The Opportunity
- An operator of a national chain of fast food restaurants desired to improve profits through price changes which would not affect the weighted-average price of current offerings. They had previously contracted with a consulting firm, comprised of academics, to produce item-level elasticities. They desired to take these elasticities and build optimization models for menu items at the store level.
Our Approach
- The company desired to scope the analysis to seven pilot markets containing 130 stores. We received historical point-of-sale data for 421 items in those stores, along with item-level elasticities from the previous econometric modeling work, and information about their current store price groupings.
- We worked with the company to identify specific constraints and business rules it wished to observe. We then built several optimization models, with varying kinds of constraints, such as the spread of prices between small, medium, and large offerings, sandwich vs. the components of a meal item, etc.
- The models focused either on maximizing profit or sales, while holding to the restriction that the weighted-average price of current offering remain essentially the same.
The Impact
- Depending on the market area, the results showed an increase in sales ranging from 1.43% to 3.33%. Profit showed increases of 1.25% to 2.55%. These were achieved without changing the weighted price of current offerings, so as to maintain the perception of value in the mind of the consumer.
- As part of the insights delivered, we helped the company understand the impact that their business rules have on productivity.
- Finally, a plan was delivered to demonstrate how to roll the application out to additional stores on their own.