Restaurant dynamic pricing isn’t a new concept but it’s one that’s seen more attention in recent years. It’s intended as a means to control the flow of customers into (and out of) your restaurant and allows you to more effectively make a profit during peak times. There’s a lot that goes into considering dynamic pricing for your restaurant, we’ll cover the basics below.
Introduction to Dynamic Pricing in Restaurants
Before we break down the pros and cons of restaurant dynamic pricing, it’s important to define what dynamic pricing is.
What is Dynamic Pricing?
Put simply, it’s the practice of adjusting your prices based on supply and demand, often centered around your busy and slow hours.
A great example of old-school dynamic pricing is happy hour; the period between when most people get off work and are generally home for the night is the perfect time for a slight discount. It gets customers in the door, encourages them to leave once the dinner rush begins and prices raise, and helps get a bit more volume into your restaurant during what is traditionally a slow period.
The Rise of Dynamic Pricing in the Restaurant Industry
There have been examples of dynamic pricing for years in the restaurant industry. Despite that, though, it’s only seen a major increase in popularity in recent years.
The rise of online ordering and delivery, both in and out of the restaurant industry, has been the major catalyst for dynamic pricing across industries. It started with airlines and rideshare services like Uber adjusting prices during busy times and eventually made its way into the restaurant circle thanks to third party delivery services.
The Pros of Implementing Dynamic Pricing in Restaurants
While we’ll get to the downside(s) of restaurant dynamic pricing in time, first we need to talk about the good it can do. From increasing revenue to a bit of added flexibility, restaurant dynamic pricing can be an incredibly handy tool to keep around.
Maximizing Revenue During Peak Times
The most obvious perk of restaurant dynamic pricing is its ability to increase revenue during your busiest hours. If there are days that you know will be packed every week (maybe due to an event night), dynamically increasing your prices slightly can allow you to maximize profits.
While this can take a bit of effort to truly nail down, finding the “Goldilocks zone” between too much and too little will pay off. Even a slight increase of ~$0.50 per plate can add up very quickly when serving hundreds of guests.
Flexibility to Adapt to Market Demand
Dynamic pricing restaurants are often able to adjust more effectively than those who don’t. While this, again, will take time and effort, it’s wonderful being able to find yourself in a lull and offer lower prices. It also provides a shockingly easy way to encourage table turnover, meaning you can regularly adapt to whatever the rush throws at you.
Arguably of more importance, though, is the flexibility that restaurant dynamic pricing offers for peak hours.
If you find that more guests have come in during a short time than you can reasonably accommodate, slightly increasing prices can accomplish two things. First, it’ll encourage those who don’t want to wait to move along, allowing you to serve those who can and will wait. Second, it encourages tables that have been lagging behind to leave; if they find out that drinks have raised in price since they first got there, chances are that you’ll be able to turn over the table pretty quickly.
Encouraging Off-Peak Sales
We discussed happy hour previously as one of the old-school roots of restaurant dynamic pricing. It was initially used as a means to encourage people to come in, grab a drink and snack, and get going — and as you likely know, it works wonders. Generally, the crowd that comes in for happy hour will have a plan to leave once happy hour is up, allowing you to more easily predict table turnover and service times.
More importantly, though, restaurant dynamic pricing allows you to get the best out of times that are traditionally slow. While a discount may seem like it does the opposite of making more money, it often encourages more people to visit. This, in turn, means that you can serve more people than you normally would during off-peak hours while selling low-effort, high-profit items like cocktails and appetizers.
The Cons of Dynamic Pricing in Restaurants
Unfortunately, restaurant dynamic pricing isn’t all good. It’s caught a bit of flack in recent news (more on that shortly) and, if implemented poorly, can be seen as dishonest or even outright manipulative. Let’s talk about the bad and, importantly, how to mitigate it.
Potential Customer Backlash
While it may seem like an obvious fact of life that changing your prices on customers could be seen poorly by the public, we’ve gotten a relatively recent first-hand example of exactly how badly it can go.
In February of this year, Wendy’s announced their intention to implement “surge pricing” (dynamic pricing) powered by AI. While they quickly backtracked this sentiment following massive backlash from their customers, claiming that they would not, in fact, implement surge prices, the damage was done.
The intention behind this move was to have AI dynamically adjust the menu display based on possible discounts and items that were out of stock, along with weather conditions and other variables. In practice, though, it led to the (false) perception that their menu would become more expensive.
Complexity in Implementation and Management
This fiasco has shown us exactly how difficult it can be to properly implement and manage restaurant dynamic pricing. Wendy’s, with all of their resources and national coverage, struggled to properly implement a transparent form of surge pricing. Some may argue that it could have worked with a better announcement and rollout, but that’s still unclear.
