Has Subway Got Their Pricing Strategy Wrong?

For a really long time the way in which Subway has priced its menu has annoyed me. It still does. Being the master procrastinator that I am, I kept doing what I do best, procrastinate. Now that there is a blog which I would like[1] to update on a weekly basis, here we are.

I think there is something wrong in the way Subway has priced its products. Let me take you through the menu before showing you why I think it is wrong and proposing a possible solution.

Let us have a look at their prices:

Source: Zomato – Subway Churchgate Menu

So a sub of the day is priced at 120, but a normal Veggie Delitte is priced at 135. Does anyone see a problem here? (For those of you who don’t care about anything apart from getting food cheap, don’t answer that question)

The current method of pricing is doing damage on two fronts:

  • First, Subway is losing out on the additional revenue it could generate by pricing the sub of the day right (higher).
  • Second, it is reducing margins by alienating customers who would have otherwise just had a regular Veggie Delitte (possibly a very high margin product) and contributed to revenues.

 

The concept of decoy effect in pricing isn’t being applied correctly.

For those of you wondering what decoy effect is, it is “the phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically dominated. An option is asymmetrically dominated when it is inferior in all respects to one option; but, in comparison to the other option, it is inferior in some respects and superior in others”.

For decoy effect to work successfully there are two criteria:

  • One option has to be completely dominated (i.e. inferior to) by one option
  • Partially dominates the other.

Let us understand this through an example:

ipod_touch

When Apple launched their new iPod Touch, the prices were as above. Here, the 16GB was a decoy to encourage people to buy a 32 GB one. By paying $70 more, you could not only double your storage space, but also get additional features – 5MP iSight camera and so on. By paying $100 dollars above that, you could double your storage space again and no additional features would accrue. So the 32 GB completely dominated the 16 GB and partially dominated the 64 GB. There almost always will be takers for the 16 GB and 32 GB variants, but this tiny proportion of the entire population has a fixed preference pattern.

So the way in which the menu is now framed is:

Sub of the day is the cheapest. However, sub of the day minus the filling (a veggie delitte) is more expensive than a veggie delitte + a filling (sub of the day). The “inferior” product is more expensive than the product which the company aims to sell. So the sub of the day, strictly dominates all other options. And this is the cheapest product on the menu!!!!

So what could be a better way to frame the menu?

For the sake of convenience, let us rename the above categories:

  • Egg & Cheese as Egg & Cheese itself.
  • The Subs which are sold for Rs. 135 as Veg A.
  • The Subs which are sold for Rs. 150 as Veg B.
  • The Subs which are sold for Rs. 175 as Non Veg A.
  • The Subs which are sold for Rs. 180 as Non Veg B.

Sub of the day come from two categories: Veg B and Non Veg A.

The idea while setting prices is to get the customer interested and then increase his/her willingness to pay by offering something “better” at a HIGHER price. Offering the “better” selection at prices lower than the entry level subs don’t make sense!!

Ideally, there could be two subs of the day – one veg and one non veg. The price of the egg & cheese combinations could be the lowest with veggie delitte being added to this category followed by Veg A. The vegetarian ‘sub of the day’ come from the Veg B category. Hence, the veg ‘sub of the day’ could be offered at the same price as those of the Veg A category (or lower). The non-vegetarian subs come from the Non Veg A category. These ‘sub of the day’ could be offered at the same price as the Veg B ones (or lower). At the end of the menu, there is the Non Veg B category.

So the new menu would look like:

  • Egg & Cheese + Veggie Delitte.
  • Veg B sub of the day at Veg A prices (or lower)
  • Veg A
  • Non Veg A sub of the day at Veg B prices (or lower)
  • Veg B
  • Non Veg A
  • Non Veg B

If for some reason, the idea is to have only one sub of the day at a fixed price, the price of this sub should be somewhere between Veg A and Veg B.

For a moment, let us consider that there is no change in the sales volume and the composition of sales. This change will then increase the revenue which being lost out due to the earlier pricing strategy. The loss (not necessarily accounting loss) of revenue accruing from selling sub of the day at those low prices will be reversed, hence adding to the revenue.

But there obviously will be changes in consumption pattern. By pricing the products such, the menu is now so framed as to gradually increase the willingness to pay by appealing to the “Indian” mentality. This framing, I believe, can have a positive effect on the sales volume as well as revenues.

 

[1] Note: LIKE. So if I do end up procrastinating, we should be able to accommodate it. And yes, when I say we I mean me.

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