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  • Writer's pictureNihit Ningthoujam

À La Carte Pricing using Menu-Based Choice Modelling

Updated: Jan 11, 2023


À la carte offering is a selling mechanism in which customers can configure a product or choose items from a menu according to their needs and price acceptance. This model is vastly adopted in different sectors such as:

  • Fast-food chain - Menu of McDonald's

  • Automotive sector - Customization of a SUV

  • High-tech sector - Configuration of a Dell laptop


If designed correctly, à la carte model enables effective targeting of multiple customer segments using a single menu. This model also results in high customer satisfaction by enabling customers to tailor their own product or service. On the flip side, as compared to designing a limited number of product offerings, optimization of an à la carte offering could be much more challenging because there are many moving parts in the equation such as numerous menu items, their prices and cross-demand effects among them. One powerful tool to address these challenges is Menu-Based Choice modelling (MBC). MBC is an effective tool to optimize an à la carte offering because of five key reasons:

  1. It provides in-depth insights on the customer demand for each menu item.

  2. It provides precise price sensitivity for every item on the menu.

  3. It takes into account complementary relations among the items (e.g. effect of burger price on demand of cold drinks at McDonald's).

  4. It takes into account supplementary relations among the items (e.g. effect of burger prices on demand of wraps at McDonald's).

  5. It outputs the product items which are likely to be chosen together which is instrumental in designing product bundles (e.g. McDonald's Value Meals).


Menu-Based Choice modelling is a very realistic research technique which simulates real-life purchases from a menu, and choice decisions of potential customers are then modeled to:

  • Engineer menu (select profitable menu items)

  • Optimize prices of each item

  • Design product bundles (combos)

  • Optimize bundle discount

MBC Survey


MBC is an advanced form of Conjoint Analysis in which different price levels for each menu item is tested to estimate their price elasticity. I have illustrated Conjoint Analysis as a powerful pricing tool in my previous articles:


The output of a MBC exercise is an interactive simulator in which the price of each optional item can be optimized to maximize volume, revenue or gross margin. An example of a simulator is illustrated below.


MBC Simulator


MBC enables menu engineering across diverse sectors which offer mass customization products or services. Some examples are highlighted below.


Applications of Menu-Based Choice Modelling Across Sectors


In nutshell, à la carte model is prevalent in diverse sectors which offer configurable products or services. However, à la carte pricing is challenging due to numerous items on the menu and cross elasticity effects among them. Menu-Based Choice modelling effectively tackles these challenges and enables menu engineering, price optimization for each item on menu and discount optimization for product bundles.


 

Nihit Ningthoujam


I am a pricing consultant. I have helped more than 30 businesses realise their monetisation potential by quantifying product value based on internal intelligence, historical data and customer insights. Although 60% of my clients are in SaaS sector (B2B & B2C), I have also delivered projects across CPG, pharmaceuticals and automotive sectors.


Very frequently renowned global consulting, private equity and marketing research firms also collaborate with me to bridge expertise gaps. Some of these firms are Pricing Solutions, MG Pricing, Le Club du Pricing français, Movens Advisory, 3H Partners and Ingear Research.

I pursued Grande Ecole MSc in Management from ESSEC Business School, Paris and Bachelor in Engineering Physics from Indian Institute of Technology, Delhi.


Contact: Nihit@pricingstratz.com

 

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