Strange prices at Johnny Rocket’s

Ben Daniels writes to me:

Seen at Johnny Rocket's near LACMA:

Pancakes. Delicious buttermilk pancakes, served with bacon or sausage & warm syrup.

Two pancakes 4.99  

Three pancakes 4.99

Error aside, how might we account for this?  One option is that the company wants to give the "three pancake consumers" the sense they are receiving a bargain.  I suspect, by the way, that the marginal supply cost of an extra pancake is quite small.  The extra pancake may also increase your demand for high-margin beverages.  What else might be the explanation? 

JohnnyRockets 

Comments

Have you never been to a restaurant (or a grocery store) and felt you might even be ready to pay a premium fro smaller portions/package sizes? There are many reasons why I would not want to take in a larger amount of food (intended weight loss, health reasons more generally, planning to do sports afterwards, just no appetite) and since there are commitment issues and an aversion to throwing away food, this looks like a welcome option.

Actually, I wish more places had something like this (a 'downgrade' option), because in most places when you order a small portion, that doesn't really work well.

My supermarket once had a sale where two quarts of ice cream were cheaper than one. I thought this might be a money-making opportunity, where I could buy them jointly and return them severally, but I suspected that it wouldn't work out in practice.

Several explanations:

1. The marginal utility of the third pancake declined;

2. They were trying to sell you the 4.99 price for pancakes relative to a lower price for eggs by "giving" you a "free" pancake. If you had just seen three pancakes 4.99 (without being offered the two pancakes and the apparent discount of a free pancake), you would have noticed the pancakes were at a higher price relative to the eggs.

3. Some marketing students in grad school are conducting an experiment in pricing.

By the way, some grocery stores will sell you an item, say, two for $5, and if you go to the checkout counter with one item, you will pay $2.50. Most people buy two, but the one price is simply half of the two price.

Smaller pancakes: If my calculations are right, the same volume of batter can make 3 pancakes at 82% of the radius. So, that would be roughly 2x 6" diameter pancakes versus 3x ~5" pancakes. Unless one person orders the 2 and another orders the 3 and compares you'd never tell the difference. They may cook faster as well (no time for fluid dynamics and heat transfer equations on how much thinner smaller pancakes may be) and may fit better on the griddle.

The best pricing I saw was (not in US$):
Beer - 1l - 40,- (Discount!)
Beer - 0.5l - 25,- (Discount!)
Beer - 0.3l - 30,-

A friend bought a 0.3l as he didn't want to drink more. He was very surprised to find out that buying half a liter and not drinking it all would be a cheaper option.... Now tell me what was the intention here :) (In my opinion they did a discount on the most common amounts being bought and didn't think about the rest..)

This is an example of everyday price discrimination. The typical US restaurant serves humongous portions. Those of us that are civilized eat half, and leave the rest on the plate to be thrown away. Those of us who are not, gobble the whole thing down, or take home half the meal, to eat it three days later when it tastes like garbage. The pancake pricing avoids throwing out the excess food, so it is privately and socially more efficient than merely serving oversize meals.

At the McDonald's in Hyde Park, a small and medium sized drink cost the same amount.

The restaurant realizes there are good reasons why some people want two and equally good reasons why some people want three. However, the restaurant owners are saying that price is not one of those reasons.

This saves time ordering. They could just put 3 pancakes for $4.99, but they have probably recognized that a good portion of people ask, "can I have two?" and a good portion of people order 3 and end up leaving 1. So, why not give people what they want?

I do like Karl's reason too. There seems to be some evidence to suggest he's correct.

In the 80's and 90's there was a local restaurant chain in the western/northwestern suburbs of Detroit that had pricing like this for their egg platters. The main listing was for two eggs plus meat, potatoes, and toast, for a certain price, then there was a note that you could get a third egg for "free". Sometimes I ordered two, and other times three. It just depended on how hungry I was on a particular Saturday morning.

My wife, who's a journalist, reckons the major difference between blogging and journalism is that journalists regard the phone as an adjunct to their writing. Guess she's right. Seventeen hypothetical opinions and not one call to the restaurant.

So, in other words journalists base conclusions on surveys with a sample size of one?

