QSR April 2023

MENU INNOVATION

When I go back and look at pricing from a revenue manage ment perspective—something I’ve been doing for over 30 years—there are two fundamental pricing questions that need to be addressed: One, what prices should be charged? And two, how to determine who pays what prices? Answers to both are equally important, but I would argue that even if the prices aren’t exactly optimal, a company can achieve significant rev enue increases from having a reasonable (as in OK) set of prices if they’re able to do a good job of segmenting their customers, as in determining who gets which price. Let’s begin with what prices should be charged. That’s essen tially what dynamic pricing is all about. So, what is it? We asked just that question. Pretty much everyone thought that dynamic pricing means prices vary based on demand, but they had all sorts of thoughts on what that meant.

HOW FREQUENTLY ARE PRICES CHANGED? Opinion on the frequency of changes also varied. For example, in a LinkedIn poll we conducted, 35 percent of 274 respon dents opted for hourly price changes, about a quarter for daily changes, about a sixth for weekly changes, and another quar ter for monthly price changes. Similarly, in the survey, clearly, there’s a variety of opinion. Theoretically, prices can be changed as frequently as a restaurant wants to change them, but in practice, they’re usu ally changing at most a few times a day. For example, with DynamEat, restaurants can change prices as many times as they want, but most opt to change them by meal period. At Juicer, prices change at most a few times a day, while at Sauce it largely depends on what the restaurant group wants. Priceff changes their delivery prices every 10 minutes while at Reve nue Management Solutions, they typically change prices several times a year. HOW ARE PRICES COMMUNICATED TO CUSTOMERS? Let’s go back to the fundamental pricing questions of revenue management. The first question was about determining which prices to charge and the second is on determining which cus tomers pay the different prices. The answer to the first is more based on math (forecasting, elasticity, and the like) while the answer to the second is more based on market segmentation and consumer psychology. This segmentation can be done by things like day of week, time of day, by meal period, by loyalty status, and by frequency of purchase. Essentially these are the reasons why customers pay different prices (in revenue management, we refer to these as rate fences). When there isn’t a particular reason—other than high or low demand—why customers pay different prices, customers may view the prices as unfair and choose not to patronize that restaurant. As the airline and hotel industries have learned, the way different prices are communicated to their customers so that guests have some control over the price they pay is crucial for the success of dynamic pricing and revenue management. THE WHY OF DYNAMIC PRICING So, in general, dynamic pricing is all about prices varying based on demand. OK, but why would a restaurant adopt the approach? Given my experience in the hotel and other indus tries, I can think of many reasons, but decided to ask the survey respondents what they thought. Not surprisingly, the top reason (92 percent of respondents) was to increase revenue. But reasons No. 2 and No. 3 might surprise you. The second-most chosen response (82 percent) was to spread demand to slower periods, while the third was to better manage capacity (70 percent). To me, this indicates a good understand ing of the fact dynamic pricing is not just about increasing prices during busy periods. REASON NO. 1: INCREASE REVENUE The hotel and airline industries typically achieve 3–5 percent revenue gains with revenue management and dynamic pric ing. Dolan and Simon, in their cross-industry study on pricing,

The responses ranged from quite general (“changing prices based on a number of factors”) to quite specific (“personalized prices … served up to a consumer.”) I decided to ask some of the dynamic pricing companies what their definitions were. Carl Ors bourn and Ashwin Kamlani of Juicer told me “dynamic pricing is ensur ing the right price at the right time for each sales channel to optimize a restaurant’s profitability and the

DYNAMIC PRICING IS ALL ABOUT PRICES VARYING BASED ON DEMAND

guest experience,” while Colin Webb, from Sauce, explained “dynamic pricing is the practice of updating prices in response to variable inputs.” Revenue Management Solutions’ Jana Zschieschang stated, “dynamic pricing is the process of adjust ing prices based on customer demand.” Javier Espinosa of DynamEat said they consider dynamic pricing to be a strategy in which every item on the menu is priced differently “depend ing on factors like demand level or customer profile in order to obtain the maximum profitability while driving demand.” Axel Hellman told me Priceff considers dynamic pricing to be “fully automated pricing based on real time demand and avail able capacity.” Essentially, dynamic pricing is all about prices varying based on demand. The concept makes sense, but how is it done? Specifically, one, how are the prices determined, two, how frequently do they change, and three, how are they com municated to customers? HOW ARE PRICES DETERMINED? The dynamic pricing companies mentioned above tend to use a combination of forecasting and price elasticity to determine the “optimal” price for each menu item. That being said, it’s not always 100 percent necessary to have the “optimal” prices. For example, up until a few years ago, hotels and airlines didn’t even have optimal prices, but instead had a range of prices they systematically opened and closed based on demand. They were also extremely effective at using rate fences to segment their customers.

ADOBE STOCK / PIXELROBOT

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APRIL 2023 | QSR | www.qsrmagazine.com