Should Chipotle have a subscription?
Patrick Campbell Jan 28 2021
This week we are talking about the champion of fast, casual, and healthy dining—Chipotle—the champion of our hearts. We're going to be walking through what Chipotle is doing well with their pricing strategy, and implementing what we think is a really good idea to boost not only shareholder value, but also the value to all of their customers, by instituting a membership program. It's going to be a little controversial, but we have the data, w have the insight, and ultimately, we have the right points that you can take into your business, while also learning from what a giant behemoth success story has actually done within the fast casual space.
Pricing field notes
Controlling the product is what initially spearheaded Chipotle's success, but it may have also caused some of the set backs they've experienced. So today, we're going to talk about what Chipotle can do to not only boost shareholder value, but also the value to all of their customers. We're talking about an unlimited subscription for Chipotle.
Below are some valuable takeaways you can implement in your own business.
- Unlimited memberships and tiers only work if the amount covers LTV and/or buys into super fans.
- Don't be afraid to do an unlimited plan just make sure it covers your LTV and then some.
- Unlimited memberships and tiers only work if the amount covers LTV and/or buys into super fans.
- Tax the reduction in your number-one, unavoidable pain.
- Make sure to carefully balance retention and revenue implications.
- Make sure you provide, those more than willing to pay, the ability (in this case) the ability to skip the line.
- Become part of you customer's identity.
- Take advantage of this and accelerate your super fans.
- Don't think short term, or so transactional.
- Think about those relationships because ultimately, that's what business sells.
Watch the full episode
What most people don't know is that Chipotle started out as a means to an end. Founder Steve Ells wanted to open a fine-dining restaurant after training under renowned chef, Jeremiah Tower. Fine dining is expensive though, so Ells thought he could raise cash by opening a quick-service Mexican restaurant right next to the University of Denver.
An $ 85,000 loan from his father—thanks dad—and some cost-saving sheet metal decor later, the first Chipotle opened in 1993 to serve San Francisco style burritos.
Ells and his father calculated that they needed to sell 107 burritos per day to make a profit and anything over that would go into the fine dining fund. Yet, within the first month Chipotle was selling over 1,000 burritos per day. Based on the success, Ells abandoned the fine dining dreams —sort of as we'll find out in a bit—but 26 years later, Chipotle now has more than 2,500 locations in the US, Canada, and Western Europe, with an annual revenue of $5.6 Billion dollars per year.
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It's not all rainbows and Sofritas though. As we'll see in a bit, Chipotle was in a world of hurt the past few years. First up though, what made them so successful and what gives them potential to be successful in the future.
Chipotle is the epitome of controlling the product. If you've ever watched fine-dining chefs, you know they can be jerks in the kitchen about the quality of the food. Ells was no different. With Chipotle he tapped into the thesis of "Food with Integrity." From the ingredients to the options offered, everything was tightly controlled.
All of Chipotle's ingredients are locally grown, including the 100,000 avocados used every day for the guacamole in their 1-1.5 pound burritos. Those ingredients are freshly made every day and while there are 60k different types of burritos you could order, there are only 53 ingredients offered by Chipotle. Again, control allows for quality.
This is insane if you're thinking about most quick-service restaurants, because in a restaurant you have two main axes of growth—you can serve more customers or you can increase the amount of money each customer spends with you by selling them more.
Chipotle rebufffed analysts by not offering more options, opening stores for breakfast, or even franchising to scale quicker, even though this would lead to billions more in sales.
Instead, Chipotle kept the constraint of "food with integrity" and did everything they could to maximize these two axes of growth. To get more butts in seats, they learned from their competitor Mcdonald's, and automated as much as humanly possible. As anyone who's been through a lunch-rush Chipotle line can attest, those employees are fast, even at the speed in which they ask you if you want guac, which is of course extra. More recently they've added digital ordering and a second assembly line in the back for no-line pickups and even drive-thru pickups.
To increase order size, Chipotle's been unapologetic about their quality and charges accordingly. The average order value is right around $15, which is three times that of McDonald's, even though McDonald's offers almost 10x the number of options to order, including breakfast all day, and a store that's open 24 hours per day. Turns out guac, chips, and a beverage is all you need to take on the happy clown.
Control of product and their thesis was great for Chipotle, but it may have caused their downfall, because their growth was as fragile as a piece of lettuce. Turns out they didn't have control over the execution of that vision.
Starting in 2015 Chipotle was at an all time high with a stock price of over $700 per share and then came tumbling down when they experienced not one, but six different food related illness crises in less than six months. July 2015—E. Coli outbreak in Oregon. August 2015—Norovirus outbreak in California. Also, August 2015—Salmonella outbreak in Minnesota. October 2015—E. Coli outbreak in Washington and Oregon. November 2015—E. Coli outbreak in Kansas and Oklahoma. And then December 2015—Norovirus in Boston.
