Financing

Thinking about dynamic pricing? Tread carefully

Dynamic pricing, also known as surge pricing, is expected to take off in the coming years, thanks to new technology. But customers may not like it.
FSTEC conference
Technology has enabled more dynamic pricing at restaurants. | Photo by W. Scott Mitchell Photography.

Earlier this month, according to the New York Times, the U.K. pub company Stonegate said it would charge more for a pint of beer at 800 of its 4,000 pubs during times when they’re busiest.

The practice, known as dynamic pricing or “surge pricing,” is a growing phenomenon, not just in the U.K. but in the U.S. And many expect it to grow in popularity in the coming years, thanks largely to technology.

It’s certainly a big topic in the restaurant industry. It is a common question at industry conferences, such as the recently concluded FSTEC, a sister operation of Restaurant Business. A lot of companies are thinking about it. “It’s a huge, ethical battle internally at Dog Haus,” CJ Ramirez, EVP of marketing with the hot dog chain, said on Friday at the conference.

Brands should indeed tread carefully when it comes to the practice. While dynamic pricing is alluring to companies looking to take advantage of demand when they’re busiest and price more aggressively when they’re not, the practice is a minefield.

Specifically, restaurants are a competitive industry. And consumers can easily shift their attention elsewhere. Consumers, said Technomic Senior Principal Rich Shank, “tend to not think dynamic pricing is fair.” Most of the industries where the practice is most common tend toward more captive consumer audiences than restaurants, where people have less choice.

At a restaurant, a customer can simply look at the prices of a cheeseburger on an app and opt for somewhere else.

Dynamic pricing in simple terms is demand-based pricing. Lower prices when demand is lowest. Raise them when prices are higher.

Restaurants have been doing this in some form for years. In 1979, for instance, a Taco John’s operator in Minnesota lowered the price of his tacos on Tuesdays, a day that was otherwise slow. He called it Taco Tuesday and, until the brand lost that trademark earlier this year, that day turned into a busy day for the chain.

Yet such efforts would traditionally require a person to physically change menu boards or erect signs with the value offer.

These days, many more orders are coming digitally—some pizza chains get more than 80% of orders through digital channels, for instance, and large-scale fast-food chains are on their way there. Inside restaurants, customers order increasingly from kiosks. Menu boards that were once changed every few months are now digital and can change automatically.

Other orders are coming through mobile app. On any of these places, AI can change prices based on time of day, day of the week or weather.

Many of these systems cost money, of course, and require constant attention. “We would have to put digital menu boards in every store,” Scott Scherer, chief information officer for Jersey Mike’s, said at FSTEC. “It would be quite expensive.”

But there would be benefits. Demand pricing in some form is common in many industries. A hotel in a hot tourist district, for instance, is pricier than one on a rural highway, even when they’re the same brand and overall quality. Why can’t restaurants do the same thing by, say, charging higher prices on Friday nights?

And, low-price offers can bring customers in the door during periods when business is weakest.

And companies with strong loyalty programs could have an advantage. Starbucks in late July and August offered its Starbucks Rewards customers half-price cold drinks when they ordered through the app on Wednesdays—which it called WinsDays. The result: Traffic to its shops spiked on those Wednesdays, according to the data firm Placer.ai.

“Digital channels provide more flexibility from a system perspective,” Pankaj Patra, chief information officer for Chili’s owner Brinker International, said at FSTEC. “The concept is really interesting. A lot of companies are looking at it.”

The challenge for companies is when their digital prices do not match what’s in the restaurant. On top of that, fast-food brands pushing value may not want to alter that by raising prices at certain times of day. And they may not want to cheapen their brand by lowering prices at other times of day.

Dog Haus hasn’t come to a conclusion on its internal debate. The brand’s goal is to offer the highest-quality hot dogs, sausages and burgers at the best possible price. Dynamic pricing could theoretically change that, even though the company could manipulate traffic and revenue. “There are pros and cons,” Ramirez said. “We haven’t come to a conclusion on that.”

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