Will dynamic pricing work for restaurants?

Discussion
Source: Juicer
Nov 04, 2022

The restaurant industry is debating the merits of dynamic pricing as the expansion of digital menus over the pandemic has made instant price changes easier. The big unknown is how patrons will react.

Better optimizing pricing could help offset the significant inflationary labor and food pressures restaurants are facing.

With dynamic pricing, operators could lower prices during off-peak times to better maximize seating capacity and labor. Encouraging price sensitive customers to order earlier or later outside of busy periods would also help staff better manage pickup or delivery orders.

At the same time, raising prices marginally during peak times would maximize profit. New apps offering dynamic pricing solutions, including Juicer and Sauce, claim online ordering and third-party delivery are providing the data to fine-tune price adjustments without jarring the customer.

“The low-hanging fruit here is to use all of that data to figure out, when things are busy, how can I make more money from that?” Ashwin Kamlani, co-founder of Juicer, told Food On Demand. “If I own a pizzeria and I’m on a college campus and have a line out the door at 1 AM because all the kids have been out partying, are they really going to care that the pizza’s now $11 instead of 10? Probably not, but that’s 10 percent more I can make on every pizza and that’s a big deal.”

Proponents also believe consumers have become accustomed to dynamic pricing through airlines, hotels and Uber.

Writing for QSR Magazine, Sherri Kimes, a professor at Hotel School at Cornell who specializes in pricing, said her research shows restaurant customers are fine with price changes based on factors such as time-of-day or day of week as long as it’s framed as a discount. She said, “What customers do not like is prices that vary all over the place without any particular reason.”

Still, some have reservations. According to Restaurant Business, Tim Voss, CTO of Focus Brands, parent of Moe’s Southwest Grill, Schlotzsky’s and other foodservice brands, said during the FSTEC conference in September, “I don’t want to go to a stage where I walk somewhere and I’m paying a different price than someone at the table next to me.”

DISCUSSION QUESTIONS: Do you see more potential benefits or drawbacks to dynamic pricing at restaurants and other foodservice establishments? How likely are a large number of eateries to begin using dynamic pricing in the next few years?

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"Just because you can do something doesn't mean you should."
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"Restaurants already do limited dynamic pricing, it is called happy hour specials or early bird specials. The key there is you need predictability..."

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26 Comments on "Will dynamic pricing work for restaurants?"


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Neil Saunders
BrainTrust

It’s a good idea in theory. The problem arises when someone tries to check prices online beforehand only to find the price differs when they dine. The same applies to people who dine multiple times and see prices fluctuate and change. Many may not notice, but some will. That’s why it’s important to have a standard price but apply discounts – like a happy hour or X percent off before 5pm, etc. – during troughs rather than simply change the actual menu prices.

Ken Morris
BrainTrust

Let the gaslighting begin? If prices are constantly changing, it can be difficult for customers to know what’s a fair price and what’s not. While it’s true that people are used to dynamic pricing in other industries, restaurants are a bit different. People tend to be more sensitive to price changes when it comes to food, and they may not appreciate feeling like they’re being taken advantage of. By the way, most college kids know EXACTLY what the cost of pizza is.

That being said, dynamic pricing is the inevitable maturation of the pricing model. In the beginning, we had chain price. Then we switched to a division model, then a zone model to price in an advertising zone — and ended up with store pricing to compete with the local market. Each iteration increased home office complexity as it took people to implement, but today we have technology that runs on rules and we have an opportunity to leverage it to optimize profitability. Digital changes everything.

David Naumann
BrainTrust

Well said Ken! I agree that some customers might not care, but if you are a regular customer at a restaurant and order the same thing frequently, you probably know exactly how much you pay. And if it is a QSR, you may have the exact change ready when you arrive. Changing prices will be surprising and may be upsetting for customers. However times are changing and maybe in a few years restaurants will be the next industry to adopt dynamic pricing and we will all get accustomed to it.

Dr. Stephen Needel
BrainTrust

Isn’t this the idea behind early bird specials? (Sorry – been spending time with Mom down in Florida). I’m with Neil – the first time you show me an online price then charge me more because I’m dining at 7:30pm is the last time I show up at your restaurant.

Bob Amster
BrainTrust

The concept is not entirely new for those who are familiar with “early bird specials” in retirement communities. “Happy hour” is another similar proposition. The customer comes in for a cheaper cocktail and decides to stay for dinner at regular prices. The concept is a win/win proposition for customer and restaurateur. The rule should be to publicize the regular price and discount from there based on slow, non-profitable times of the day or days of the week, or special events. But nowhere in here does the word “dynamic” intimate hourly or arbitrary price changing. I think customers would not like that.

