Dynamic pricing isn’t new: It’s been used in the hotel and travel industry for years. McKinsey defines dynamic pricing as “the (fully or partially) automated adjustment of prices.” But even if the term is unfamiliar, most people understand the concept from their travel experiences.
Think of the last time you planned a trip. Chances are, if you waited until the last minute to book a flight, the ticket price was much higher than if you’d booked three weeks in advance. The ticket price can vary depending on the day and time you fly — and that price variation can also depend on the day you make your arrangements.
The hotel and travel industry, as well as some large eCommerce retailers, use dynamic pricing to optimize revenue by increasing prices when demand is up (during peak periods) but also by decreasing prices to draw customers in when demand is down (during off-peak times).
Although dynamic pricing is not used as commonly in the restaurant industry as it is in others, now may be the perfect time to explore it as a pricing strategy.
Restaurant challenges continue
Even though restaurants are welcoming guests back to indoor dining, the challenges restaurants face from the pandemic are far from over. When indoor dining wasn’t possible, many restaurants pivoted to online and delivery. The Square Future of Restaurants report found that 54% of restaurants surveyed added or expanded options to take online orders over the past year. Restaurants have to stretch their staff to meet those augmented needs. This comes as restaurants face staffing shortages: 73% of restaurants reported experiencing a labor shortage and have an average of 21% of positions unfilled.
As a result, some restaurants are reducing hours and decreasing menu items. Others are raising hourly pay rates to above minimum wage to attract and keep staff.
But it’s not just a shortage of workers that restaurants are coping with. They are also dealing with supply chain and material shortages. These shortages result in significant price increases in the cost of goods.
According to the National Restaurant Association:
- 95% of restaurants have recently had significant supply delays or shortages of key food items
- 75% of restaurants changed their menu because of supply chain issues
The National Restaurant Association said that in September, wholesale food prices had the highest 12-month uptick since 1980 — a time of double-digit inflation. Restaurants saw this sticker shock firsthand and when commodity prices for beef increased 57.7%, fats and oils went up 49.6%, and egg prices increased 39.2%.
Dynamic pricing for restaurants
To juggle these multiple challenges, many restaurants are joining other industries by implementing dynamic pricing strategies. Restaurants have a fixed capacity, so keeping tables filled with guests is the ultimate goal.
Additionally, by their nature, most restaurants have the flexibility to adjust their pricing as needed. They have peak and off-peak times, which can include certain hours, days of the week, or even seasons. Restaurants also have perishable inventory, which means there’s an additional incentive to have flexible pricing when necessary. The same Square report found that customers are pretty understanding of pricing changes right now, with 77% saying they would understand if their favorite local restaurants raised prices.
Using dynamic pricing in restaurants
It’s critical to remember that a dynamic pricing strategy isn’t “surge pricing,” like when gas prices skyrocket after a pipeline shuts down. That practice can alienate customers.
Instead, dynamic pricing offers real-time pricing changes based on demand, going up or down depending on need. Restaurants can use excess inventory, like perishables, by featuring them in menu items during the off-peak times. In contrast, restaurants can offer more of their high-profit margin products during peak times.
In addition to using dynamic pricing based on demand, restaurants can use it to create a sense of excitement and urgency among diners searching for a great deal. Remember: Getting them into the restaurant is the hard part. Just like with any business, it’s easier (and cheaper) to satisfy a current customer than to win over a new one.
With more restaurants embracing technology and looking to automate their back-of-house tools, dynamic pricing is easier to implement across all of your ordering channels. Sixty-two percent of restaurants say that automation would fill critical gaps in managing orders placed online, at the restaurant, and via delivery apps. Adding digital menus to the restaurant allows for immediate adjustment of prices, and QR code digital menus and Self Serve Ordering have the added benefit of freeing up time for staff to focus on other tasks outside of taking orders. Ninety percent of restaurants agree that increased automation for back-of- house operations would allow staff to focus on more important tasks.
Restaurants are looking at new ways to thrive in a constantly changing environment. Dynamic pricing gives them the flexibility to ensure the price fits the demand. If you’re looking to explore dynamic pricing, the most important thing is to be transparent about pricing and let customers know when and why you are doing it. By implementing this strategy effectively, restaurants can have more control over their bottom line while offering current and prospective customers pricing options that are seen as a value, not a takeaway.