A short guide to dynamic pricing in restaurant

Since the outbreak of COVID and the crisis that emerged immediately after, the companies have needed to show an unseen level of flexibility. The most intuitive way to achieve it is to manipulate the menu and offers. Some more tech-sophisticated companies reach for dynamic pricing. But where do you even begin?

According to the “Future of Restaurants” report, the situation in the HoReCa business remains hard, even for the larger players. Staffing shortages are seen by 31% of all restaurants; according to the report, it has been more than 2 years since full staffing. Also, the National Restaurant Association names significant shortages and delays in supply—9 of the restaurants surveyed witnessed them. 

This situation has forced companies to implement greater flexibility in their operations. It is usually seen in the menu, which is modified and adjusted to fit the current needs. However, it is not the only way to implement flexibility in the workplace. One of the less common – at least in the restaurant industry – approaches is to pursue dynamic pricing. 

What is dynamic pricing?

Static pricing, in which the owner sets a price for a product or service and rarely changes it, is very different from dynamic pricing. This strategy is commonly used in offline businesses where the owner has little to no information about the customer and, as a result, no data to adjust the price to better suit their needs. 

In the dynamic pricing approach, the price is changed on the fly to better serve marketing and selling purposes. It is changed depending on multiple factors, starting from the purchasing history of the user, to the actual market situation, surges in demand, or the competitive environment—you name it. 

Depending on the technology used, the prices can be adjusted to the particular client, the time of day, or the demand. Yet it cannot be done by changing the printed price on the shelf or static display; it can be done only using digital devices. 

Examples of dynamic pricing in other businesses

There are multiple businesses that use dynamic pricing to gain benefits and maximize income. Examples include: 

• Ride-sharing – Uber and Lyft adjust their prices to the weather conditions, with stormy, rainy, or snowy weather witnessing a surge in price in response to the greater willingness of the user to take a ride instead of a walk. 
• Airlines – the “last minute” offers can change within minutes, depending on the demand and the time left to a flight. For ordinary folks it is reasonable to buy tickets in advance, while business people often need to make an ad-hoc purchase for an unexpected trip, making them more eager to buy an overpriced ticket. On the other On the other hand, it might make sense to sell an extra ticket a few minutes before a flight for a lower price just to make up for the money lost by transporting an empty seat. 
• e-commerce – with the sophisticated machinery of marketing automation and digital selling platforms, e-commerce can do wonders with dynamic pricing, adjusting it not only to particular use but also to one’s purchasing history, purchasing journey, or a plethora of other factors. 

How are prices determined (and how frequently changed) in QSR

According to QSR magazine, prices in restaurants are rarely dynamic. Most QSR companies use predictive analytics mixed with pricing elasticity and gut feelings to determine the price. And this approach worked, 

The article shows that the majority of respondents (35%) were adjusting prices every hour, 25% had done that once a day, and one in six had weekly changes. Another quarter has chosen to change prices once a month. This said, it is rarely a tool to optimize income in a more sophisticated way. The poll also included questions about the technology used and the dynamics of price changes, as well as technological proficiency and abilities. 

Considering that, the HoReCa business has great potential for improvement when it comes to dynamic pricing. 

Dynamic pricing in restaurants

Running a restaurant is a business of fixed capacity; there are a limited number of tables to be filled and a finite number of dishes that can be prepared at once. In a perfect world, the restaurant would run on the edge of capacity. Yet the world is far from perfect and comes with challenges. 

Benefits of dynamic pricing

Dynamic pricing is adopted in a growing number of sectors and businesses, mostly due to the rising number of benefits it comes with. These include: 

• Better margins – the ability to adjust the price to make it the highest possible, yet remaining competitive greatly improves profit margins. The gap between the current price and the highest possible one can be considered a lost profit. Letting it leak during the crisis is unreasonable. 
• More fitting offer – dynamic pricing can be used to deliver a more fitting offer, encouraging the customer to buy complimentary products or pick an addition that fits one’s preferences. 
• Less waste – the prices in the restaurant can be adjusted in the manner the airlines do so. Some sets and dishes can be sold at a lower price to prevent food wasting, especially if there is a risk of food being spoiled. Having some ingredients higher in stock, the restaurant can just dynamically lower the price to sell the overstock. 

Challenges of dynamic pricing

Dynamic pricing comes as a solution to multiple business problems at multiple companies. Yet it is far from easy for several reasons. 

• Technology – implementing the dynamic pricing approach requires using a sophisticated tech solution that becomes even more complicated with the increasing number of purchasing channels available to the customer. For example, the pricing may vary in the locale, in the direct order on the website or in the food ordering app like Uber Eats. Ordering Stack is a perfect example of a digital tool that enables this way of doing business, as well as supports the restaurant in solving other challenges like order scheduling and management. 
• Potential customer dissatisfaction – the customer may feel confused to see the different prices every time one visits the restaurant. This can be challenging to communicate, especially if one sees prices constantly rising in the most popular hours and categories. 
• Deep analysis and analytics culture required – dynamic pricing is a never-ending loop of feedback gathering and optimization. This requires dedicated time and resources to do so, experiment constantly, and analyze the outcome. It is basically about readjusting the whole business model from business-as-usual to a more digital mode. 

Summary

Dynamic pricing is a powerful tool to tackle the harsh times that have come with the modern business environment, like inflation and rising prices of goods. But putting them into action is hard and would require help from a tech partner with experience. 

If you wish to talk more about how to approach this task, don’t hesitate to contact us now!