Ultimately, the reality is that restaurant dynamic pricing needs to be slowly rolled out and, importantly, that it will likely need a few test runs before you iron out all of the kinks. This is especially important if you plan to implement increased surge pricing, as those who are familiar with your menu will likely be less than pleased.
Impact on Brand Loyalty
We all know that price increases rarely go well, even when they’re sorely needed to account for inflation and increased cost of business. As such, restaurant dynamic pricing can (if poorly implemented) have the same result — disgruntled guests.
If your guests find that their regular days or times of the week for dining with you will become more expensive, it’s not unreasonable to assume that they’ll move along to another business. While that can be a painful realization, the truth is that sometimes it’s worth it. If you’re still bringing in new customers with increased prices, the loss of a few that pay less will be negligible over time.
How to Determine if Dynamic Pricing is Right for Your Restaurant
So, with the good and the bad out of the way, it’s time to talk about restaurant dynamic pricing for your restaurant.
Assessing Your Restaurant’s Market and Customer Base
As with most things in business, it’s important to examine your market and customer base before making major decisions. If your market doesn’t really use dynamic pricing, being the standout may not be the best decision. If, however, it’s a relatively common practice, you can earn a bit of loyalty by offering customers an incentive to come in during slow hours.
Similarly, your customer base will play a major role in deciding whether restaurant dynamic pricing is for you or not. The best way to determine this is to look at common price points in your area; if they’re generally higher than yours, chances are that you’ll be able to increase prices somewhat during peak times without too much issue. If, however, you already run on the higher end of pricing for your area, it’s very possible that your clientele won’t be willing to spend that extra cash.
Analyzing Competitor Strategies
As mentioned above, the market in your area will play a major role in how effective restaurant dynamic pricing will be. And, crucially, your market includes your competitors.
This makes an analysis of your competition and their pricing strategy vital to planning your own. Generally, it’s best practice to find the soft point in your competition’s pricing and fill that gap; whether that’s by lower overall prices or higher prices on the things they can’t offer, it’s an important part of keeping up in the game that is the restaurant industry. By extension, this means that even if you don’t implement dynamic pricing across your entire business, it may be beneficial to consider it in some parts or during specific time periods.
Evaluating Your Restaurant's Operational Capabilities
Even if restaurant dynamic pricing seems like a viable option for your restaurant in terms of the market and clientele, you need to evaluate your ability to effectively implement it. For example, if you were to implement a happy hour, could your business handle the increased traffic? Alternatively, if you increased prices during a surge in business, can you afford the possibility of a slow day?
This is ultimately something that will vary from restaurant to restaurant, but it’s a crucial part of deciding whether or not to implement restaurant dynamic pricing.
Considering the Legal and Ethical Implications
Dynamic pricing, while legal in the United States, Canada, and the EU, can come along with some ethical concerns. Over the years, we’ve seen accusations of price gouging across industries, ranging from ridesharing to airlines. While Wendy’s is the most notable example in our industry, the point is that this has become something of a touchy subject. In fact, just last month, U.S. Senator Sherrod Brown demanded more transparency from Uber and Lyft over their implementation of surge pricing.
Tips for Implementing Dynamic Pricing Successfully
Choosing the Right Technology Solutions
As with most aspects of modern restaurant work, there is a subset of technology that’s specifically designed to implement restaurant dynamic pricing. Generally, these will tie into your pre-existing POS and allow you to dynamically control prices in the moment.
Clear Communication with Customers
At the end of the day, we’re in the service industry. This means that you need to be incredibly transparent with your guests and, importantly, that you clearly state any dynamic pricing you may implement.
Generally, this is done with a note on the menu, though it can also be done on a personal level with servers. What matters, though, is that you don’t surprise guests with suddenly increased prices — instead, communicate when discounts will apply and encourage them to order during low-cost periods.
Testing and Adjusting Pricing Strategies
Over time, you’ll find that some strategies for restaurant dynamic pricing work better than others. One of the most important parts of dynamic pricing is that it’s, by nature, dynamic — which means you need to be, too. If you find that price increases don’t work, or that they’re more effort than they’re worth, consider adjusting your pricing strategy. Similarly, should you find that your pricing isn’t efficient, don’t be afraid to raise or lower them further!
Monitoring and Analyzing Results
Analyzing your numbers allows a clear, unbiased view on what’s working and what isn’t. This allows you to be flexible and adapt while showing whether or not restaurant dynamic pricing is worth it for you. While most people don’t love parsing the numbers, we promise — it’s worth the time.
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