Why Can’t I Have the Brownie Instead of the Muffin with My Box Lunch Special?

I maintain a relatively regular lunch rotation that features essentially the same main item at each eating establishment. Today, I was delivered a shock to my comfortable culinary routine: I was told that I could not substitute a brownie for the muffin that comes with the chicken salad sandwich box meal at, what I will call, “Establishment X.” (Note that the woman at the cash register was not the same woman I have seen for all these many months to-date. I can only assume that THIS time, I got the manager/owner!)

As I did my best to conceal my complete and utter shock and dismay, I casually observed that the brownie is the same price as the muffin ($1.99 vs $2.00). I was summarily informed that “the ingredients are different. They just use different ingredients. And the muffin is really good.” My overt protest shut down at that point, but my inner pricing analyst began gnashing away on the logic of this tragic situation.

Eating establishments typically use bundling to entice consumers to buy additional food that they otherwise would not have purchased separately, either because of price or (temporary) appetite constraints “at the moment or at the margin.” This technique is profitable when the complementary product has a high enough margin such that the effective discount applied to the extra food item still results in a positive overall margin.

In the case of the brownie vs. the muffin, I can only assume that the cost of the ingredients of the brownie are higher than those of the muffin (assuming no difference in labor and spoilage costs, etc..). If so, then all my earlier substitutions have caused Establishment X to lose some untold amount of profit (likely very small).

It was not in my interest to provide unsolicited pricing advice in this case since I am the consumer. However, if Establishment X hired Ahan Analytics, LLC for pricing consultations, I would likely recommend increasing the price of the brownie. Let’s assume a 25 cent increase still leaves the muffins with higher margins. This price increase would serve multiple purposes which should lead to higher overall profits:

  1. Drive consumers who are indifferent between muffins and brownies to buy the more profitable muffins.
  2. Extract more money out of consumers who strongly prefer the brownie and are willing to pay accordingly. I am biased on this point because I believe the brownie is at least ten times better than the muffin, and the slightly higher price would not discourage my purchase of the brownie by itself.
  3. Eliminate confusion about the relative value of the brownies vs. the muffins in the sandwich meal.
  4. Provide an opportunity to offer a brownie option for the sandwich meal at a slightly higher price.

Given I have plenty of other eating options in my lunch routine, I will not likely miss the chicken salad sandwich meal. I will just have to find solace in the “satisfaction” that on future visits, I will be purchasing the brownie at some discount to its, let’s say, “true price.”

Changing pricing and merchandising strategies in retail

Stephanie Rosenebloom writes in the New York Times: In Recession, Strategy Shifts for Big Chains (June 20, 2009). Retailers continue to re-engineer the industry to maintain positive profitability. The recession has forced the hand of several major retailers to bring prices and product offerings in-line with the new frugality of consumers.¬† Luxury retailers are broadening the product mix to include more mid-priced product.¬† Mid-tier retailers are offering fewer product options but trying to make up for it with premium service¬† levels. Most interesting: “One of the biggest changes consumers are likely to see is greater personalization and regionalization of merchandise.” Looks like more progress for the concept of “mass customization.”

Where margins are already slim, pricing strategies have limited ability to enhance competitiveness. Retailers are doing well to re-orient their supply chains around getting the right product at the right time to the right customer. Wal-Mart has been doing this for years by empowering employees at individual stores to report on merchandising needs.

It will be worth monitoring the changing landscape in retail for lessons in other high-touch businesses.