The Pricing Dilemma: How Do We Get It Right?

Pricing has been creeping back into discussion lately, and it's no surprise—it moves whenever commodity prices shift. In business, it's easy to take our eyes off the details when things feel stable, but when costs rise, we're forced to pay attention again. The volatility of commodity markets, from fish and oil to potatoes, ensures that pricing remains a pressing issue. Understanding these fluctuations is crucial, and given how frequently they appear in my discussions, it's clear that pricing is one of the most challenging aspects of running a food business.

We saw fish, oil, and potatoes skyrocket a few years ago. Then, last year, it was potatoes again. This year, frozen-at-sea cod is climbing, and while frozen-at-sea haddock is currently lower but rising quickly, as we all know, it won't take long before it follows suit—especially with the lower catch quotas in place.

 

Recently, while chatting with industry veterans like Gary Warner and Bobby Joyce on The Ceres Podcast, co-hosted with David Miller, I questioned pricing strategies in the fish and chip sector. If you've been following my articles, you'll know I've been reading a lot about economics, trying to understand how businesses adjust prices and, more importantly, if they do it correctly.

When Retail Prices Rise, Do They Ever Fall?

Here's a scenario: Imagine cod was priced at £180 per box in 2022. Then, due to supply chain issues, it jumped to £250. Naturally, you increased your menu prices to compensate. But then, cod prices dropped back to £200. That means your margins are now in a healthier position than before, right? So, after some initial pain, there's some gain.

 

And now, cod prices are once again approaching £250, continuing the scenario from before. The cycle repeats, forcing us to ask—do we need to adjust prices again, or is there a smarter way to manage these fluctuations? Should you raise prices once more, and if so, does it need to be as large an increase as before?

 

Some of you are already rolling your eyes, thinking, Why should I drop my prices?—and trust me, I get it. No one is saying you should. But it's worth understanding why, from an economic perspective, you probably don't have to.

The Economics Behind Price Increases

 

1. Price Ratcheting: Once Up, Rarely Down

Price ratcheting is when businesses raise prices when costs increase but rarely lower them when costs drop. Over time, prices keep rising rather than falling back.

 

Why does this happen?

- Cutting prices to increase them again later can frustrate customers.

- Higher prices become the new norm, and customers eventually accept them.

- Not all costs decrease at the same time—labour, rent, and operational expenses often remain high.

2. Sticky Pricing: The Reluctance to Lower Prices

Prices tend to be "sticky," meaning they don't adjust quickly to changes in supply and demand. Businesses are often slow to lower prices, even when their costs decrease.

 

Why?

- Frequent price changes confuse and annoy customers.

- Lowering prices now might make it harder to justify increases later.

- Some costs—like wages and rent—are sticky themselves, meaning raw material savings don't always translate into overall cost reductions.

 

3. Asymmetric Price Transmission: The 'Rocket & Feather' Effect

Have you ever noticed how fuel prices rise immediately when oil prices go up but take forever to drop when oil prices fall? That's asymmetric price transmission, also known as the "rockets and feathers" effect. It's common in industries with few competitors or low pricing transparency.

Examples in Fast Food:

- McDonald's & Burger King: Ingredient costs surged during the 2008 financial crisis, leading to higher menu prices. Even when those costs stabilised, menu prices never went back down.

- Greggs: In 2023, the price of a sausage roll went from £1.15 to £1.25 despite wheat prices stabilising. Consumers had already accepted the new pricing.

- Domino's Pizza: Instead of lowering menu prices when ingredient costs dropped, they relied on discounts and promotions to maintain perceived value.

- KFC: Meal prices increased during the UK's 2018 chicken supply crisis. When the supply chain stabilised, those prices stayed the same.

 

So, What's the Right Approach?

Understanding these economic models doesn't mean unquestioningly increasing prices every time costs rise. Instead, informed data-driven decisions can help counteract pricing pitfalls, allowing businesses to adjust strategically rather than reactively. With the right insights, you can balance profitability while maintaining customer trust and market competitiveness. The fundamental strategy lies in knowing your margins—and that's where data comes in.

You can make smarter pricing decisions with access to real-time numbers through our Ceres business calculators. Before jumping to a price increase, consider the following:

- Trimming waste—Are you over-preparing and losing margin through waste?

- Optimising labour—Could smarter scheduling reduce staffing costs?

- Menu adjustments—Are there items that aren't profitable or fast-moving but are eating up resources?

- Efficiency gains—Can energy, time, or ingredients be saved?

 

Price increases shouldn't be your only tool. They should be one of many in your financial and operational toolbox.

 

Final Thoughts: Don't Price Yourself Out of the Market

If you're raising prices without knowing your exact costs, you risk pricing yourself out of the market. Use tools to track your numbers and understand your actual position before making any changes.

And one final warning: Be careful not to increase prices twice, following a common pricing trap unintentionally. If you raised prices when fish prices first spiked but didn't lower them when they dropped, then increased them again when costs rose, you might have pushed prices higher than necessary. This is known as a Cost-Plus Pricing Error, and it can be dangerous—leading to reduced sales, customer pushback, and ultimately, a loss of competitiveness.

At Ceres, we're here to help your business thrive, not just survive. We've explored how economic models like price ratcheting and sticky pricing shape our industry, and ultimately, the key takeaway is this: data-driven decision-making is your best defence. Whether it's tracking costs, optimising operations, or making strategic price adjustments, understanding these principles ensures you stay competitive without alienating your customers. Yes, times are tough, but you can navigate the challenges ahead with data, wise decision-making, and proactive planning.