Pricing 2.0

By Kate Rockwood

In-store bakery experience

During heavy rains and on Saturday evenings, Uber raises its rates. Around holidays and school breaks, airline ticket prices skyrocket. Heavy traffic can spark higher tolls on Southern California freeways. Check the price of an item a few times an hour on Amazon, and you’re likely to see it fluctuate. 

But even when the line at Jimmy Johns snakes around the block during lunch service, prices remain steady—just like at most other quick-service restaurants nationwide. Many industries embrace dynamic pricing—pricing that changes based on variables like weather, time of day and demand. Is it time for the restaurant industry to join the surging trend?

“I don’t think it’s a matter of whether, but more when,” says John Ganotis, founder of Credit Card Insider, a consumer education company. “As more real-time foot traffic data becomes available, it will only make sense for price-sensitive markets to consider that data in pricing.” He points out that Grubhub, a food delivery service, sends users more promotional emails when it’s raining in their cities. “This type of response to real-time conditions could also incorporate a discount, which would be a mechanism for dynamic pricing that feels valuable to the customer,” Ganotis says.

Easy to Lower, Hard to Raise

Restaurants have been incorporating time-linked discounts for years, from Starbucks Frappuccino “happy hour” and Qdoba offering free kids’ meals twice a week to pre-theater dinner deals, senior discounts, special lunch prices and weekly prix-fixe menus. 

Consumers appreciate these specials and discounts, but, unsurprisingly, they’re less open to paying more during peak meal times. According to Technomic’s 2015 Value & Pricing Consumer Trend Report, only 31 percent of consumers say they’re willing to pay more to eat at peak times. Of that portion, 45 percent would pay up to 5 percent more, and about one-third would pay 6 to 10 percent more.

“Raising prices at quick-service restaurants during peak hours would likely hurt value perception, restaurant traffic and, ultimately, sales,” says Jill Failla, editor of Consumer Insights at Technomic. Fine-dining and ticketed meal restaurants may be better equipped to withstand the blow to perceived value from dynamic pricing, she says. For instance, The French Laundry, a highly acclaimed fine-dining restaurant in Yountville, California, sells meals successfully through a ticketing service. Diners may spend $255 each for a Wednesday dinner at 5:30 p.m. and up to $285 for a Saturday evening seating.

In addition to the dining experience quality, consumers’ ages may also impact how receptive they are to ponying up more for a meal. Technomic found that younger consumers are more open to this emerging style of pricing than baby boomers and older diners, so fast-casual operators that cater mostly to a younger demographic may have a greater opportunity to implement this strategy.

Service: A Secret Weapon?

Uber helped usher in an era of dynamic pricing, but it worked in part because the service offered something very different from the industry standard of taxicabs, says Maeve Webster, president at Menu Matters, a consultancy focused on helping clients identify, evaluate and effectively leverage trends. 

"Consumers have no reason to believe a burger should cost anything more than $1 at quick-service restaurants. The restaurant industry needs to drive value perceptions based on what it can do best for consumers: convenience, service, quality, technique, experiences and fresh ingredients.”

—Maeve Webster, president at Menu Matters

In the foodservice space, though, “consumers have no reason to believe a burger should cost anything more than $1 at quick-service restaurants,” Webster says. “The restaurant industry needs to drive value perceptions based on what it can do best for consumers: convenience, service, quality, technique, experiences and fresh ingredients.”

Alok Gupta, associate dean of faculty and research at the Carlson School of Management at the University of Minnesota, who specializes in dynamic pricing, says there’s an opportunity for fast-casual and quick-service restaurants to leverage speed and wait times. If restaurants really want to use dynamic pricing to their advantage, he says, they should be able to charge customers different prices for faster service. 

That strategy is similar to the one amusement parks take, charging more to let consumers bypass long lines during peak periods. Diners could likewise pay extra during the lunch or dinner rush to skip the line, have a guaranteed seat or ensure quicker delivery. 

“People associate higher prices with better service,” Gupta says. “In the restaurant industry, 15 to 20 percent is usually acceptable as service charge, so that kind of extra charge during a rush for better service should be tolerable.” If people are more keen on paying fluctuating prices for services than food that may also explain why dynamic pricing seems to be gaining a toehold with food deliveries faster than at brick-and-mortar restaurants. Food delivery companies Postmates and Sprig both utilize surge pricing, and VentureBeat recently predicted that most other food delivery companies will likely follow their lead in the near future.