It might not seem like it, but dynamic pricing is more common than you think.
Many industries have been using the dynamic pricing model successfully for years. Whether you’ve bought seafood from a fish market, parked your car at a sporting event, seen a matinee movie, taken a ride using a rideshare service, or attended a restaurant’s Happy Hour, each employs dynamic pricing.
Although it’s common for concerts, flights, and hotel rooms, restaurants have been slower to join. However, that’s not to say restaurants haven’t used their own version of dynamic pricing in the background.
What is Dynamic Pricing?
Dynamic pricing uses demand metrics and historical data to determine how much to charge for a product or service. Although the cost of ingredients is one piece of the pie, it’s only one of many variables taken into account, including:
- Week Day
- Product Availability
As conditions change, so does the price of your items. In theory, the amount you charge could change constantly.
Different industries have jumped on the dynamic pricing bandwagon, including airlines, ticket sellers, and rideshare services - but restaurants have mostly sat on the sidelines. That may be changing, though, thanks to the digital transformation taking over quick service and fine-dining locations.
Digital ordering has fundamentally changed how restaurants operate, partly because of the cloud-based point-of-sale (POS). Years ago, your POS system was linked to some dusty old computer in a back office, and data crunching was time-consuming.
Today’s restaurants, cafes, and bars rely more on cloud-based POS options, opening the door for better data parsing and more power to change prices at a moment’s notice based on new information.
If the thought of being trapped in an office sifting through spreadsheets gives you hives, you’re still thinking about the past. Current POS systems allow owners and operators to move menu items, create promotions during slow dayparts, and maintain better profit margins - even during traditionally slow times.
The Growing Case for Dynamic Pricing
Let’s look at rideshare services for a second through the lens of dynamic pricing.
Rides don’t cost nearly as much on a Tuesday afternoon as on a busy Friday night when people are out and about. That’s because there is more demand on Friday night than on Tuesday.
The result? You’ll pay way more for that service if you don’t want to wait.
Now let’s look at the same model in a restaurant.
Spread Guests Out During the Day
Some dayparts are busier than others in restaurants (lunchtime is typically packed for quick-service restaurants, while cafes deal with heavy morning traffic).
But not every moment is busy - sometimes, it can be dull as dishwater. That’s where the trusty Happy Hour deal, early bird special, or mid-week discount comes in to get more people through the door.
While some deals are open to everyone, others could be limited to loyalty club members or people who meet certain criteria; for example, a 55+ menu or special drink promotions for nurses and teachers. The exclusivity ensures you’re not losing money by offering deals 24/7 while attracting a new subset of guests who want to take advantage of the lower prices.
More Money, Fewer Problems
One way to encourage guests to spend more money is to upsell them. But how does dynamic pricing help with that?
Like surge pricing in rideshare situations, guests can pay a premium for delivery or avoid longer wait times. It’s also possible to adjust costs based on daypart, using surge pricing during busy times and lowering costs when it’s slower.
Remember, the point of dynamic pricing isn’t to get as much money from guests as possible. It’s to provide every guest a personalized experience based on their preferences.
Some naturally gravitate toward lower prices, taking advantage of specials, promos, and events. Others may not want dinner at 4:30 PM and will pay more to eat when they want. Yet another segment of guests don’t want to go out but will pay more to have food delivered as quickly as possible.
Improve Staff Morale
Restaurant life can be hectic, especially during the breakfast, lunch, and dinner rush hours. But other times, it can feel like watching paint dry.
Dynamic pricing helps even the playing field by reducing highs and lows seen during the average day. Offering specials at certain times creates a situation where rush hours aren’t wearing out team members, and cobwebs aren’t forming during slower shifts.
Creative Way to Menu Engineer
Not every kitchen creation or new cocktail will set the world on fire - that’s where menu engineering comes in.
Dynamic pricing allows you to lower the price of poor-performing items to spur sales and clear out inventory tied to a small number of dishes. The same treatment can be applied to popular items, as restaurants can increase the price of those meals to meet higher demand.
It’s also possible to test out potential menu items by offering a low promo price. If it’s popular, it can be added to the menu full-time, and the cost can be adjusted accordingly.
One Step Closer to the Restaurant of the Future
Old-school cash registers are quirky but won’t help you make money.
The more restaurants dip their toes into digital waters, the easier it becomes to adopt new and emerging technology. For example, digital menus make it easy to change prices fast, compared to printing out new ones every time there’s a change.
A cloud-based POS system also speeds up menu changes, pushing them to one location or an entire network with a keystroke. Previously, menu changes were handled at each restaurant, making it hard for franchisees to be on the same page.
Finally, an increasingly digital restaurant can access tools like birdbill®, which seamlessly integrates with POS systems to share events, promotions, and price changes in real time.
Don’t Use Dynamic Pricing as a Catchall
Inflation is taking its toll on everyone, but dynamic pricing isn’t a free pass to jack up the cost of everything in your restaurant.
When we talk about using it to your advantage, we mean as a specialized data-driven tactic to increase revenue in select areas. Not as a blanket to hide under after raising prices across the board for guests.
However, you can use dynamic pricing to raise certain prices on particular days, at specific times, during events, or even when targeting guest segments. On the flip side, drop prices when you need a traffic boost or to move more inventory.
Dynamic pricing is a powerful tool, especially when it’s in the right hands.
When we talk about dynamic pricing, we talk about benefits like:
- Fewer daily peaks and valleys
- Higher staff morale
- Increased revenue
- Personalized segments guest offers
While it’s safe to say that dynamic pricing is pretty rad, it still has drawbacks.
In the same way Pavlov’s dogs were conditioned to start salivating at the sound of a metronome, your customers may also eventually get used to showing up at certain times. While some may still like eating or drinking on their schedule, an entirely different group is here for the bargains and deals, taking advantage of whatever they can get.
This isn’t to say every customer will do this, but they could if you don’t handle your pricing models correctly.
There is no magic elixir to make your restaurant highly profitable. Everything requires trial and error, and no amount of fancy technology and data crunching can replace hard work, good food, and a welcoming atmosphere.
Much like Batman’s toolbelt, dynamic pricing is only one of many tools available to you. Use it wisely, and you could reap the rewards of new customers, loyal guests, and a more efficient operation.