Anyone who has ever taken an Uber is probably painfully familiar with the concept of dynamic pricing.
Fares surge when demand is high, a tactic designed to get more drivers on the road so that no one is left without a ride.
A similar strategy has been used by airlines and hotels for decades to control the flow of customers into seats and rooms. And now, some tech startups want to apply the concept to restaurant menus, with prices that change by the day, daypart or minute depending on demand, competition and even the weather.
It’s yet another byproduct of the industry’s pandemic-fueled shift from in-person to digital. Tools like online ordering and third-party delivery are providing the data and platforms necessary to make real-time price updates possible.
“Once you bring an industry online and the majority of those transactions go online, that’s when everyone is like, I can use the internet in the way that it’s supposed to be used,” said Colin Webb, CEO and co-founder of dynamic pricing startup Sauce.
Adding extra topspin to the dynamic pricing trend: Restaurants’ recent preoccupation with menu prices as costs skyrocket.
“It’s increasingly becoming a subject of conversation, and I think it’s only natural because of the inflationary environment,” said Carl Orsbourn, COO of Juicer, another dynamic pricing startup.
Under normal conditions, restaurants might change prices a few times a year based on their costs as well as competitors’ prices, with a certain profit margin in mind. Those changes are then updated manually: New paper menus have to be printed and new rates punched in across online listings.
“It’s very often a non-savvy, non-tech, low data approach that people use,” Webb said. “And they’ll just set it up for their restaurants, plug it into their POS and continue transacting for their business.”
Lately, restaurants are having to update prices more frequently to keep up with rising costs. And while that may be helping margins, there are signs the hikes are hurting traffic, particularly among lower-income consumers.
That’s where some operators see an opportunity in the more surgical approach of surge pricing.
“We’re looking at a market that is riddled with inflation and figuring out a way to not simply just blanketly pass that along to the customer, but more intelligently look at what is a fair price at a fair time,” said Michael Montagano, CEO of ghost kitchen provider Kitchen United.
The company, which leases kitchen space and technology to other concepts, is using Sauce to adjust prices at three locations, in Houston, Dallas and Santa Monica, where it actually operates some of the restaurants.
Sauce’s algorithm uses both past sales data and current demand to calculate the optimal price for a given menu item by daypart. For instance, a breakfast burrito might cost a little more in the morning, when demand is high, than it does at lunchtime. The changes happen automatically and stay within limits set by Kitchen United.
“At the end of the day, 5% to 10% is the adjustment that you’re seeing,” Montagano said. And yet, because the changes align with demand, “we’re actually seeing a bigger increase in profit despite not having to go with some blanket 20% lever across the board.”
The “microdose” approach has had a big impact at Kitchen United, boosting sales by 6% over the past year or so.
“In some cases, that means higher quantities are being ordered, sometimes less,” Montagano said. “But for us, that 6% has bled straight to the bottom line, which is the good news.”
Along with boosting sales, proponents of surge pricing see another benefit for restaurants in the age of online ordering: It can help even out demand so restaurants aren’t slow one hour and slammed the next.
“Every single restaurant has a lull period and a period where you’re getting too many orders,” said Webb, noting that some restaurants get so overwhelmed that they will turn off their ordering systems. “That’s actually money that you could be continuing to drive if you’re able to manage the flow of that better.”
By raising prices during peak times, restaurants can stem the tide of orders without losing margin, he said. Or they can widen the funnel with lower prices when business is slow.
It’s like a data-driven version of happy hour, Orsbourn said. Under dynamic pricing, “if they order ahead or order at a less intense time, maybe they get a cheaper price,” which frees up capacity during a rush.
“No one wants to say no to any orders,” Montagano said. “This allows you to incrementally increase the price and ultimately control the volume in the kitchen and ultimately fulfill it more profitably.”
At Rachel’s Kitchen, a six-unit cafe chain in Las Vegas, the price of a smoothie on Uber Eats can swing 40% throughout the day—20% above or below the regular price—with changes happening by the minute.
Rachel’s became one of Sauce’s first customers during the pandemic. The chain was doing more delivery and was intrigued by the fledgling company, said founder and CEO Debbie Roxarzade.
Since then, Sauce has become a fixture at three of Rachel’s locations, where it governs their prices on third-party delivery apps. Dynamic pricing has increased Rachel’s sales, Roxarzade said, though she didn’t know by how much.
It has also dialed in prices to an extent that was impossible before, though Rachel’s still has to change its base prices from time to time.
“With everything that’s been going on with inflation, we’ve had to raise our base prices a lot over the last couple of years,” she said.
At Kitchen United, the days of across-the-board price updates could be over, barring any “jarring input changes,” Montagano said.
“Today, so far, we wouldn’t need to see any more uniform or blanket pricing adjustments given that this system is intelligently doing it and delivering results,” he said.
Consumers have begrudgingly come to accept dynamic pricing in hotels, airlines and Ubers. After all, they don’t really have a choice. In restaurants, they do—so will they accept paying different prices at different times?
At Rachel’s Kitchen, some customers have been confused by price fluctuations—“some pleasantly and some not so pleasantly,” Roxarzade said. But most don’t even notice.
“The majority of people are just so accustomed to just clicking through,” she said.
Montagano said there’s been no pushback from guests at Kitchen United, noting that a 10% upcharge can amount to as little as 50 cents.
Orsbourn added that because dynamic pricing today is entirely digital, most customers won’t know what others are paying. And even if they did, he said, they understand the challenges restaurants are facing.
“Imagine if you walk into a restaurant today at 7:05 pm and find out that happy hour ended at 7 p.m.,” he said. “You’re not going to get upset and walk out.”
Still, some in the industry have reservations. “I don’t want to get to a stage where I walk in somewhere and I’m paying a different price than someone at the table next to me,” said Tim Voss, CTO of Focus Brands, during the FSTEC conference last month.
There’s also the matter of convincing restaurants to let go of something they’ve always been in control of. Sauce ran into that issue early on.
“We quickly found that while some restaurants did appreciate [the automation], a lot of restaurants really appreciated and wanted control of those pricing strategies,” Webb said. So Sauce tweaked its system to give operators more say.
“I think a lot of people, especially smaller operators, they have a hard time with relinquishing control,” Roxarzade added. “Letting somebody else have access to your system can be scary, and obviously you have to have that trust factor.”
At this point, restaurants are just beginning their flirtation with dynamic pricing. Sauce and Juicer, in fact, are among the few companies Restaurant Business could find that even offer the technology to do it. Sauce lists about 10 customers on its website, and Juicer is in a trial phase with 11 partners, changing prices manually to prove what it can do.
“We’re early. We’re one of the handful of companies that are doing this,” Orsbourn said. “I would suggest that more restaurants than not will be doing this in five to 10 years.”