protested against). A unique target strategy is difficult as it requires a lot of information. Despite the difficulties, however, it’s so profitable that companies always explore ways to do it. Interestingly, even supermarkets could implement this strategy with the right technology. Two customers buying the same product would be offered different prices based on what they had previously bought. Each customer could have an identity tag, and price labels would change according to who was looking at them. However, this can receive mixed reactions from the customers depending on how expensive/cheap their frequently bought goods are.
2. Group Target Strategy: Here, the aim is to offer different prices to members of distinct groups. For instance, reduced train fare for the elderly and discounts on coffee for regular customers. At first, social benefit or loyalty might appear the cause for this. It may be an added benefit. But the real objective here is to attract customers who might otherwise choose an alternative (buses instead of trains) or retain customers who are price sensitive. Price Sensitivity, also referred to as price elasticity, refers to how much would my sales change if I change my prices? So if coffee shops remove the “regular customer discounts,” they might lose local customers to homemade coffee. Another example is that of Disney World. Disney World offers a discount to its locals to encourage them to visit regularly. However, they charge high fees from tourists, since they only visit the place once and will visit Disney Land, whether it is cheap or not. Group Target strategies are easier to put into action and socially acceptable, but they deliver lesser profits than unique target strategy.
3. Self Incrimination Strategy: This is the cleverest (and the most innovative) of all three strategies. To understand this, let us consider the menu of a coffee shop.

Let us consider prices for a regular-sized cup of coffee.

• Eye opener expresso- just give me the caffeine (INR 98)
• Cappuccino — no-frills (INR 110)
• Filter coffee — no-frills (INR 110)
• Café Latte- frills on coffee (INR 115)
• Café Mocha- I feel special (INR 139)
• Toffee Latte- I am feeling indulgent (INR 144)

If you think of it, café mocha is just a café latte with chocolate syrup. So charging INR 24 extra for just a spoonful of chocolate syrup seems unreasonable. It doesn’t cost much more to make a larger cup, use flavored syrup, or add a whipped cream squirt. But the prices vary a lot. This is how a coffee shop smokes out customers who are less sensitive about price or have lavish choices & are willing to spend extra. This is how coffee shops use the “self-incrimination” pricing strategy.

To get customers to give themselves away, the company has to sell products that are at least different from each other. They offer these products in different quantities, with different features, and at different locations. In simpler terms, the company persuades the customers into paying a premium (extra profit for the company) when the customer is feeling indulgent or is willing to pay extra without the customer's knowledge.

After discussing all the three pricing strategies, we can confidently say that a company aims to squeeze the maximum advantage out of whatever scarcity power they have. Price targeting is the most common way to do so! Products can be prices based on many other strategies depending upon the product, company, competitors, and customers. In this blog, we just explored 3 of the many possible strategies. This is where the marketing team comes into play and can use various innovative techniques to price their products!

To leave you with a thought,

“How much the customer is willing to pay for the product has very little to do with cost and has very much to do with how much they value the product or service they’re buying.”