An Overview of the Prospects and Challenges of Implementing Dynamic Pricing For Restaurants
Everyone has felt the effects of inflation over the last few years, and probably none more than workers in the restaurant industry.
In a trade already operating on razor-thin margins, the 3.4% inflation increase of 2023 meant restaurants had to, yet again, tighten their belts a notch.
Traditionally, the only way to combat inflation is to raise menu prices, but with everyone getting hit, there’s a severe risk of scaring customers away with menu sticker shock.
So, what are restaurants to do?
Some operators are trying out dynamic pricing—it’s been around for years but largely ignored by the restaurant industry.
Having seen that customers are willing to accept it in other industries, does that mean it’s finally time for restaurants to start using it, too?
What Exactly Is Dynamic Pricing?
Dynamic pricing is a strategy where prices are adjusted in real time based on current market demand, customer behavior, and other external factors.
It allows businesses to set flexible prices for products or services depending on the time of day, day of the week, customer demand, or special events.
This approach aims to maximize revenue and efficiency by aligning prices with the current market conditions.
As mentioned, dynamic pricing isn’t new. You’re already familiar with how it works if you’ve bought tickets to a concert, used a ride-sharing app, stayed at a hotel or Airbnb, or flown on an airplane.
The concept has been around for decades, and while they can’t take direct credit for the idea, the most notable example of it hitting mainstream was in the 1980s with American Airlines and what they called “revenue management.”
During a time when the passenger flight airline industry was going through some wild changes, American Airlines looked at consumer behavior and saw an opportunity to stay competitive.
By offering prices based on customers’ demand and a tiered traveling experience, American Airlines could consistently fill more seats on every flight and make more money.
For example, when most of us fly, we look at ticket prices weeks or even months in advance. Once prices start rising as we get closer to our flight date, we buy tickets to lock in an economical price.
Other people don’t care about planning ahead, or maybe they need to buy tickets in a last-minute situation. Either way, airlines can charge a premium for those same seats we got on the cheap, effectively mitigating selling us a low-cost ticket.
Everyone is happy, and the airlines make more money than they would if flying were a flat-rate offer.
So, what would that look like in the context of a restaurant?
How Does Dynamic Pricing Work In Restaurants?
You’re already familiar with several types of dynamic pricing within restaurants:
- Happy hour
- Seasonal menu items
- Special events pricing
- Early bird specials
Restaurants could take dynamic pricing further by adjusting menu pricing throughout the day based on demand or other factors like weather and local events.
For example, a restaurant close to a sports stadium could raise prices on game days due to higher demand without necessarily disturbing customer expectations.
That said, the only way dynamic pricing works in restaurants outside of scheduled times like happy hour, early bird, etc., is by leaning heavily on restaurant technology.
Restaurant operators need integrated software that analyzes sales and traffic data and connects with their POS to make real-time strategic price adjustments.
Dynamic pricing could be especially appealing to businesses that use digital menu boards, like QSR—adjusting prices would be simple and could be done entirely by software monitoring POS data.
Dynamic pricing can open new revenue possibilities by managing existing systems, like reservation software.
For example, Tablz, a guest fulfillment system software company, will make a 3D rendering of your dining room that connects to your reservation system.
Customers take a virtual tour of your restaurant and make reservations and special requests based on the preferred and available table.
Using systems like this, restaurants optimize busy times by charging a premium for reservations at frequently requested tables. According to Tablz, restaurants could make $65-$90 a year on reservations alone without the additional costs of goods or labor.
While dynamic pricing is a great option to mitigate rising costs, it does have drawbacks.
The first challenge is integrating dynamic pricing software with your current tech stack.
While theoretically, you could do it manually, I don’t recommend taking this route. It would be incredibly time-consuming, and the cost of labor alone would be more money than just paying for software.
There’s also the high probability that staff would make mistakes while shifting prices around—causing unhappy customers who are probably already dubious about your new pricing system.
It would erode trust and damage your reputation.
There are several companies specializing in dynamic pricing that can help—like Souffle.ai, an AI-powered software that offers “Smart Pricing” to monitor customer demand in real-time.
It considers factors like weather, competitor’s prices, and local events, then adjusts prices to maximize your restaurant’s profits.
Here are a few other tech companies that use dynamic pricing software:
After integration, there’s the most obvious challenge.
How will customers react?
There’s a lot of debate about dynamic pricing within the restaurant industry. Some people feel it’s “not fair” to customers to constantly fluctuate menu pricing, especially to regulars who have developed trust and loyalty in a restaurant brand.
Of course, there will be grumbling, but the idea is to ease people into the change by making smart cost adjustments, like adding one or two dollars to a dish, not doubling the price as you’ll see on ride-sharing apps.
The other step to customers accepting dynamic pricing is complete transparency about what’s happening—you can’t blindside guests with higher ticket prices when it comes time to pay.
Restaurants must take steps to educate customers about dynamic pricing and how it can benefit them.
Using dynamic pricing automatically causes a shift in operations that can benefit restaurant owners, employees, and customers.
For operators, fluctuating prices can bring in a consistent flow of traffic. Higher prices during peak times boost profit margins, while the lower-cost meals during slow periods bring in customers who’d typically not come in at all, resulting in a higher cover count and more revenue.
Workers win because dynamic pricing analytics help operators accurately predict scheduling, eliminating times with too many employees on the floor and giving staff a higher tip-out. During busy hours, sufficient staff coverage makes service a breeze.
When customers hear “dynamic pricing,” some might automatically assume “higher prices,” but with proper customer education, they’ll see it creates an opportunity for cost-conscious diners.
For example, Alinea, a world-renowned 3-Michelin-Star restaurant in Chicago, offers a 35% discount on their menu during slower days of the week.
Dynamic pricing brings in guests who would never have the chance to dine at such a prestigious restaurant.
Will Dynamic Pricing Catch On?
That boils down to two things:
- Customer acceptance.
- Robust tech that can handle the job
Certain restaurants can get away with dynamic pricing, like those offering online ordering or high-demand restaurants where reservations can fill for months, like Alinea. Still, it’s a case-by-case scenario with how well a restaurant can transition customers to a menu that might be a little different price-wise every time they dine.
It’ll require striking a balance between profit and fairness, but if enough restaurants transition to dynamic pricing, then with time, guests will grow accustomed to the idea.
Either way, restaurants are getting crushed by inflation, and dynamic pricing could be a solution many restaurants need.