In his first earnings call as Wendy’s CEO, Kirk Tanner offhandedly noted the company’s plans to add new technology, notably digital menu boards. In the process, he mentioned that it would test “dynamic pricing” sometime next year.
“Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and daypart offerings, along with AI-enabled menu changes and suggestive selling,” Tanner said earlier this month.
There was relatively little reaction to this until this week, when the New York Post noted that Wendy’s would test “surge pricing,” another name for dynamic pricing. Other members of the media jumped on board. And reaction on social media was swift and opinionated.
Whoever’s idea it was to raise prices during busy times of the day is so disconnected from the reality of their consumer base. If anything, if it’s busy out, make it cheaper to get more foot traffic
— ricnnachos (@WaveRiderABC) February 27, 2024
Me looking to test never eating at Wendys again
— Locust Abortion Technician (@83percenter) February 27, 2024
Everyone has a choice where to eat. This tactic of surge pricing is really price gouging the customers! If more people would purchase groceries and fix their own lunches, then these restaurants would have to lower prices to get people to eat at the restaurants.
— David Gibson 🇺🇸 (@rdgibson1969) February 27, 2024
And thus, before any such test begins, we have a great idea of the risk associated with a major fast-food restaurant chain toying with the prospect of dynamic pricing.
The idea of dynamic pricing is to set prices based on time of day or demand levels. During busy times, companies set prices higher because demand is higher. When there is less demand, prices can be lowered.
It’s a common practice in airlines, hotels and rideshare companies. We looked up Spring Break flights from Minneapolis to Myrtle Beach, S.C., recently to find prices in the $1,700 range. Hotels in New York City can vary greatly based on the time of year you visit.
Restaurants have engaged in dynamic pricing in more moderate forms for years, through lower-priced “happy hours” at bars or by offering deals on certain days. As more brands have added loyalty programs, they’ve started using them to get customers to come in on days when traffic is weaker. Starbucks has started doing this periodically, offering loyalty members half off beverages.
Higher-end restaurants have started doing this in some form through the reservation platform Tock, which allows those restaurants to sell ticket-like reservations to customers that are priced based on how popular the restaurant is at a specific time.
For the most part, however, the fast-food sector—and most restaurants—have been reticent to deploy surge pricing or dynamic pricing or whatever you want to call it. For one thing, technology wasn’t readily available for them to do so until relatively recently.
But the big reason is related to the reaction highlighted above: The restaurant business is competitive. Consumers can always visit the next restaurant.
Indeed, a survey by Restaurant Business sister company Technomic found that more than two-thirds of operators would not implement dynamic pricing and another 22% hadn’t heard of it but didn’t like the idea.
But some operators have tested the concept. And some technology firms have emerged to offer restaurants the prospect.
And there’s some industry data that has suggested in the past that consumers may be OK with the idea. A survey published last year by the National Restaurant Association found that more than two-thirds of adults would be OK with “variable pricing” at restaurants.
Yet it’s worth noting just how much frustration consumers have now with fast-food prices. Fast-food menu prices have increased 22% over the past three years and, while that is roughly equivalent to retail grocery price inflation, it is still getting a lot of attention. The reaction over an $18 Big Mac meal at a rest stop McDonald’s is proof of that.
None of this is to say that Wendy’s shouldn’t experiment with it. And if Wendy’s succeeds, we could see more brands jump on board, as the prospect of generating more revenue during high-demand periods—and more traffic during weaker periods—could prove tempting.
Yet, as panelists noted last year during the FSTEC conference (presented by RB's parent company), tread carefully.