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Dynamic Pricing for Restaurants: Unpacking Growth in F&B Revenue Management

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Jordan Hollander in Food & Beverage

Last updated January 26, 2024

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Restaurants are increasingly adopting dynamic pricing due to its potential to optimize revenue by adjusting prices based on demand and timing, a strategy long used in industries like hotels and airlines. This approach doesn't solely increase prices; it can also lower them during off-peak hours to attract customers, a significant benefit in the restaurant sector which has traditionally been slow in implementing such strategies.

The adoption of dynamic pricing in restaurants is gaining traction, especially as the industry faces challenges like inflation and high labor costs. Technology platforms are emerging to support restaurants in implementing dynamic pricing, offering services that promise a quick return on investment. For instance, some early adopters have reported substantial revenue boosts, countering the fear that higher prices might lead to reduced sales. This shift is supported by a growing acceptance of variable pricing among consumers, a trend seen across various industries and digital platforms.

However, the transition to dynamic pricing in the restaurant industry is not without challenges. The sector is known for its slow tech adoption, and seamless integration of dynamic pricing into existing systems is crucial. The strategy's success hinges on balancing profitability with customer satisfaction. Rather than indiscriminately increasing prices, dynamic pricing can be used to strategically offer discounts during slower periods while protecting margins.

The keys to successful dynamic pricing implementation include effective integration with current technologies, collaborative efforts among industry players, and a commitment to preserving the quality of customer service. As restaurants continue to embrace dynamic pricing, the focus is on making informed, data-driven decisions about pricing to benefit both the business and its customers.

Benefits of Dynamic Pricing in Restaurants

Dynamic pricing in restaurants is not just a strategy; it's a transformative approach that ushers in a host of compelling advantages. At the forefront is the enhancement of profit margins. This smart pricing method allows restaurants to fine-tune their prices, ensuring they hit the sweet spot where they're as high as the market can bear but still remain fiercely competitive. It's a delicate balance that, when achieved, seals the gap where potential profits might otherwise slip away, a crucial tactic especially during economically challenging times.

But it's not all about the bottom line. Dynamic pricing brings an element of personalization to the table. It empowers restaurants to tailor their offerings, aligning them more closely with customer preferences. Whether it's suggesting complementary dishes or customizing deals, dynamic pricing ensures that what's on offer resonates with the diner's palate, making every meal an invitation to indulge just a bit more.

Then there's the commendable contribution to sustainability. Echoing strategies employed by sectors like the airline industry, dynamic pricing in restaurants addresses the critical issue of food waste. By dynamically adjusting prices, restaurants can ensure that surplus ingredients or dishes close to their expiration are sold rather than squandered. It's a strategy that not only makes economic sense but also echoes a growing consciousness towards responsible consumption and waste reduction. In this way, dynamic pricing is not just redefining profitability; it's reshaping the ethos of the culinary industry.

The Best Restaurant Dynamic Pricing Tools

JUICER

Juicer offers a real-time, automated revenue management solution for digital sales strategies in the restaurant industry. It dynamically modifies prices per menu item, location, and time of day. Utilizing data analysis, AI, and guest sentiment analysis, Juicer aims to optimize pricing, boost profitability, and enhance the efficacy of offers and promotions​.

Key customers

  • Bartaco
  • Carrot Express
  • Salad Box
  • BurgerFi
  • LaGuapa
  • Freebirds World Burrity
  • Anthony’s Coal Fired Pizza & Wings
  • Cali BBQ

POS Integrations

  • Micros Simphony
  • ItsaCheckmate
  • Qu Beyond
  • NCR


Sauce

Sauce is a dynamic-pricing startup that uses machine learning to adjust menu prices for delivery orders, based on a restaurant's historical and real-time data. The platform enables restaurants to manage margins effectively by recommending pricing strategies that can both increase during peak times and decrease during slower periods. With its AI-driven approach, Sauce offers flexibility in pricing and has proven to increase profitability, as evidenced by partnerships with chains like Piada Italian Street Food. The technology also allows customization of prices store-by-store, addressing the unique demand in each market.

Featured customers

  • Square Pie Guys
  • Flame Broiler
  • Piada Italian Street Food
  • Carvel
  • Holy Crust
  • Bandit Taco
  • BurgerIM
  • Greenleaf
  • 92Chicken

POS Integrations

  • Toast
  • Revel
  • NCR Aloha
  • PAR Brink

Dynameat

DynamEat offers a platform for restaurants to optimize menus using dynamic pricing and AI algorithms. It provides weekly occupancy forecasts, pricing recommendations for each dish, and smart menu configurations to maximize profitability and customer satisfaction. The system prioritizes dishes with high margins, quick preparation, and popularity, especially during peak demand, ensuring efficient and profitable restaurant operations.

Featured Customers

  • Palladium Hotel Group
  • Melia Hotels & Resorts
  • Atlantis Dubai
  • IHG Hotels & Resorts
  • Radisson Hotel Group

POS Integrations

  • Infrasys by Shiji
  • SAP
  • Oracle Simphony
  • Agora
  • Revo
  • Silverware

 

Priceff

Priceff offers a dynamic pricing solution that automatically adjusts prices based on real-time demand and capacity. It maximizes revenue and transaction volume while reducing demand volatility. The platform provides a user-friendly dashboard for price management, detailed analytics for strategic insights, and easy integration with existing workflows, making it an effective tool for businesses like food delivery, vehicle rentals, and sports reservations. Priceff ensures optimal pricing 24/7, helping businesses to improve service, increase sales, and potentially reduce waste.

