By Sakshi Singh, Contributory Author
Dec 23, 2022 / 7 MIN READ
As food and labour expenses rise and consumers reduce their spending, restaurant owners are faced with the choice of increasing prices to retain profitability or "toughing it out" so as not to upset their customers.
Dynamic pricing has been extensively discussed in the media, but what precisely is it? Definitions range from simple to intricate. Multiple price changes per year across the board is the simplest strategy. While this is simple, it implies that customer price sensitivity is the same for all menu items, it disregards time-of-day and day-of-week demand swings, and it provides no insight into how frequently and when these price changes should be implemented. At the highest level of complexity, operators can utilise quantitative techniques to calculate appropriate prices by menu item for distinct time periods.
There have been concerns about how the rise of digital transactions has made it simpler for restaurants to alter prices swiftly (and menu items). Several firms, like Juicer, Revenue Management Solutions, and Sauce, provide analytical dynamic pricing solutions, however some operators are uneasy with the concept of variable pricing since they are unsure of how customers would respond.
According to research, people regard fluctuating pricing based simply on demand as unfair. Hotels, airlines, and Uber all adjust their costs based on demand, but how do they do it? The brevity of the response is that they allow clients some discretion over the price they pay. Consider whether there are ways to obtain cheaper plane tickets. If you are willing to travel at an inconvenient time or accept a non-refundable ticket, then yes. Similarly, is it possible to negotiate a reduced hotel rate? Absolutely. Perhaps you are a member of the hotel's loyalty programme, book on a day with low demand, or are ready to reserve a room with a subpar view. Even Uber has options. The Uber app displays the fare in advance, and you may choose whether or not to accept it.
“Applying it to dine in restaurants in my view has its pros and cons. A patron might get happy for a certain menu item to be cheaper during off peak times, but on the contrary might get offended if he/she is charged higher than usual prices during peak hours. Pricing in dine in restaurants is a sensitive issue and people dine out not only for good food but for the whole experience. In my view, dynamic pricing is a bad option for dine in restaurants but can be a healthy practice for cloud/delivery kitchens listed on online platforms,” Chef Tej Wardhan Saini, head chef at Cafe De'Lan Noida 104 commented.
However, if one is apprehensive about implementing full-fledged dynamic pricing, start with simple rate barriers that are simple to express to clients and attempt to portray price disparities as discounts.
The next obstacle is the implementation of rate barriers. Very few point-of-sale (POS) systems have the capacity to charge different prices for the same menu item, thus operators would need to manually adjust the prices in their POS system or maybe set up different menu item codes for different time periods. Clearly, these methods are laden with obstacles, the most significant of which is the time commitment. Consequently, this strategy would be tough to sustain.
It’s critical to remember that a dynamic pricing strategy isn’t “surge pricing,” like when gas prices skyrocket after a pipeline shuts down. That practice can alienate customers.
“Instead, dynamic pricing offers real-time pricing changes based on demand, going up or down depending on need. Restaurants can use excess inventory, like perishables, by featuring them in menu items during the off-peak times. In contrast, restaurants can offer more of their high-profit margin products during peak times. In addition to using dynamic pricing based on demand, restaurants can use it to create a sense of excitement and urgency among diners searching for a great deal,” Rajesh Saini, Director of The Butter Story Cafe commented.
“The low-hanging fruit here is to use all of that data to figure out, when things are busy, how can I make more money from that?” Ashwin Kamlani, co-founder of Juicer, commented. “If I own a pizzeria and I’m on a college campus and have a line out the door at 1 AM because all the kids have been out partying, are they really going to care that the pizza’s now at 11 dollars instead of 10? Probably not, but that’s 10 percent more I can make on every pizza and that’s a big deal.”
In a world that is continuously changing, restaurants seek new strategies to thrive. Dynamic pricing provides businesses with the freedom to ensure that the price corresponds with demand. The most crucial aspect of implementing dynamic pricing is to be upfront about pricing and inform customers when and why a restaurant is doing it. By efficiently executing this method, restaurants may exert greater control over their bottom line while providing current and prospective customers with pricing options that are perceived as a value, not a rip-off.
As food and labour expenses rise and consumers reduce their spending, restaurant owners are faced with the choice of increasing prices to retain profitability or "toughing it out" so as not to upset their customers.
Dynamic pricing has been extensively discussed in the media, but what precisely is it? Definitions range from simple to intricate. Multiple price changes per year across the board is the simplest strategy. While this is simple, it implies that customer price sensitivity is the same for all menu items, it disregards time-of-day and day-of-week demand swings, and it provides no insight into how frequently and when these price changes should be implemented. At the highest level of complexity, operators can utilise quantitative techniques to calculate appropriate prices by menu item for distinct time periods.
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