QSR April 2023

MENU INNOVATION

found a 1 percent increase in price led to a 12 percent increase in profit. If you can maintain your current sales volume, the profit potential is even higher. Let’s take a look at the revenue gains some of the pricing companies have been able to achieve. Koti Pizza achieved 6 percent increase in revenue by using Priceff’s dynamic pricing for delivery. DynamEat, in its work with a multi-unit restaurant chain, was able to increase the margin for dinner by about 15 percent without reducing volume. Similarly, Piada was able to double delivery margins by using Sauce Pricing. Given the experience of the airline, hotel, cruise line, and multiple other industries, I am confident that appropriate use of dynamic pricing will lead to increased revenue and profit. Please note my use of the term “appropriate.” Appropriate entails increasing profit without affecting customer satisfaction. As Orsbourn of Juicer states, “surge pricing is not the best way to describe how dynamic pricing can help restaurants. Setting guard-rails on upper and lower thresholds for prices is important so that the guest experience isn’t impacted negatively through the introduction of this functionality.” REASONS NO AND USE PRICE TO HELP SPREAD DEMAND I’ve lumped reasons No. 2 (spread demand to slow periods) and No. 3 (better capacity management) together since they are essentially the same. For instance, as one respondent stated, “dynamic pricing changes based on a range of factors selected by management to take advantage of high demand and also generate increased interest in low demand. This could relate to times of day, menu items, seating locations or more.” Similarly, another respondent said, “pricing that fluctuates according to demand. Lower prices when demand is low. Higher pricing when demand is high.” Restaurant demand varies wildly throughout the day and by day of week. At times, demand is so high the kitchen can’t keep up. Rather than taking the risk of dissatisfying customers whose orders can’t be fulfilled in a timely fashion, some oper ators turn off, or throttle, some of their distribution channels (i.e. online orders, takeout orders) to reduce demand to a man ageable level. Throttling has become so widespread it’s even offered by providers such as Olo, Toast, and QSR Automations. Think about it. By throttling, we’re turning away custom ers who obviously want to patronize our business. As Orsbourn says, “Most restaurants don’t know their optimal capacity. It is left to throttling switches which may not be as informed in their level setting as they should be. Even more concerning, is when throttling switches don’t get switched back on. There has to be a better way to curtail orders than to just switch off entire sales channels—we believe dynamic price changes are one such approach.” I agree, as do the survey respondents, that this is an area where dynamic pricing can help with. What can we do to get them to dine with us during slower periods? Isn’t that exactly what restaurants have been doing with happy hour and early bird specials for years? Dynamic pricing is just adding a twist—think of it as “happy hour on steroids.” Happy hours and early bird specials work, but what about

other slow periods. Would dynamic pricing work? The answer is a resounding “yes.” In a 2004 study, Alex Susskind and his colleagues found 75 percent of customers were willing to switch to an off-peak demand if given an incentive to do so. The question then becomes one of what that incentive should be. That’s where dynamic pric ing arrives. Another question is whether dynamic pricing can actually help spread out demand. At Koti Pizza, a Harvard study showed the brand was able to reduce within-week demand variation by 10 percent while achieving a 6 percent rev enue increase along with a 10 percent increase in transaction orders. AVOIDING CANNIBALIZATION How can you make sure that you don’t cannibalize your business during busy periods? One of the concerns operators often have with dynamic pricing is whether offering lower prices to certain customers or at certain times will cause customers who would normally be willing to dine at full price to avail themselves of the discounts. The hotel and airline indus tries have faced a similar issue and use rate fences to help distinguish which customers can get the lower prices. With Marriott, customers have to either “do” something or “be” something in order to get a lower rate. Examples of “doing” something might be things like booking for a slow night or opting for a non-refundable reservation. On the other hand, “being” some

92 % say increased revenue TOP REASONS RESPONDENTS GAVE

82 % to spread demand to slower periods

70 % say to manage capacity

thing might include things like being a member of the loyalty program, being over 60 or working for a certain company. By using these rate fences, they have been able to effectively reduce cannibalization. Rate fences can not only help to reduce can nibalization, but can also answer the second fundamental pricing question: how should you determine which customers pay which price? Restaurants can adopt a similar strategy. “Doing” some thing might be placing an order ahead of time or choosing to dine during a slow period. “Being” something could be being

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APRIL 2023 | QSR | www.qsrmagazine.com