- Some American restaurant chains are reporting increased revenue and orders with the dynamic pricing model, Nation’s Restaurant News reports.
- The pricing strategy can boost sales during slower periods of the week as customers continue to cope with inflation.
The dynamic pricing model might be finally gaining a foothold in the U.S. restaurant industry, and inflation could be a driving force that moves it into the mainstream, according to Nation’s Restaurant News (NRN).
PMQ reported on dynamic pricing and its usage by Kotipizza, the No. 1 pizza chain in Finland, a year ago. Kotipizza was the first European pizza company to use dynamic pricing for delivery. “It means that the price of pizza delivery is determined by demand,” Johanna Kuosmanen, Kotipizza’s director of digital and customer experience, explained to PMQ in our November 2021 cover story. “The price is lower when the demand is lower and vice versa. In practice, the price of delivery fluctuates between €2.90 ($3.35) and €7.90 ($9.13).”
The chain’s digital customers who pay close attention can often order a delivered pizza for a lower fee, determined by a specialized algorithm created by Priceff, at certain hours of the day or night. The fees are reset again and again throughout the day, as demand for delivery rises and falls.
The approach can boost sales during traditionally slower periods, Kuosmanen told PMQ. “The demand for pizza is very high between Friday and Sunday, whereas the beginning of the week is very slow, and, from our experience, no amount of campaigning can boost it very much,” she said. “We wanted to find a way to boost demand during the slow period early in the week, and Priceff’s model offered a unique way to do that.”
Airlines, hotel chains and other companies have used dynamic pricing for decades. Airline tickets, for example, are cheaper during slow travel periods, then jump higher over holidays or the summer vacation season. Hotels, meanwhile, charge higher rates over weekends as compared to weeknights.
Now the American restaurant industry might be catching up, NRN reported on November 18. A panel at the Restaurant Finance and Development Conference, held November 14-16 in Las Vegas, focused on the benefits and risks of dynamic pricing.
At the conference, Ashwin Kamlani spoke about how his company, Juicer, has brought the model to restaurants, although it’s still in the proof-of-concept phase, according to NRN. Kamlani said he had anticipated pushback from the restaurant industry but turned out to be wrong.
“On the contrary, the timing was perfect because inflation is hurting the industry, as are labor prices,” he said. “And we’re seeing price dynamism becoming more popular throughout other industries while the customer is getting more and more familiar with this idea,” he said.
Juicer has 10 restaurant groups with 4,000 units on its dynamic pricing platform and another 400 units with paid contracts through the first quarter of 2023, NRN says.
While Kotipizza only uses dynamic pricing to set delivery fees, the model can just as easily be applied to menu pricing. According to Juicer’s website, the platform “builds an accurate forecast of demand per menu item based on historical sales. Optimal prices are updated automatically into [the restaurant’s] POS or digital ordering system.” The platform also takes into account competitor pricing, events in the area and the weather.
Sauce Pricing is another company offering a dynamic pricing platform for U.S. restaurants. According to a case study published on Sauce’s website, Rachel’s Kitchen, a casual dining chain in Las Vegas, has seen dramatic success with this approach. “Through Sauce, they were able to have a different pricing strategy for their signature dishes and also react effortlessly to any changes in competitor pricing and marketing strategies,” the case study asserts.
Sauce Pricing says the Trailwood Drive location of Rachel’s Kitchen saw a 64% boost in revenue and an increase in orders of 50% in four months after starting with Sauce. Online sales rose from $18,726 in the month prior to launching the Sauce Pricing platform to $30,832 per month afterwards.
NRN reports that Faizan Khan, a Dog Haus franchisee, adopted dynamic pricing methods for his virtual brands and saw a “10-to-15-times return.” Dog Haus opened its first location in Pasadena, California, in 2010 and specializes in hot dogs, burgers and sausages.
Pricing fluctuations are relatively tame in the dynamic pricing model.
“We’re not talking about doubling or tripling prices. This is about using data to make smarter decisions about pricing,” Kamlani told NRN. The approach gives consumers more control over what they pay and when they decide to place their orders. “Rather than increasing prices blanketly across the board, the next time costs rise, maybe [restaurants] only increase prices on particular days of the week or particular hours of the day. So you can still offer lower price points that drive consumers in but still take great care of your margins.”
At Kotipizza in Finland, the delivery fee changes at five-minute intervals based on demand. If only a few people are ordering at a particular time, the fee for delivery goes down. On slow days, typically Monday through Wednesday, the fee is lower, and it climbs higher on peak days in the latter part of the week. So customers looking for a better deal on a Tuesday night can keep an eye on the fluctuating delivery fee and try to order at the perfect time to save the most money.
The result, according to Kotipizza: Dynamic pricing decreases demand variation—in other words, it reduces the difference in delivery demand between peak hours and slow periods.
“Another concrete customer benefit is the fact that dynamic pricing has raised the availability of delivery and lowered delivery times during peak hours,” Kuosmanen told PMQ last November. “And there is also a segment of customers who are very engaged with the model and like to play around with it.”
Kamlani told NRN that his clients haven’t seen “a lot of [consumer] pushback because [pricing] is a reality for the consumer. As long as it’s done well—balancing the preservation of loyalty and customer experience with the opportunity to attract more profit—it can be done.”