Tired of seeing his business evaporate every weekend, Stuart Frankel - the owner of two Subway franchises in Miami - came up with an idea. He decided to offer all foot-longs for $5, about a buck less than regular prices, on weekends.
Next thing he knew, Frankel had lines out the door and double-digit sales growth.
Next thing Subway knew, it had one of the biggest hits in fast-food history.
The $5 footlong promotion alone generated $3.8 billion over the past year - more than Arby’s and Domino’s entire U.S. business. At a time when everyone’s business is down, Subway’s sales grew 17 percent in 2008, making it the number two fast-food company, worldwide, behind behemoth McDonald’s. Actually, Subway should surpass McDonald’s in total number of franchises in 2010, an amazing feat.
The big question is this: Is the $5 footlong just a flash-in-the-pan, a round number that resonates with fast-food customers? Or is it a function of consumer price-points and price elasticity that affect virtually all markets?
It doesn’t surprise me one bit that Frankel came up with the $5 footlong seemingly at random. Finding the price-point where product flows readily, like water through a frictionless pipe, is often far less scientific than some marketers would like to think. Sometimes, it’s just trial and error. Other times it’s born of necessity or even desperation.
For example, at a microprocessor chip company (Cyrix) in 1996, a unique situation caused sales to stall and inventories to grow to dangerous levels. With our worldwide distributors sitting on almost a million units (the chips sold for $50 - $80 apiece) and our company close to bankruptcy, something drastic had to be done.
After a week or two of analysis, I became convinced that there were certain price-points that would cause product to flow readily and relieve our inventory bottleneck by enabling PC resellers to sell systems at certain lower price-points. I wasn’t exactly sure what those price-points were, but there was no time to test a theory, so I took a stab and presented my plan at a heated board meeting. Our CEO angrily exclaimed, “Is that all you marketing &#*$s know how to do, lower prices?!”
Nevertheless, he approved the plan. It worked, of course (or I wouldn’t be writing about it). Within two quarters, inventory levels were back to normal and we had a new strategy for driving low-cost PCs. The following February Compaq launched the world’s first $999 multimedia PC - with a Cyrix processor - and we were off to the races.
In a prior post, I extolled the virtues of product positioning as a means to gain market share, even chiding marketers who think of price as their only lever. But as you can see, there are times when price is still the best lever. And recognizing those times is often more a function of desperation than marketing wisdom.
Which still doesn’t answer the question: Is the $5 footlong phenomenon a fast-food prime number, or is it a function of “magic” price-points and price elasticity that affect virtually all markets? I think it’s the latter, but that’s just me. What do you think? Can it work in your business?
[Subway ad image courtesy Subway]