I'd say that from a producer's perspective, the price to provide a third pancake. is VERY close to 0.

You're actually paying for service and rent for the table. Meat has actual cost. But the restaurant should and is indifferent to exactly how many pancakes you get.

Denny's has unlimited pancakes... isn't that the same thing? 10 costs the same as 100 in that case.

Btw...this reminds me of some restaurants offering to give you whatever amount of [insert type of side-dish] you can eat. Maybe the variable costs are very low so they don't care how much you eat as long as you pay 4.50..

My guess is that it was a typo and menu costs (in a very literal sense here) make it not worthwhile to correct the error for the time being, especially since the company can partially correct for the error without incurring the menu cost by making the pancakes in the 3 pancake option somewhat smaller.

Why pay more for less?

- Because I can. I may go to Johnny Rocket's but I am not like the other customers. I'm better than them. I don't need to stuff my face with pancake.

- Because I am so averse to waste that I couldn't bear letting a good pancake go to ruin. Clean plate, clean mind. World saved.

Prompted by Gareth I called Johnny Rockets (323-634-0888). The man that answered said they get that question a lot, but he doesn't know why it is.

A good explanation of such phenomenon: http://comp.uark.edu/~sjahedi/bargains.pdf

Btw...this reminds me of some restaurants offering to give you whatever amount of [insert type of side-dish] you can eat.

The pancakes basically are a side dish. The restaurant's costs for the bacon and sausage are probably more than for the pancake ingredients.

Psychological pricing. If the best price for 2 pancakes is $4.99, the profit per dish before deducting fixed costs is $1.00 and the marginal cost of a pancake is $0.20, you might think that a bit above $5.19 is the best price for the 3 pancake deal. But psychologically customers scan prices left-to-right and some fraction of them set themselves a budget below $5. If you lose more than one-fifth of the sales you actually make less profit at $5.19 than at $4.99.

P.S. I have started blogging again, in this case on how the mystery of how the developed world has managed to break out of the Malthusian trap.

@Gareth,

All too often, journalists use the phone not to gather actual information but merely to get an obligatory sound-bite quote or two. This "quote fetish" is instilled in them in journalism school, as shown by the recent brouhaha where Steve Jobs snubbed an exceptionally pushy journalism student.

Bloggers don't need to use the phone to fish for quotes because most blog postings are in response to text posted elsewhere (in the blogosphere or mainstream media or the web), so gathering a quote is a simple matter of copy-and-pasting. And when there is some genuinely unknown information to be found out, it can often be looked up by web search, or requested via a tweet, or sometimes even provided by blog commenters in response to a posted request by the blogger.

All too often, with a newspaper story all the information content is in the headline; the actual article, full of unenlightening quotes and other padding to attain some mandatory minimum column-inch length, is hardly worth clicking through the headline link text (Bloomberg.com is particularly poor in this regard). Whereas with a blog entry, the rich information content is all in the post itself rather than in the title, and the post is as long or as brief (a single sentence, even) as it needs to be, no more and no less.

McDonald's has been doing something like this for years, and I think the only thing that stops people from taking advantage of it is embarassment at ordering 3x 4 piece nuggets when a 10 piece is on the menu:

4 Chicken Nuggets: $1
10 Chicken Nuggets: $4

The morbidly obese demographic is being tapped out...so to speak

Gives new meaning to the term "market saturation"

[thanks to Karl at Modeled Behaviour for link to this post, I had missed it]

There’s a well-known behavioural effect called the decoy effect (also called asymmetric dominance, as londenio says), which this takes advantage of.

Quite possibly the owner of the restaurant has read Predictably Irrational, whose first chapter is all about this phenomenon. The famous example is the Economist’s online versus print versus print-and-online subscriptions.

Details easily findable, for example here.

Incidentally, any sensible restaurant is much more concerned about maximising revenue than minimising cost – since higher revenue lets them spread their high fixed costs across more sales. So the marginal cost of a pancake is unlikely to be very relevant here; the effect of this menu design on revenue will be the determinant of its success.

It's actually not that rare an occurrence. I mean it is in essence a 'Buy Two, Get One Free' scheme. Sort of like a Happy Hours that you might get at a bar.

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