The hospitality industry long ago adopted dynamic pricing models. Airlines, hotels, and even most recently entertainment giant Disney World have all adopted pricing models to maximize their margins. With dynamic pricing, companies are trying to understand the maximum price a consumer is willing to pay for each product at a particular time. Restauranteurs are just now embracing the concept and looking at how this could impact their bottom line and how easily it could be implemented across their locations.
Dynamic Pricing Essentials
Dynamic pricing begins with the data. Many restaurants have data sets from their point-of-sale systems that include historical transactions, which can be bifurcated by a variety of subgroups and layered with outside data sets to tell a story about the restaurant’s consumers. Data sets relevant to the restaurant industry can include the transaction day and time, the specific menu items purchased, the weather at the time of the transaction, if the transaction was on-premise or off-premise, if an event was occurring at the time of the transaction if it was purchased by a loyalty member, etc. The data would then be analyzed to understand consumer buying patterns. Some restaurants introduced dynamic pricing models years ago by offering early bird specials or discounts during happy hour to help shift the dinner crowds to earlier times when the wait staff had more capacity. But new models are being implemented as technologists analyze data sets and further test price elasticity for restaurants. For example, it’s likely a consumer would be willing to pay higher prices at a sports bar on Monday night during a college football championship game than any other Monday night during the same month. It’s also proven that pizza delivery sales spike when it’s raining outside. Restaurant owners can adjust their pricing to reflect these peaks in demand.
New technology companies are emerging to analyze this data and provide restauranteurs with instant feedback on how and when to change prices. As with any implementation, there are challenges facing the industry that still need to be understood. For example, how do you roll out menu prices to consumers? Some restaurants are using this only on their digital platforms that provide off-premise dining through pick-up and first and third-party delivery services. Other restauranteurs wishing to adopt this method for in-premise dining are using digital menus in the form of QR codes or kiosk menus. Questions continue to flow with the adoption of this new methodology. For example, if menu prices are changing throughout the day, how are open tickets handled when prices change before a ticket is closed out? For example, a customer orders a burger at $12 at 11:44 a.m., but the price surges at 11:45 a.m. to respond to a crowd rush during lunch. Ideally, the customer is grandfathered into the 11:44 price, but the restaurant’s point-of-sale systems must be able to accommodate the dual pricing.
We are at the tip of the iceberg for understanding how dynamic these pricing models can truly be. Many other data sets can be layered into the dynamic pricing model to ensure a restaurant operator is maximizing their profits. For example, a restaurant may want to keep its prices 5 percent lower than its competitors. Or a restaurant’s brand may be associated with certain deals, such Subway’s $5 Footlong, and be limited by which menu items can be adjusted. Perhaps most relevant in today’s environment, supply chain costs are highly variable and a restaurant’s costs of goods sold are higher than ever. Some dynamic pricing models can even integrate with inventory management systems to monitor the real-time inventory product costs while establishing pricing bands that automate price increases to menu items if ingredient prices exceed certain thresholds.
Dynamic pricing is entering the restaurant space and should be considered as a key to preserving eroding margins. The tech stack for restauranteurs will be important as they look to select a dynamic pricing technology solution and the subsequent integrations with their point of sale and inventory management systems. For more information about how dynamic pricing can impact your restaurant business and its profit margins, please contact your Windham Brannon advisor, or reach out to Maggie Wise.