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How to Get Over Fears About Dynamic Pricing in Hospitality

Restaurants can start testing revenue management by implementing rate fences, giving customers some control over the prices they pay, similar to practices in the hotel, airline, and ride-sharing industries. Rate fences involve setting conditions that can lead to discounted prices, like traveling at less popular times, being a loyalty program member, or accepting less desirable product features. Research indicates customers accept dynamic pricing when it's transparent and justified, such as varying prices for busy versus slow times or for loyalty members, but react negatively to seemingly arbitrary price fluctuations.

To begin with dynamic pricing, restaurants can introduce simple rate fences that are easy to communicate and perceived as discounts. However, implementing these rate fences poses operational challenges due to the limitations of many Point of Sale (POS) systems, which may not support variable pricing for the same menu item. While some systems allow time-based pricing or events like happy hours, integrating dynamic pricing into POS systems can help reduce complexity.

Deciding when and what prices to offer involves understanding customer demand patterns through data analysis and determining pricing strategies. Restaurants can start by experimenting with different prices to see what works or use companies that provide analytical pricing recommendations. Although the analytical approach has costs, the potential revenue increase is likely to outweigh these expenses.

Why Restaurants Should Start Experimenting with Dynamic Pricing Now

Restaurants should adopt dynamic pricing for several compelling reasons. Primarily, dynamic pricing can significantly increase revenue. Evidence from the hotel and airline industries suggests that revenue management and dynamic pricing can lead to 3-5% revenue gains. Moreover, a minimal increase in price can result in a substantial profit surge, with a 1% price hike potentially yielding a 12% increase in profit.

Additionally, dynamic pricing helps in spreading demand to slower periods and better managing capacity. By varying prices based on factors like time of day, menu items, and seating locations, restaurants can encourage customers to patronize during off-peak times, leading to better demand distribution and capacity utilization. This approach isn't just about hiking prices during busy periods; it's also about offering incentives for customers to dine during slower times, akin to an enhanced version of traditional happy hours or early bird specials.

Implementing dynamic pricing effectively can also help mitigate the risk of cannibalizing business during peak times. The strategy involves setting rate fences, conditions under which customers can access lower prices, thereby ensuring that discounts are targeted and do not unduly undercut standard pricing. By adopting similar tactics as the hotel and airline industries, restaurants can distinguish which customers are eligible for discounts without eroding their revenue during busy periods.

Dynamic pricing presents a strategic opportunity for restaurants to increase revenue, manage demand more effectively, and optimize their operational capacity, all while maintaining customer satisfaction and preventing revenue loss during peak times.

What Restaurants Can Learn from Hotels & Airlines Successes in Dynamic Pricing

Restaurateurs looking to integrate dynamic pricing into their business, much like hotels and airlines have successfully done, can embark on a strategic journey that marries technology with savvy restaurant management. The first step is to grasp the concept of dynamic pricing and its potential to reshape the restaurant industry. This involves understanding how menu prices can fluctuate based on various factors such as time of day, day of the week, or even specific menu items.

Implementing a dynamic pricing strategy requires a seamless integration with the restaurant's point-of-sale (POS) system. This allows for real-time price changes, ensuring that the pricing model reflects the ebb and flow of demand during busy times and slow times. Digital menus, potentially accessed via QR code, can display different prices for the same dish, much like how Uber showcases surge pricing during peak hours. This transparency in price changes enhances the customer experience, allowing patrons to make informed decisions based on time-based pricing.

For instance, restaurants can adopt a model similar to happy hour, offering specials or lower prices during off-peak times to attract customers. Conversely, during busy times or in response to fluctuations in food costs – a situation exacerbated by the pandemic – menu prices can dynamically adjust to ensure profit margins remain healthy.

Moreover, algorithms akin to those used by tech-forward companies like Sauce and Juicer can automate these adjustments, factoring in not only demand but also participation in a loyalty program or online ordering patterns. This level of automation ensures that restaurant operators can focus on delivering quality service while the system manages the complex task of revenue management.

In this digital age, tools such as LinkedIn offer a platform for executives and industry leaders to share insights and strategies, fostering a community that's well-informed about the benefits and nuances of dynamic pricing. By leveraging these resources, restaurateurs can fine-tune their approach, ensuring that their dynamic pricing strategy not only boosts the bottom line but also elevates the overall dining experience.

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Jordan Hollander
Jordan is the co-founder of Hotel Tech Report, the hotel industry's app store where millions of professionals discover tech tools to transform their businesses. He was previously on the Global Partnerships team at Starwood Hotels & Resorts. Prior to his work with SPG, Jordan was Director of Business Development at MWT Hospitality and an equity analyst at Wells Capital Management. Jordan received his MBA from Northwestern’s Kellogg School of Management where he was a Zell Global Entrepreneurship Scholar and a Pritzker Group Venture Fellow.