Dynamic pricing is a controversial subject in the restaurant sector. Widely used across numerous industries, it’s a strategy that doesn’t sit right with some of those plying a tentative trade in the F&B vertical. Nevertheless, an increasing number of restaurants are implementing dynamic models to offset rising food and labour costs.

Dynamic Pricing - Key Takeaways

• Can Boost Profitability, Drive Perceived Value and Balance Stock Levels.
• May Also Cause Transparency Issues, Perceived Unfairness and Confusion
• Important to Evaluate Demand, Understand Customers and Costs Base
• Crucial to Conduct Limited Tests Before Rolling Out Changes
• Successful Dynamic Pricing Strategies Depend on Accurate, Reliable Data
• Solid Tech Infrastructure is Very Important

So how does dynamic pricing work?

What is Dynamic Pricing?

Dynamic pricing describes the practice of raising and lowering prices according to consumer demand. Also known as variable pricing, the strategy is employed across a wide spectrum of industries, from commercial aviation to concert ticketing.

How Does Dynamic Pricing in Restaurants Work?

Although adoption has been slow, more and more restaurants are implementing dynamic pricing models instead of relying on fixed prices. The following strategies are typically used.

Demand-Based Pricing

Demand-based pricing is a reactive strategy that’s based directly on real-time customer demand. It's sole purpose is to maximise revenue. Higher prices are triggered by high demand, low demand triggers discounts and reduced rates. Surge pricing is a typical example of this approach. So a restaurant might use data from an online reservation app and set it to increase prices after they reach 80% on a particular evening. 

Time-Specific Pricing

Time-based dynamic pricing is a proactive strategy in which the costs of a product or service are adjusted in advance of a day, week or season. Typically, it’s put in place to optimise revenue, manage foot traffic and encourage the consumption of ingredients that would otherwise go to waste. Raising prices is often aimed at encouraging customers to book cheaper, earlier slots to free up space during busier periods. Lowering prices potentially entices diners to visit when business is slow.

Personalised Pricing

Personalised pricing is a relatively new approach in the restaurant industry. As is the case with surge-based strategies, it’s reliant on data analysis. The primary goal is to drive repeat visits by creating offers that relate to past orders and spending behaviour. Typical examples include loyalty rewards, and special occasion discounts.

Supplier-Based Pricing

This is another reactive dynamic pricing strategy in which menu prices are adjusted in response to supplier costs. If ingredient prices increase, dish prices increase accordingly and vice versa. This practice is particularly common at the moment given food price inflation. And it’s also used to counteract seasonal changes. By way of example, many seafood restaurants will raise lobster dish prices during the peak months of October, November and December – this is when because suppliers tend to charge more due to scarcity issues.

Dynamic Pricing Advantages

In an industry that’s beset by rising costs and volatility, dynamic pricing is, for some operators, a powerful and highly-effective strategy. So what are the advantages of dynamic pricing for restaurants?

Maximises Profitability

Dynamic pricing allows restaurants to mitigate against the volatile demand fluctuations that are unique to the food service industry. The ability to capitalise on peak demand but at the same time maximising profits during quiet periods can be the difference between success or failure.

Covers Costs

Raising prices can help food and beverage operators to cover other expenses related to things like staffing and security. Indeed, many popular pub chains in the UK increase weekend prices to offset labour expenses.

Drives Perceived Value

The use of time-specific pricing models helps create a sense of exclusivity around certain dishes even if the dish hasn’t changed. On one hand, raising the price reinforces the notion that a dish is popular and worth ordering. On the other, lowering the price makes customers think they’re getting a deal.

Optimises Stock Levels and Reduces Holding Costs

When done properly, variable pricing helps operators to streamline their inventory and cut back on holding costs. Offering discounts and lowering prices during off-peak times or for specific time periods is an effective way of preventing overstocking.

Encourages Data-Driven Decision-Making

Dynamic pricing, particularly the surge-based model, requires detailed customer analysis. Even today, this is an area in which many restaurants fall short. By implementing variable pricing, some operators are compelled to take a more data-driven approach which tends to result in a more efficient, profitable business. 

Dynamic Pricing Disadvantages

Despite the many advantages of using dynamic pricing in restaurant operations, the strategy is not without risk as Wendy’s found out to its detriment in 2024. These are the most common challenges of dynamic pricing for restaurants.

Transparency Issues

For customers, sudden and unexplained price changes may suggest a lack of transparency on the part of the restaurant. In some cases, they may even be perceived as being deceptive. As well as eroding brand trust, ambiguous price hikes could lead to regulatory breaches.  

Perceived Unfairness

Price increases often seem unfair to customers, especially if the cost of a dish varies between location. Premium prices put in place for bad weather or special events can also appear to be opportunistic and cynical.

