Charging different prices for the same food and drink at different times of day might seem like a surefire way to irritate or even alienate customers.
But some restaurateurs have been successful, especially with the help of technology that can calculate when demand is the highest, and even analyze which guests will respond to discounts versus those willing to pay extra.
“The margins in restaurants are too small and we work too hard,” says Shawn Walchef, founder of Cali BBQ in San Diego, which operates a restaurant, two ghost kitchens that handle delivery and two stands at Snapdragon Stadium, home of the San Diego State Aztecs football team. “There is a more profitable and sustainable way to build restaurants, and the only way to do that is to work with (tech companies).”
Among them are companies focused on dynamic pricing – calculating what to charge customers based on a restaurant's traffic and guest demands.
The idea isn't exactly new: Happy hours and early-bird specials have been around for generations. And in other industries, such as hotels, rideshare and airlines, dynamic pricing is expected – not to mention sports venues, live theater and even utilities. Why not charge more for a meal at 7 p.m. on a Saturday compared to one at 2 p.m. on Monday?
Walchef hasn't applied dynamic pricing at his restaurant yet, but he is trying it with third party delivery. Customers ordering delivery tend to be less price-sensitive, and understand that the cost might be different based on the time – just as they're familiar with surge pricing from ride-share services.
Walchef has partnered with tech company Juicer, a dynamic-pricing specialist whose co-founders previously developed pricing algorithms for hotels that calculate guest demand for different dates and times. The software automatically adjusts pricing based on demand, following parameters set by the restaurateurs: Walchef allows a $4 spread, so guests might pay $15 for a pulled pork plate at the slowest times and $19 during busy times.
“Not one customer has said anything,” he says. “What's fascinating to me about dynamic pricing is how we can leverage it as a marketing tool when there's low demand.” He's particularly interested in enticing guests to order in advance by offering deals.
The biggest problem as a restaurateur, he says, is predicting customers, which would allow him to manage food and labor costs much better. “That's why anything that is getting us a future order that incentivizes someone to buy ahead of time or buy a gift card is a much better way for us to drive revenue in the restaurant.” A lower menu price stands a good chance of building advanced sales.
Juicer analyzes at least 12 months of restaurant transaction data – menu items, the time of day and the location – and applies the company's algorithm to calculate optimal prices at a given moment, says Carl Orsbourn, co-founder and chief operating officer. This practice is in line with operator-set parameters, such as not allowing for fluctuations of more than 20%, “so you avoid those Taylor Swift moments” when prices can spiral out of control, he adds.
Juicer also compares competitor prices and adjusts according to operator rules agreed to up-front. Orsbourn said it would soon start factoring in other considerations, such as weather (grilled cheese and tomato soup orders go up when it's raining) or events (pizza and wing sales surge during football games).
DEMAND-BASED PRICING PROVIDES CUSTOMERS WITH A CHOICE
Dynamic pricing, Orsbourn says, is an ideal way to keep all guests happy. Those looking for a discount might happily order at 5 p.m. instead of 6 p.m., while less value-conscious customers, or those who just want what they want on a Friday night (or after a fun night out at 3 a.m.) will spend more for the convenience.
“Ultimately this is all about empowering the customer with choice,” he says.
Pricing a menu according to demand has yet to be widely adopted. But technology companies that offer the service say restaurants will eventually practice what airlines and hotels have been doing for years.
“Behaviors will change, pushing more volume to shoulder hours and reducing the need for restaurants to throttle (turn off) digital channels,” Orsbourn says.