Restaurants depend heavily on the loyalty of their patrons. Since people tend to pay attention to how much they're paying for their food, changing menu prices is a dangerous game for restaurants. That’s why dynamic pricing in restaurants hasn’t been common in the past.
Nevertheless, more and more restaurants are finding that dynamic pricing can significantly increase profits, offsetting the struggles restaurants are having with staffing and food prices.
Not only do customers not seem to mind, many appreciate the savings a dynamic pricing strategy can offer. Here's what you need to know about why restaurants are looking into dynamic pricing and how you can implement a dynamic pricing strategy for your restaurant.
This approach to pricing is a departure from how a business usually charges for its products or services. Instead of fixed prices for a particular item, dynamic prices change depending on all kinds of factors which are determined by the business and the industry.
Dynamic pricing in the restaurant industry can mean lowering prices to increase traffic during slow hours, increasing prices for specific menu items to reflect changes in ingredient costs, or increasing prices across the board during seasonal rushes, among other things.
Restaurants have not historically been quick to implement this kind of pricing strategy, and there are many reasons for this. Dynamic pricing is more commonly used in retail environments, where varying prices are less obvious to consumers, or in the hotel or travel industries, where changing rates are generally accepted.
Frequent patrons of a restaurant are likely to notice changes in price for their favorite menu item. For a business like a restaurant, which depends so heavily on consistency from their patrons, taking a risk with alienating customers isn't worth the potential benefits of dynamic pricing.
That said, restaurants have been using some forms of dynamic pricing for years without customer pushback:
Restaurants have long utilized dynamic pricing to equalize the rush periods that are typical of the industry. Menu rates aren't usually decreased across the board, but drinks or appetizers may be half off or otherwise discounted, or there may be select menu items available at reduced prices. “Happy hour” is a classic example of this kind of dynamic pricing strategy.
Restaurants operating in places with heavy seasonal traffic changes, like vacation areas, typically charge much higher rates during the “high” season. Restaurants need to charge the highest rates they can to make money when they're busy, but then drop prices so that they can scrape by during the off-season by attracting locals.
Delivery apps have been some of the first to venture into dynamic pricing in restaurants. When demand for these third-party drivers is high, the system automatically increases prices, motivating more drivers to get on the road.
Customers are tolerant of the rate increases because they are built into the algorithm of the system. Furthermore, it works both ways. Customers can also take advantage of this system by choosing to get deliveries during slow periods when rates are low.
Restaurants are taking advantage of this technology directly as well. A pizza chain in Finland is utilizing dynamic pricing to develop varying prices for pizza delivery depending on demand. The cost can change by around six US dollars.
A number of restaurants are utilizing dynamic pricing technology to price signature dishes differently and adjust pricing depending on what competitors are doing. Some companies can adjust every item on a menu automatically. The prices can be set by the level of demand or even a customer profile.
The big question when it comes to dynamic pricing in restaurants is how patrons will respond. Customers who are accustomed to going to their favorite restaurant and ordering a particular menu item for a particular price may not be happy to suddenly see varying prices for their favorite meal.
On the other hand, when a dynamic pricing strategy is implemented properly in restaurants, it seems that customers respond well. Dynamic pricing is particularly well-received if it is framed as a discount.
Customers are okay with prices varying by time of day, week, or year, especially if they can take advantage of those variations to save money. However, customers don't want to go into a restaurant and pay a different price for the same menu item as the person eating next to them.
In fact, some restaurant patrons seem to be very happy with appropriately applied, transparent dynamic pricing. Price-conscious customers can choose to dine or order delivery during times when prices are set lower, potentially saving a lot of money. Of course, restaurants also benefit by spreading out the rush hour and equalizing traffic.
Keep in mind that the more complicated the algorithm for determining dynamic pricing, the more challenging it can be for patrons to consciously take advantage of reduced prices and see the benefits of dynamic pricing.
While some concepts of dynamic pricing, such as happy hour, are easy to implement in a restaurant, the modern concept of dynamic pricing, in which algorithms determine how things should be priced day by day or even hour by hour, is likely not right for every restaurant.
Ignoring dynamic pricing in restaurants entirely may mean leaving money on the table, but advanced technology to devise a complete dynamic pricing strategy is a huge investment that the average restaurant isn't able to make, especially considering the potential risks in customer satisfaction.
The best solution for your restaurant may lie somewhere in between complete dynamic pricing technology and static pricing. Here are a few ideas to help you decide how to use dynamic pricing in your restaurant:
Determining pricing based on ingredient costs is one of the ways to adjust menu prices that is most acceptable to customers. Increasingly, today's customers are interested in food that is sustainable.
Instead of emphasizing that some foods will cost more because the ingredients are expensive or in short supply, emphasize that other menu items are very affordable when ingredients are readily available, and that varying prices in this way significantly reduces waste.
One of the easiest ways to utilize dynamic pricing in restaurants is with happy hour. By automating happy hour, you can increase earnings and ensure that menu items are always entered at the appropriate rate.
Whatever kind of item you want to discount, whether appetizers, drinks, a subset of cocktails, etc, can automatically be discounted by the desired amount. Automatic time parameters ensure that the discounted pricing starts and stops on time.
A loyalty program is a great place to play with a dynamic pricing strategy, because customers are already accustomed to getting different prices for the same thing due to their loyalty points. Send an email or text message announcing that points will be doubled for a period to encourage business during slow times, or promote special discounted prices for loyalty program members to increase patronage.
As long as you have a loyalty platform that can send personalized messages or emails, effortlessly control loyalty points, and encourage customers to join, you'll be able to see the benefits of dynamic pricing to make your loyalty program more effective.
Customers are not yet used to wide-scale dynamic pricing in the restaurant industry and there's no question that food is one of the things customers are most likely to notice in relation to price changes. Therefore, you'll want to use some tact as you adjust your customers to your new system. Here are a few tips:
If a regular walks into your restaurant and suddenly finds that their favorite menu item is significantly more expensive without explanation, you're likely to lose that customer, not just for the day, but for good. Explain varying prices openly and frequently.
It's a good idea to put a notice on the menu, announcements on your website, and post anywhere else you can think of to get your customers’ attention. Emphasize the benefits of dynamic pricing for customers.
It will be a shock to customers if you change all of the prices on your menu at once. Instead, ease into dynamic pricing by making the prices of a few items variable at a time. Lean heavily into marketing happy hour discounts while gently explaining that prices for lunch and dinner times may increase, well before you actually increase those prices. If you experience a lot of pushback, don't be afraid to back off and slow down. It's not worth sacrificing customer loyalty to incorporate a dynamic pricing strategy.
You may not be ready to completely change your pricing strategy to make prices flexible depending on multiple factors, but there's a lot you can do to incorporate a dynamic pricing strategy into your restaurant.
Consider automating happy hour, basing menu pricing on the cost of ingredients, or using your loyalty program to experiment with dynamic pricing. As you and your customers get comfortable with fluctuating prices, you can go further into changing the way you think about pricing at your restaurant.