What Can a Restaurant Teach Us About Software Pricing?

Sunday, October 12, 2014

I recently enjoyed a great lunch at one of my favorite restaurants. The entire experience was good. The food was tasty, and served in reasonable portions. The staff was attentive and made sure that we were seated promptly. The premises were impeccable and beautifully laid out. All in all, it was a great outing, with one glaring exception: the price.

Now I won't say that the price of our lunch was excessive. For $8.95, we received a soup, salad, bread, rice, an entree of our choosing and unlimited desserts. Unfortunately, while the price was $8.95, it wasn't "8.95".

The price on each menu (prix fixe for those in the know) was originally printed as "$6.95". Then someone took a thick pen and updated each menu's price by changing the leading "6" to an "8".

I have no idea when this happened - for all I know, the menus had been misprinted, and the price had always been intended to be $8.95. Nevertheless, each time I see one of those menus, something terrible happens inside of my brain. It's called "price anchoring".

I see the menu and assume that I am about to receive a meal worth $6.95, yet I am going to pay $8.95 for it. Despite the quality of the food, despite the beautiful ambiance, despite the excellent service, the little pen-mark on the menu makes me think that I'm paying nearly 30% more than I should be.

The ironic thing is that the author of every economics textbook dealing with pricing would skip over this possibility. It's not because they don't discuss the concept of anchoring, but because they don't believe that any restaurant in the entire history of humankind would be foolish enough to write new prices over the old ones on their menus.

Don't believe me? Checkout Wikipedia's article on menu costs. Economists have long used restaurants as the classic example of "sticky prices" - prices that can't change easily. The reason for this is that the restaurateurs have to incur the cost of reprinting their menus each and every time their prices change. This cost (known as the "menu cost") prevents restaurant owners from reacting in real-time to market changes in the cost of their inputs (such as labor, ingredients or linen costs).

By saving around $20 in menu printing costs, the restaurant is effectively making each and every customer think that he is being overcharged. Talk about being penny-wise and pound-foolish!

Want to learn how to price software effectively? Then you'll certainly want to check out my book on pricing software!