How to measure price response?
Sales analysis, Tutorial

How to measure price response?

The reaction-price index ratio

First of all, you propose to your customers several distinct ranges that group your dishes together :

  • aperitifs,
  • the entrances,
  • the main courses,
  • desserts,
  • the drinks,
  • the softs,
  • the white wines,
  • red wines,
  • the waters...

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Dishes are offered at different prices within each of your ranges.

In each range of dishes, the PIT is calculated.

  • The Price Response Index (PRI) will compare
    • the Average Bid Price (ASBP) (the average of the bid prices); and
    • the average asking price (AOP) of the dishes.

Then we get the following formula:

IRP (Price Response Index) = ARP (Average Asked Price) / ORP (Average Bid Price)

If IRP > 1 Your customers buy the dishes at the top of the range (higher priced dishes). In general this means that :

  1. Your offer is too low compared to what your customers expect, so they choose your expensive products rather than your entry-level products.
  2. the prices in this range are too low.
  3. or you have to offer even more expensive productsin this range.

Si IRP < 0,9 : à l’inverse, vos clients achètent les plats en bas de la gamme  (plats aux prix les moins élevés). Ici, cela signifie que :

  1. Your offer is too high compared to what your customers expect, so they choose your entry-level products rather than the prices are perceived as too high.
  2. the prices of this range are too high
  3. or you have to offer even lower products in this range

In general, this ratio should be between 0.9 and 1.

  • If it is higher than 1: the prices are too low.
  • If it is lower than 0.9: prices are too high.

This calculation makes it possible toanalyse the price positioning of the establishment.

For example: sales of the tickets to the restaurant "la plage"...

Dishes Awards Quantities CA INCL. VAT
Meat Bricks 8,40 121 1016,40
Thousand Leaf of the Sea 12,70 90 1143,00
Smoked salmon 10,20 138 1407,6
Caesar Salad 8,70 256 2227,20
Goat's cheese puff pastry 8,90 34 302,00
Cream of carrot soup 3,80 21 79,80
Leek Soup 3,90 34 132,60
694 6308,60

Average Bid Price (ASP) = average of bid prices
PMO = (8.40 + 12.70 + 10.20 + 8.70 + 8.90 + 3.80 + 3.90) ÷ 7 = €8.09

Average Price Requested (ARP) = average price of dishes requested (sold)
PMD = 6308.60 ÷ 694 = €9.09

Price response index = PMD ÷ PMO
9,09 ÷ 8,09 = 1,12

In conclusion, the PIT index of 1.12 >1 indicates that your customers choose the dishes at the top of the "starter" range. Here the work will be to remove the dishes at the bottom of the range and/or add some at the top of the range.

The opening of the range

A second indicator to measure the price response is the price opening ratio. That is to say, the ratio between the lowest and the highest should be between 2.5 and 3.

In the above example :

Highest price €12.70 divided by the lowest price $3.80.
This report gives us the opening factor of 3.34

  • Less than 3: the opening of the range could be larger, the offer of dishes must be enlarged (for example more expensive products)
  • Between 2.5 and 3: the opening is correct that the price range of the dishes are right.
  • Above 3: the range opening must be smaller, the price difference between the most expensive and the least expensive dish must be reduced.

In conclusion of these price reaction indices

Therefore, in our example, the 2 soups with the lowest prices must be removed and 2 dishes higher in the range must be added.

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