Should Restaurants Move to Dynamic Pricing?
There’s a compelling reason for restaurants to move to dynamic pricing. But what exactly is dynamic pricing? And how can restaurants — whose business model is notorious for having narrow margins — employ a dynamic pricing strategy?
Dynamic pricing has been adopted in numerous hospitality and customer-facing industries.
Major airlines do it. Utility companies do it. Hotels do it. The latter even has revenue managers whose primary job function is figuring out what to charge for a room at any given time.)
And of course, online ticketing platforms that sell admissions to sports and entertainment events do it.
In short, dynamic pricing is everywhere. It's even in our Restaurant and Culinary Management program... as a topic of conversation and learning.
What is dynamic pricing?
In its simplest terms, dynamic pricing is the adjustment of product prices in response to fluctuations in consumer demand for said products.
A robust dynamic pricing strategy can also include adjustments to product prices in response to production and landed costs. (The latter includes things like shipping costs and tariffs.)
Dynamic pricing benefits
The benefits of dynamic pricing can be substantial.
Consistent margins
A dynamic pricing strategy allows you to keep your margins consistent. If your goal was to have your COS (Cost Of Sales) stay, as an example, at 32%, by adjusting your price based on what you last purchased the product(s) for, you would consistently maintain your margin.
To become and remain profitable, restaurateurs have to concern themselves with KPIs (Key Performance Indicators). Besides labor and occupancy (which is typically a fixed cost), COS is a ratio (KPI) that is necessary to maintain one’s profitability. It would solve a big problem.
(Understanding this jargon, by the way — and knowing how to leverage it to your business advantage — is a key part of the curriculum at our New York campus and in our LA restaurant management coursework.)
Offsetting rising labor costs
Dynamic pricing helps with labor as well (for the same reason it helps with COS). If pricing goes up alongside labor costs, your KPI remains intact.
And, lowering your pricing during off hours can help to pay the rising cost during slow periods of the day or year (especially for a seasonal business).
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Dynamic pricing risks
The primary dynamic pricing risk centers on public perception. Customers can't set cost expectations and often only remember the "bad things" that happened around price changes — which can seriously harm your long-term business strategy.
Significant fluctuations
Customers often perceive that prices only go one way: in short, once a price goes up, it's not likely to go back down.
And if your prices go up too high or too often, customers will remember the increase and the frequency — and forget the stabilization.
Comparison shopping
Pricing sensitivity is at an all-time high. Value perception is very important to the dining public. Due to the internet and social media (to a lesser extent) and online reservation systems, price shopping has been simplified.
Will customers understand that your pricing is different solely because of the time of day? As a restaurateur, you may be willing to charge less for the same menu item purchased at 5:00 pm or 10:00 pm versus 8:00 pm.
Possible regulatory issues
In 2023, New York State Attorney General Letitia James’ office proposed a series of rules governing enforcement of New York State’s Section 396-R of the General Business Law, which restricts price gouging.
One rule states, “The proposed rules establish a presumption that price increases during a disruption beyond 10% are unconscionably excessive if they are not needed to preserve margins."
While the proposed rule in New York is limited in scope, it may signal coming regulatory battles over pricing as inflation continues to eat at consumer disposable income.
Can a dynamic pricing strategy work for restaurants?
The National Restaurant Association, in its State of the Industry 2023 report, claimed some 79% of adults have a favorable view of variable or dynamic pricing.
In order for dynamic pricing to work, communication is key.
How do you explain this model to consumers (your diners)? Will they understand or reject this method of pricing? While some risk is inevitable, I believe over time this method will become more prevalent, especially in these times of pandemics, fluctuations based on supply chain, international uncertainty and stability, etc.
How will the dining public react? We will see.
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