Should Restaurants Move to Dynamic Pricing?
ICE's Executive Director of Industry Relations Rick Camac examines the feasibility of a new way of restaurant pricing.
There’s a compelling reason for restaurants to move to dynamic pricing. But what is dynamic pricing anyway? And how can a business model notorious for having narrow margins employ a dynamic pricing strategy?
Dynamic pricing has been done in many other hospitality-focused industries for years.
Major airlines do it. Hotels have revenue managers whose primary job function is to figure out what to charge for a room at any given time. Online tickets to sports and entertainment also fluctuate based on demand. Utilities work that way as well.
What is dynamic pricing?
There are a number of definitions available but, simply put, the typical dynamic pricing definition is the adjustment of pricing due to demand (or lack thereof).
A robust dynamic pricing strategy also often includes room for adjustments due to the change in the product(s) cost (especially when fluctuations may be great).
Dynamic pricing benefits
The dynamic pricing benefits are substantial.
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.
Whether due to supply chain, pandemics or other cost swaying reasons, cost for products has never, in recent times, fluctuated to the degree it does today.
To become or 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.
Offsetting rising labor costs
Dynamic pricing helps with labor as well (for the same reason it helps with COS). If pricing goes up along with rising 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).
Dynamic pricing risks
The primary dynamic pricing risk would be that customers would not know what they’re paying at any given time.
The fluctuations in pricing may be great. Chicken increased by 13% over the last year, and at one point was closer to double that number. Other products had similar price fluctuations.
Once a price goes up, is the venue really going to bring it back down? They should, as they may no longer remain competitive, but there would be consumer concern that fluctuations only go one way.
At times, a venue that raises and lowers pricing may be deemed to not have competitive pricing. If I raise the price of my egg dishes (based on rising egg costs) and my competitors don’t, I surely could lose business.
Also, 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 becomes easy. You could lose diners based on the perception that your pricing is too high.
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
To note, 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 worse, dislike 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.
More from Rick Camac: What to Look for When Hiring for Hospitality