Dynamic Pricing: What Every Restaurant Must Know
This story is not about Wendy’s. But when the QSR chain made the news this week due to reports of plans for adopting “surge pricing” (which Wendy's denied), we realized the time was right to take a close look at dynamic pricing — what it is, what it isn’t, its potential benefits, and its potential drawbacks. We checked in with our MURTEC Content Council for guidance.
Dynamic Pricing & Revenue
Dynamic pricing — whether driven by data and automation or by a more analog approach — means simply that restaurants adjust menu prices based on demand. It does not necessarily mean that prices rise during the busiest time of day (“surge pricing”), although that is an option.
“By adjusting prices during high-demand periods, restaurants can capitalize on their popularity, potentially increasing overall revenue,” says Skip Kimpel, Principal Consultant, New Business Development, ConStrata Consulting, . “Conversely, lower prices during off-peak times can attract price-sensitive customers, filling seats that would otherwise remain vacant.”
Kevin Bentley, Head of Technology, Jollibee Foods Corporation (USA), cautions, “it’s crucial to communicate effectively, emphasizing ‘dynamic menu offerings’ rather than ‘dynamic pricing’ to avoid customer confusion and potential turn-offs due to perceived price ‘surges.’”
“Many restaurants already offer some form of dynamic pricing — they just call it comps, or early-bird discounts — which tends to focus on boosting volume by charging less,” says Hanson Li, CEO, Lazy Susan. “One of the biggest hurdles is to train our FOH employees to graciously explain to a customer why the price today is different from what they paid yesterday.”
Tom Seeker, Chief Information Officer, Earl Enterprises, says, “Like everything, there is a time and place. In the case of dynamic pricing, it must be used where the cost of doing business cannot be easily understood based on a fixed price model.”
Enhancing Service
“Dynamic pricing can help manage customer flow by incentivizing customers to visit during off-peak hours with lower prices, leading to a more even distribution of demand throughout the day,” says Clark Matthews, VP of IT, El Pollo Loco.
Kimpel says, “Interestingly, dynamic pricing can lead to higher customer satisfaction. Special deals and lower prices during less busy hours can attract customers who prefer a quieter dining experience or those looking for value deals, creating a win-win situation.”
Boosting Operational Efficiency
Matthews notes potential operational enhancements. “Pricing can be adjusted based on inventory levels. For instance, prices can be lowered for items that are in surplus or nearing their expiration, reducing waste and loss. And dynamic pricing allows QSRs to make informed decisions based on real-time data. This can lead to better understanding of customer behavior, preferences, and price sensitivity.”
Potential Drawbacks
Matthews also notes, “Establishing a dynamic pricing model requires sophisticated software and algorithms, as well as continuous data analysis. This can be complex and costly to implement and maintain. Integration to platforms within your system may be complicated or not function within systems optimally.”
Further, says Li, “Customer pushback initially will be during occasions where we charge more
than the customary menu price. But if we look ahead, a few years, when dynamic pricing is pervasive, there may be no “menu price” — just a range of prices that will depend on factors, such as demand and inventory.”
Kimpel says, “I do feel it is important to educate your customers, especially now that there is a spotlight on this practice. Be transparent with your guests about how and why prices vary. Clear communication can prevent confusion and maintain trust.”