Gene Detroyer
BrainTrust

Bars have been using dynamic pricing for as long as I have been drinking. It is called happy hour. Many restaurants have early bird or late-nite specials. However as I understand dynamic pricing as airlines, hotels, and Uber use it, customers who walk in when the restaurant is empty will get a lower price than when the restaurant is full.

I agree with the comments from Ms. Kimes and Mr. Voss. The last thing that I would want is to plan to dine out and find that the pricing is not what I expected. I would stay and dine there for the last time. It strikes me as bait and switch.

Dick Seesel
BrainTrust

Restaurants have practiced kinds of dynamic pricing for years — think early bird and weeknight specials — but they have not always used available data to vary “regular” pricing during different opening hours. Once you post your pricing online, or once your prices are visible at a delivery partner like DoorDash, it would be tough to raise your prices during peak hours. So — the capacity may exist but the wisdom of such a tactic is debatable.

Mohamed Amer, PhD
BrainTrust

Just because technology enables dynamic pricing doesn’t mean it’s the right thing to do for restaurants. Menu pricing should be transparent and predictable. You can introduce early bird meals or happy hour discounts; guests understand that. However adding a surcharge at peak demand times is ill-advised, especially when consumers are more sensitive to perceived price gouging due to inflation.

Kevin Graff
BrainTrust

Let’s start with this line from the article: “Proponents also believe consumers have become accustomed to dynamic pricing through airlines, hotels and Uber.” Being accustomed to, and liking something, aren’t the same thing. In fact, consider the friction caused by ever-changing prices with airlines, hotels and Uber. Just because you can do something doesn’t mean you should.

As noted by the other brilliant minds here, the restaurant industry has always benefited from early bird and happy hour specials, as have customers. The idea is to show a discount — not to raise your prices just because you’re busy.

Someone has to keep a closer eye on these IT folks 🙂

Mark Self
BrainTrust

If executed properly, why wouldn’t this work? It works with air travel, etc. It works at my local theater (pay less on Tuesday!) and it works at our local beer and wine store ($2 off on Tuesday!). So-the benefits are many and the risks lie in the execution. And once this starts happening in chains, other chains will follow suit if they see the impact on their business.

David Spear
BrainTrust

Changes in pricing based on hours/day of week has been around a long time. Think “early bird special,” “thirsty Thursday,” etc. Consumers typically don’t mind this because we’ve all been conditioned to these tactics for years. What consumers don’t like is surge pricing. Think Uber in heavy traffic times. It sucks, but sometimes you just have to bite the bullet because there are few taxi alternatives. Can restaurants take a page from Uber and seamlessly implement real-time surge pricing due to heavy traffic and maintain patron frequency and loyalty? Maybe for a period of time, but I’m betting traffic and loyalty will begin to wane.

Peter Charness
BrainTrust

I don’t think dynamic pricing makes sense. Offering specials always works, but not higher prices at peak. No one wants to do a menu check to decide where to eat and then find prices are actually higher when they get there. Well defined price/time bands are sensible. People are used to the same item costing less for lunch than dinner, and happy hour having “specials.” I think “late specials” also make sense, if a restaurant can actually staff one more post-peak seating. Geo-fenced personalized offers also would work. So offering discounts anytime makes sense — raising prices at peak would not.

KARIN JESKE
Guest

I agree there is an opportunity to increase profits with an expansion of variable (as opposed to dynamic) pricing throughout the day and/or week, but this must be on a published, predictable schedule that is available online in an easily accessible and understandable format. It could also be more simply communicated as discounts during certain time periods.

Kenneth Leung
BrainTrust

Restaurants already do limited dynamic pricing, it is called happy hour specials or early bird specials. The key there is you need predictability and it can’t be so dynamic that you have to walk up to the board to see what the price is at the time.

Kai Clarke
BrainTrust

No, No, No. Dynamic pricing is just a way to confuse the customer and lose business. If you go to a restaurant for their lunch special at a certain price, changing the pricing will only lose customers and allegiance to that restaurant. Going to that restaurant for that product at the special price is the reason why customers frequent the restaurant at lunch. Just ask anyone in the pizza business. Instead of dynamic pricing, offer specials at different times each day. Managing this is easier for the customer and the restaurant as expectations shift for each special.

storewanderer
Guest
3 months 3 days ago

Maybe. I would point out some things already:

Many restaurants will have a “special” that changes daily to get rid of overstocked food or just to have a special.

Happy Hour promotions “in the lounge only” create a scenario already where people sitting a few feet away pay a different price for the same items at the same time.

Some restaurants offer a menu at lunch with the same exact items as dinner at different prices (other times the portion sizes vary but not always).