They broke the trust in the thesis they used to succeed—"food with integrity" doesn't end up making people sick. When you walk into a McDonald's you're not expecting high quality ingredients—you're expecting consistency and speed. We don't want to get sick from a McDonald's hamburger either, but we know we're not making a healthy decision.
For Chipotle, even though their burritos can top a thousand calories, health is everything. And while we should appreciate that there are nuances when using fresh lettuce and tomatoes, in a sea of options for fast casual dining that rose in the wake of Chipotle, why wouldn't we just go to Sweetgreen, Panera, Culvers, or the multitude of upstarts popping up in cities across the states. Sure, the diehards stayed, but a brand can't grow without the casual diner.
Chipotle's making a comeback though, and thankfully the products are good, they just need to get better at executing at scale. They started with naming a new CEO in March of 2018—Brian Niccol, the former CEO of Taco Bell, who has experience playing the execution game.
Yet, there's more to be done. And while Chipotle isn't far into their comeback—the stock is at an all time high. There are some clever things Chipotle could do to rise to Starbucks' or McDonald's level while still maintaining the "food with integrity" thesis. They involve some pretty big changes though. Keep reading.
We weren't scared
Did the health stuff ever impact desire for it. I was probably thrown off for maybe like a month, but I also don’t think that enough people appreciate having healthy food. The bar for safety and stuff is so much harder. I think that's where Chipotle got into trouble because if you look at the stock price, like we talked about in the background section, they associated their brand with health and wellness, and clean and organic food. I think what's really fascinating is this point about execution of mission, it needs to go through with execution of production with the guy who ran Taco Bell. It’s basically an execution machine, given how cheap it is, taking over Chipotle. I think it's a win-win situation. As long as he doesn't tinker with the thing that got them there. Just bring them back to that healthy, fast, and casual vibe.
We're going to do something a little bit different today. We're going to talk about a hypothetical subscription for Chipotle—an unlimited subscription. We went out into the market, talked to current and prospective Chipotle customers. We wanted to figure out what the viability of a subscription was, and what the viability was of an actual membership model to Chipotle. The way we're going to walk through this to make sure that there's really good lessons for you, is we're going to, essentially, talk about how you can collect this data yourself to look at the viability of your own subscriptions or your own pricing strategy, and make sure that you can test things before you implement. A multi-billion dollar company like Chipotle isn't just going to willy-nilly, throw a subscription out there. Although they probably should, based on the data that we're about to get into.
Where does our data come from?
Here at ProfitWell, our Price Intelligently software combines proprietary algorithms and methodologies with a team of pricing experts who think about this stuff more than anyone else to help companies optimize their monetization strategy. We do this by going out into the market and collecting data from current and prospective customers, having the ability to collect data from everyone, from a soccer mom or dad in the middle of Kansas, all the way to a fortune 500 CIO in South Africa. We then take that data and run it through our algorithms and analyze it in every direction to determine a company's ideal customer profiles, as well as which segments value, which features and which segments are willing to pay more, all in the spirit of determining how a company can use monetization for growth.
Data and analysis
Unlimited memberships and tiers only work if the amount covers LTV and/or buys into superfans.
Let's talk about this concept of unlimited. This whole concept of unlimited memberships and tiers are actually really great. If the amount of the unlimited price covers your lifetime value and/ or buys you into your super fans. If I see an unlimited plan that's just kind of thrown onto a pricing page, I would think that was terrible and wouldn’t it. Because I’d be capping my growth. But when you're dealing with a physical good, like Chipotle, what ends up happening is you can actually use it from a marketing perspective to cover the costs, or to cover the actual lifetime value of that customer.
So to put this into context for B2B, I’d ask what the current lifetime value is, and if they say it’s $150 for a consumer product, I’d tell them to put an unlimited lifetime plan in place for $200. They’ll likely ask if that will hurt their earning potential in the future, but it wouldn’t because their lifetime value is $150. And theoretically, you're going to improve that over time.
At what point would an unlimited monthly subscription to Chipotle be too expensive? Because what's really fascinating is when we looked at this data, we looked at it based on brand affinity. We still gathered information on people who were kind of negative or didn't like Chipotle, people that are neutral, and most importantly, the superfans. Because, the willingness to pay, at least when we just look at the super fans, the median is about $350 a month. If you think about the average Chipotle order, it’s about $14, and the average burrito is about $10. You're talking about 30 burritos in a month, which is basically one a day. But not everyone's going to use it every single day. The other thing to think about is the range. Look how high it goes. It’s going over $500 a month for a Chipotle subscription.
