Most people are quite familiar with the concept of dynamic pricing. If you’ve ever bought a plane ticket or rented a car you know exactly the meaning of dynamic pricing, more demand, the higher the price, lower demand, a lower price. Sports teams have also embraced dynamic pricing by charging more for ‘premium games’ against top competition and for games played on the most popular days of the week. Monday would not be one of those days for all but NFL football. Broadway shows also engage in dynamic pricing for a good reason – they often have the data to help drive their pricing decisions.
So why in general haven’t restaurants adopted dynamic pricing? There are a number of possible reasons.
- Data is not available to accurately track and predict traffic. Mom and Pop restaurants in particular.
- Margins are so small already for most that offering a lower price simply eats up profit .
- A few restaurants are so busy already there’s no need to consider this type of marketing.
- The concept of lose money but make it up in volume is tricky at best.
‘Happy Hours’ are a type of dynamic pricing. The idea of being able to drive business in slower times in the afternoon and late nights has been around for a long time. My guess is that most restaurants continue to use ‘Happy Hour’ marketing is that they have a feeling that it is working. But they don’t really know.
‘Early Bird’ specials (in some places still known as ‘Blue Plate’ specials) are another form of restaurant marketing. It makes sense in theory. Restaurants can be successful through an:
- Increase in customers paying checks. i.e. fannies in the seats
- Higher average check per customer
- Increase in visits per individual customer
- Increase in higher margin items
Are people really ready for a sandwich to cost less at 3PM than it does at Noon? It may seem obvious but A Forbes Magazine article from earlier this year offered this about dynamic pricing in general not limited to restaurants:
Despite these practices, the use of dynamic pricing appears to be on the decline overall. In RSR’s survey, in 2016, 28% of respondents saw dynamic pricing as an opportunity to drive margin, but in 2017 that number fell to 22%.
What gives? Well, one explanation is that consumers don’t seem to much care for it. We floated a small consumer survey alongside our pricing research, and we found that 71% of U.S. consumers surveyed didn’t like the practice, and another 23% thought it was merely “okay.”
So apparently consumers do not like dynamic pricing or at least are not yet ready for it. Enter Big Data to the picture and, at the very least, there will be empirical data points to drive decisions.
Another chart I found from the Forbes article:
Even with that small group’s enthusiasm, a majority of younger millennials still don’t care for the practice – 61% don’t like it, and almost half of those actually hate it. Older generations are even more against the practice, with 80% of Boomers showing no enthusiasm for it.
Given the way millennials tend to view other pricing practices, like an enthusiasm for deals well beyond other generations, it may be that millennials are just confident in their ability to game retailers’ dynamic pricing practices. They tend to be more tech-savvy and more willing to devote time to scouring the internet for the best prices, so they may approach dynamic pricing more informed about whether a price drop is worth acting on or not, and with more of a sense of whether their behavior or the actions of other retailers might trigger a price drop at another retailer as well.
Gaming retail dynamic pricing practices may be ok to millennials but it does seem like an awful lot of work.
The restaurant industry in the U.S. has been in part responsible for the job recovery as people’s habits have changed and we eat out more than we ever have before. At the same time it’s never been more challenging to be in the restaurant industry particularly if the restaurant is not part of a larger group that offers economies and efficiencies of scale. Restaurants will always be looking to reduce costs while maintaining what they consider to be their raison d’etre offering either good food at low prices, luxury/high class dining experience, or a hot scene. Serve yourself restaurants are also a way to reduce labor costs but still deliver a premium food experience at a lower cost.
I don’t know that I am ready for true dynamic restaurant pricing but I do expect more restaurants now that they have more data to give it a try.
An article from Neil Irwin of the NY Times this past Sunday delved into the practices of surge and dynamic pricing.
What do you think about dynamic pricing for restaurants?