About five years ago, I experienced what NPR refers to as a “driveway moment,” when you are so riveted by a story that you have to stay in the car to listen to the end. I had my driveway moment at a Sheetz in Hagerstown, MD, and the story was a Freakonomics episode about why the live event ticketing market is a disaster.
I was so captivated by this story because I have a long-time and deep loathing for the ticket resale industry. But the economist in me begrudgingly knows why they exist–because tickets are often underpriced. That sounds ridiculous considering the exorbitant prices of concert tickets, but if a show sells out in less than 30 seconds (which just happened to me as I tried to get Cheap Trick tickets), that means demand is extremely high compared to supply. Cheap Trick could have charged much more than the $75 and had the money flow back to them rather than to the secondary market, but like most artists, they don’t want to gouge their fans or lose fans in the process. Scalpers already know this and almost immediately that $65 ticket was posted on TickPick for $862.
Now, you may be wondering what the price of a Cheap Trick ticket has to do with restaurants. Besides the fact that Rick Nielsen is a co-owner of Piece Brewery and Pizzeria in Chicago, a lot.
Restaurants also experience a mismatch in demand vs. supply especially when it comes to the mid-afternoon lull versus the lunch and dinner rush. That is if you’re lucky to have a daily lunch rush considering that many workers are only coming in the office a couple times a week if at all.
This problem of managing for surges and lulls in traffic throughout the day isn’t new. This is why we are blessed with lunch specials and happy hours. What is new is the record-high inflation and soaring costs, labor challenges, and more extreme traffic highs and lows given the work from home dynamic. But, much like in the ticket broker business, we now have the data and technology solutions to determine the optimal price a customer would pay, and when.
Enter “dynamic pricing” in restaurants. Also known as “surge pricing” like what you’re familiar with when it comes to airlines and rideshares. A dynamic pricing model would enable restaurants to adjust the prices they charge based on current demand, i.e., prices would be higher when it’s busy and lower during off-peak hours. As operators have reached their limits on price hikes, they’re looking for more strategic pricing solutions to boost revenue and pull in traffic during off-peak hours, and dynamic pricing has shown to be beneficial to some early adopters.
In a recent Technomic survey, 68% of operators said they would not implement dynamic pricing, 22% of which hadn’t heard of it until the survey and did not like the idea. That leaves about a third of restaurants contemplating a dynamic pricing model.
Operators thinking of implementing surge pricing at their restaurants must carefully consider to what extreme to use it and how it will resonate with their customers. Like with rideshares, consumers are unlikely to feel that the lowest prices are a deal but rather what the meal should cost. A bump in prices while demand is high may leave customers feeling they’re overpaying and less likely to return in the future, rather than shift the time of day they typically visit which isn’t easy for consumers given busy schedules.
Above all, consumers want transparency and to not feel like they are being nickeled and dimed, such as with the various fees currently being tagged on to their bill. For restaurants, getting the pricing wrong–or having it change from hour to hour – can push customers to choose a competitor, whereas in the concert ticket scenario, consumers can blame the ticket brokers and Ticketmaster, not the band, for the jump in price. Also, a fan can’t simply go see a different Cheap Trick play the same way they can easily pick a different restaurant (no offense to cover bands).
Operators should still harness the current technology and pricing analysis to ensure your menu is optimized by items, day parts and days and reexamine the prices on a quarterly or semi-annual basis. However, just because data, online ordering and digital menus allow operators to change prices a few times an hour to maximize revenue, doesn’t mean that that approach will pay off in the long run when it comes to customer satisfaction and retention.
Much like a secondary market for concert tickets, sometimes market efficiency isn’t all it’s cracked up to be.
For more information on pricing and menu research, click here or reach out to Technomic at info@technomic.com or technomic.com. Technomic is a sister company of Restaurant Business.