If Chipotle is part of your identity, and I know that sounds ridiculous to some people, but just search Chipotle on Twitter. David Dobrick has been a big influencer. Scott Galloway talks about Chipotle on the podcast all the time. But the other thing that's really kind of fascinating is when we look at the data based on frequency, those people who go daily, their median willingness to pay jumps to about $500. So all of a sudden, you're way over the average order value for, basically, once a day. It's not about a discount, it's about some perks that can be added to this. Those folks who are going multiple times a week, they're still looking at about $200, $250 on the high end. With an unlimited membership or unlimited subscription, or a lifetime value—and you're not trying to get everyone—if they get just 10% of their base to buy into this recurring revenue bundle, I don't see a world where they're not making margin on these subscribers. Especially if they're at $500 a month, even $350 a month, it's such a win.
You're about to see something called a value matrix. We collected data from the group comparing feature preferences and plotted those on the horizontal axis, more valued features on the right, less valued on the left. We then collected willingness to pay for the overall product and plotted that based on their number-one feature preference on the y-axis. Analyzing data in this manner allows us to determine which features are differentiable add-ons, core, or commoditized for each segment.
Tax the reduction in your number-one, unavoidable pain.
Another thing to really think about is that you want to tax the reduction in your number-one unavoidable pain. What's the number-one problem with Chipotle, or Sweetgreen, or any of these other products? The lines. And what we found when we looked at the value matrix here is that this physical priority line, basically making sure you can skip the line, had really high affinity. Meaning it was preferred over the other features. And it had a really high willingness to pay for the people that cared about it.
But even more interesting are member-only events, member-only specials. The beauty of a subscription is the relationship is baked into how you make money. These are the folks who got their unlimited card. They're going to tweet about it. They're going to tweet when they get your poll. They're not only going to help increase the margin, but if you throw them some member-only events, what starts happening is you actually get more CAC implications, more lifetime value implications, more average order value implications. And you don't even need to give them the free guac or the free chips now, or even the free drinks that are on here. Because those aren't necessarily the highest things on the list. People don't understand that they have a group of people in their customer base that's willing to pay more.
You become part of your customer's identity
Finally, you become part of your customer's identity. We mentioned this a little bit earlier, but if Chipotle released this, they would have customers going viral. They'd be tweeting about it, they'd be spreading the word like crazy. These exclusive member events and being able to cut the line, this stuff would spread like wildfire.
The biggest misconception about a subscription model, especially when you're attaching it on top of a physical-good business, is that everyone needs to use it. Apple's got 800 million credit cards. A billion credit cards probably at this point because that data's from 2018. They don't need to have every single person using a recurring revenue bundle. Like Chipotle, doesn't need everyone to use it, especially at $350 to $500 per month. Say you have a small group of people and all of a sudden you're looking at a $100-million revenue stream for people who are already coming to you. You're just giving more into the relationship, get a little reciprocity with them actually buying a subscription. And I think it's a really powerful thing to do.
We talk about this principle all the time with the thousand true fans. And just because Chipotle has millions and millions of fans, it doesn't mean they can apply that same strategy. Find your absolute super fans and give them what they want. Find a way to nurture those fans, help them give you more money or at least help them get you more customers. I think that's a really big thing that not enough people are thinking about. Features are not the thing anymore. Those are table stakes. Now it's part of the identity and part of the relationship.
- Unlimited memberships and tiers only work if the amount covers the LTV and/or buys into superfans. Don't be afraid to do an unlimited plan. Just make sure it covers your LTV and then some. You're not going to get a hundred percent of people, but that's totally fine. Headspace does this really well. Calm does this really well. There's some real estate products that do this really well.
- Make sure you're taxing the reduction in your number-on avoidable pain in B2B businesses. This is a little bit hard. It might be the time it takes to do something. It might be support, it could be a whole host of things. You've got to make sure to carefully balance the retention and revenue implications. But in a world where there's a physical line, that is the easiest thing to tax. And yes, you can still have mobile ordering and ghost kitchens, to expand your capabilities, but make sure you're also providing those folks who are more than willing to pay to skip the line, the ability to skip the line. Fast Pass is one of the biggest innovations in the world of theme parks. We should be using this in some way, even if it's a little bit artificially created in the world of software or other types of subscriptions.
- You become part of your customer's identity. Take advantage of it. Chipotle has super fans. This is something that they should absolutely be doing. There's people who go every single day. There's people who go to Sweetgreen every single day. Make sure you take advantage of it, make sure you have those super fans and make sure you accelerate them. Don't think so short term, or so transactional. Think about that relationship because ultimately that's what business sells.
Who's up next?
Next week we have an accounting behemoth that actually went public, I'm pretty sure in the first month of existence. But not for a good reason. It was basically so that they could raise money out of New Zealand, so a Kiwi based company.
Xero accounting. And it's one of the first examples of a financial or a functional product, in the world of SaaS and subscriptions, that actually was able to take advantage of really good design and really good branding to attract people away from Intuit in away from QuickBooks, which was the huge juggernaut within the market before Xero.
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This is a ProfitWell Recur production—the first media network dedicated entirely to the SaaS and subscription space.
By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.
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