Some restaurants list certain items at “market price.”

As far as I see it, dynamic pricing is already very much alive and well in the restaurant industry. No reason why technology can’t be used to refine it further.

Craig Sundstrom
Guest

In a very narrow sense, this practice has existed for a long time: think of restaurants offering “early bird specials” or, more commonly, “happy hour specials.” Of course there’s a big difference: whereas people view those as the opportunity to buy at lower (than normal) prices, people view “dynamic pricing” as higher prices. In short, it’s a great way to alienate your customers (many of whom are already upset by price increases and tipping … extortion). If alienation is your business model, then go for it!

Brad Halverson
Guest

Agree with Craig on this key point. Dynamic pricing means higher than market or normal prices and with variability in it. Happy Hour is a set decades old agreement between restaurants and diners. Start creating uncertainty around food enjoyment and prices, and you’d better get ready for customer reaction.

Phil Rubin
BrainTrust

It will work for certain categories and brands but it’s unlikely to work on any kind of widespread basis. There are other ways to manage yield and demand other than dynamic prices and these techniques are already utilized, whether they are the idea of “happy hour” or only having a prix fixe menu that’s not available on weekends or certain hours.

The challenge is to manage guest expectations and ensure that they do not feel gouged when demand is high and pricing is at a premium.

James Tenser
BrainTrust

One of the core lessons from price optimization is the concept of caring for your “price image.” This means conserving customer trust with prices are fair, consistent, and not changed too frequently.

Last-minute air travelers grudgingly tolerate dynamic pricing because they have no choice. As a group, the airlines project a terrible price image.

Sit-down restaurant patrons have options in the moment, and while they may respond positively to happy hour specials, they will likely resent peak-hour surcharges and vote with their feet.

Quick-serve customers tend to know exactly what an item costs. Using surge pricing for queue management at the drive-up will only make people dislike you. Arguments at the window could disrupt the flow and even lead to abandoned transactions. (“Whaddya mean the price went up at 6:00? I got in line at 5:55!”)

So while it may be technically feasible to make time-based price changes on digital menu boards and sync those with the POS systems and smart-phone apps, I see more perils than advantages.

Brad Halverson
Guest

Restaurants offering Happy Hour specials before peak hours, then going to set retail prices the rest of the evening is simply a discount or promotional program to create trial or incentive. Customers have bought into it for decades and it works well.

Dynamic pricing would mean prices also swing higher than normal retails, and at variable or unset times. Airlines, Hotels and Ride Sharing do this — (person needs a comfortable seat to a destination, a nice bed to sleep in, a ride to somewhere) but messing with peoples’ minds when it comes to food and the enjoyment of food is a risky play. I don’t see this gaining wide traction.

Cathy Hotka
BrainTrust

“Dynamic pricing” is a euphemism for “taking advantage of customers,” and a dreadful idea. It’s a wildly easy way to destroy customer trust.

Richard J. George, Ph.D.
BrainTrust

Dynamic pricing needs to be presented as deviations from regular menu pricing. Meaning pricing can come down but not go up. Customers are well aware of menu prices and enjoy happy hour hour discounts, but may perceive up charge dynamic pricing as gouging.

Oliver Guy
BrainTrust

In food service operations spreading demand across the day makes sense because it avoids creating a queue and causing delays that impacts customer satisfaction. Providing offers to encourage dining at slow periods makes sense and this has been a form of dynamic pricing that has existed for many years – examples include fixed price pre-theater dining menus or meal deal promotions for purchases before 11 a.m.

Tony Walker
Guest

The line here seems to be on take away/delivered food, in contrast to dining in at a restaurant; convenience versus potentially occasion based patronage. As touched on in other comments, hospitality has been using variations of this model for some time through coupons, eat in vs take away prices, paying a premium on public holidays to cover penalty rates & happy hours. It’s here now!

This might be the digitisation of that strategy, which will likely be more advantageous to larger multi-site chains short term who could afford the technology. If this happens, we might see more emphasis placed on the dining experience being used to differentiate away from eateries whose custom is more driven by price.

Mark
Guest
2 months 16 days ago

I hope not! Maybe for younger and more affluent customers and couples on dates when prices don’t matter. For seniors and budget conscious families, no. Early bird specials and “happy hours” are different, and uncommon where I live in a huge city. Happy hours were locally illegal until recent years because it lead to more traffic accidents from drinking.

wpDiscuz
Braintrust
"Just because you can do something doesn't mean you should."
"One of the core lessons from price optimization is the concept of caring for your 'price image.'"
"Restaurants already do limited dynamic pricing, it is called happy hour specials or early bird specials. The key there is you need predictability..."

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