Dynamic pricing is gathering a lot of momentum in the press as of late, specifically its adoption in the restaurant industry. Other industries that have adopted dynamic pricing seem to serve as proof of its validity and success which fuels interest with leading restaurant brands. While the idea of having the power to optimize pricing models based on market conditions sounds like a good idea on the surface, it does come with very real potential drawbacks.
First, let’s level set on what dynamic pricing is for those not up to date. Dynamic pricing is a variable pricing model that adjusts charged fees based on various market influences. In normal people terms, it’s about changing the price for goods and services based on outside factors like cost of goods, weather, demand, and so on. It serves as a way to mitigate, or eliminate, dents in profit margins by passing through those costs directly to the consumer.
Many other industries have successfully adopted dynamic pricing models, or at least it seems they have. Energy providers have separate rates based on the time of day to help alleviate system loads. Mobile providers used to have the same features back in the 1990s. More recently, dynamic pricing serves as the pricing model for ride hailing apps like Uber and Lift. Finally, we’re all quite familiar with how the travel industry employs dynamic pricing models. If you’re not, just simply refresh your screen while looking for a flight. You won’t be happy when you realize that your own search has created a sense of demand and therefore is jacking up the costs of flights with every refresh.
For restaurants, the appeal of dynamic pricing is obvious. Our industry is constantly plagued by multiple financial threats. Every week a new one seems to manifest causing varying degrees of pivoting at every level. Additionally, the very nature of patron buying behaviors has created the need for bumping up traffic and sales. Mondays are notoriously bad days for most restaurant brands. Historically, many of those brands have launched discounts and coupons to help create lift on those slow days, as a result. This time-based approach to deals is the most baseline level of dynamic pricing models.
Today, dynamic pricing can be algorithmic, as seen in the travel and rideshare industries. That automated approach creates a big opportunity for restaurant brands who feel the pains of market conditions at scale. This is why this pricing approach is heating up in leadership circles. But enterprising leaders should beware. While dynamic pricing promises reprieve, there is a downside to embracing and deploying this approach. Here are just a few of the main ways dynamic pricing could be a burden to a restaurant brand.
Negative experience for patrons
Dynamic pricing can come across as exploitative to your most valuable guests, the loyal ones. It creates a negative experience when they realize that today their go-to favorite is a dollar more than yesterday. For those who watch their budgets tightly, this becomes extremely problematic especially if the details of why the pricing has changed is not well communicated.
Infrequent patrons aren’t immune to the negative experience either, especially if the pricing volatility is into the dollars, not cents. Since this group of patrons has little loyalty for the brand, dynamic pricing can scare them off permanently making it extremely difficult to attract them back.
In both of these scenarios, the result is losing patrons. It may not happen overnight, but it will happen. With every wave of negative pricing experience, their loyalty gets worn down. it won’t be long before they’re walking through the doors of a competing restaurant.
Encourages price shopping behaviors
One of the downfalls of couponing is also a downfall of dynamic pricing. It encourages pricing shopping. Why purchase the cheeseburger on Tuesday at noon when it’s at its most expensive? You can get it Wednesday night for half the price. These types of evaluation questions will start to manifest in more frequency as a dynamic pricing model is in effect. Eventually, patrons get savvy to the fluctuation patterns and adjust their behaviors accordingly.
Not everyone will pick up on the patterns and a restaurant leader can certainly bank that enough will not. I argue that’s a big misstep. The path to healthy growth is not found in the highly expensive new trials business, it’s in the loyalty building business of the restaurant industry. Dynamic pricing crushes loyalty and instead creates commodization.
Morphing a restaurant experience into a commodity is the obvious result of all of this. Just go back and look at the industries where it has been adopted and deployed. What do they have in common? They’re commodities.
Airlines constantly struggle with loyalty. Instead they rely on miles, which is simply another way of couponing. In this example, not only are airlines balancing cost of flights against competitors, they’re also trying to squeeze as much revenue from the passengers. Then, they lose money on offering miles on the other side of the transaction. As much as I love stroopwaffles, miles and those tasty snacks aren’t going to get me to pay $50 more for a flight on American Airlines.
People like stability more than anything else
People, by their very nature, seek out stability and certainty. In an era where restaurant leaders are faced with so many challenges every day, it’s easy to be myopic and focus solely on the bottom-line benefits. However, Patrons are also experiencing constant waves of challenges that threaten their bank accounts and financial stability.
The instability of dynamic pricing creates more instability in an already volatile consumer reality. Restaurants are supposed to be a break from that. While patrons fill their bellies, they’re also seeking a time out from the stresses of everyday life. Dynamic pricing strips that away and instead creates a habit of laser focusing on the price which creates more stress and frustration. It deteriorates positives of experience driven brands, and puts the focus on the money and the perceptions of exploitative pricing practices.
As much as leaders look to the aforementioned industries as proof of dynamic pricing’s potential. I encourage them to dig deeper into the nuances of those industries. One will easily find a Pandora’s Box of brand-related problems in each of them. Dynamic pricing creates critical challenges with effects that nearly impossible to rectify. It’s a course that cannot easily be changed.
The questions leaders need to ask themselves are: Are we ready to strip away the core tenets of hospitality to overcome market fluctuations? Are we ready to shove restaurants into the world of commodity once and for all?
My hope is the answer is no. Instead, we should be patron-first as an industry and seek to find better pricing models that benefit all parties.
Joseph Szala serves as Managing Director for Vigor, a PMG company. In his 20+ years of experience, he has led the charge in developing hundreds of restaurant concepts from quick to full service, and everything in between. He’s the host of Forktales podcast, and chief curator and critic at Grits & Grids.