Customer Confusion

Raising and lowering prices regularly, often serves to confuse diners which in turn may complicate decision-making and lead to tense interactions with staff. Confusion, doubt and frustration do not make for enjoyable dining experiences.

Data Dependency

Data dependency can be a double-edged sword when it comes to dynamic pricing. While detailed customer analysis leads to informed decision-making, inaccurate or incomplete data results in flawed pricing decisions that, in the long run, may have damaging implications for a restaurant.  

F&B Operations Well-Suited to Dynamic Pricing

✔️ QSRs – High-volume quick-service restaurants usually have at their disposal plenty of customer data which makes it easier to test out pricing strategies.

✔️ Pop-Ups and Ghost Kitchens – pricing models can be tested with more confidence, mainly because their digital-savvy clientele are more accustomed to ‘flexible’ pricing.

✔️ Digital-First Operations – better able to communicate and implement price change because they utilise in-app menus and push notifications.

✔️ Cuisine-Specific Restaurants – easier to justify regular price changes to their customers due to seasonal ingredient availability issues.

✔️ Signature-Style Establishments – premium positioning and emphasis on quality mean rising prices can be justified without offending customer base.

F&B Operations Ill-Suited to Dynamic Pricing

❌ Fine Dining – variable pricing may cheapen the experience for guests expecting consistency and prestige.

❌ Family-Orientated Chains – fluctuating prices may appear unfair to a customer base that expects predictability and budget-friendliness.

❌ Restaurants With Inadequate Tech – updating POS systems and menus as well as training staff is challenging without suitable tech in place.

❌ All You Can Eat Restaurants – dynamic pricing serves to undermine a business model that’s built around simplicity and predictability.

❌ Community-Centric Restaurants/Pubs – implementing demand-based pricing risks alienating regular customers who value familiarity and consistency.

Is Dynamic Pricing Right for Your Restaurant?

Variable pricing is not a one-size fits all solution. It’s suitability for your restaurant depends largely on the kind of operation you run. If your business model seems well-suited to such a strategy, how else do you gauge whether or not dynamic pricing is right for your restaurant?

Know Your Customer

As the old saying goes, ‘know your customer’. And for determining if dynamic pricing is right for your restaurant, this is absolutely critical. As we’ve seen, customer expectations regarding fluctuating prices will vary according to restaurant type. The generational profile of your clientele is also going to have a big impact. So how does age influence dynamic pricing for restaurants? Below, we've graded each generation from A (highly suitable) to C (least suitable).

18-40 (Gen Z and Millennials) - Generally comfortable with surge pricing and food price fluctuations because of exposure to delivery platforms such as Uber Eats and Deliveroo. Also places more value on experience and convenience.
Dynamic Pricing Suitability - A

41-56 (Gen X) – Tech literate for the most part and reasonably tolerant of price changes, although not quite as comfortable with them as the Gen Z cohort. Values fairness, service consistency and transparency. Price changes would need to be more justified.
Dynamic Pricing Suitability - B

57+ (Baby Boomers and Above) – Prefers predictable stable pricing with a general mistrust of price hikes which they often see unfair. Cautious of ordering technology such as apps which means they have less exposure to price fluctuation.
Dynamic Pricing Suitability - C

Evaluate Demand

With a solid understanding of your customer base, you’ll then need to identify the demand patterns and trends. Pay attention to obvious peak times such as lunch and dinner, as well as weekend evenings, while pinpointing dead zones like weekday afternoons. For dynamic pricing to work, there should be a noticeable difference in demand levels throughout each day and across the week.

Consider Your Location Carefully

Factor in your restaurant’s location too. Variable pricing tends to work very well for restaurants located near tourist attractions and stadia, due to the inevitable demand surges. Keep in mind however that while most restaurants will, at the very least, experience some variability in terms of demand, there are some businesses for which guest flow can be rather flat. For instance, coffee shops in residential areas, 24/7 diners and rural restaurants with low footfall.

Understand Your Cost Base

It’s extremely important to understand your cost base before putting in place a dynamic pricing strategy. This means having a handle on what it costs to produce and serve each dish (variable costs) while also factoring in fixed costs (rent, utilities).

Without accurate, reliable data regarding your expenses, you run the risk of under-pricing during off-peak periods which can erode your profit margins. Conversely, you run the risk of failing to fully capitalise during busier periods. In short, you’ll want to know precisely how far you can go when lowering prices while remaining profitable, and how high you can set them without annoying your customers.

Test the Water

Before rolling out any price changes, you’ll need to test your strategy. Start by defining a goal. Do you want to analyse the impact of peak-demand price hikes or off-peak discounts? To begin with, it’s advisable to identify a small number of dishes for analysis.

Then organise your customers in two groups as part of an A/B testing strategy. Group A should be the control group used for regular pricing, group B should be used for dynamic pricing adjustments. Once testing is complete, compare sales, profitability and feedback between the two groups. Pay particularly close attention to KPIs such as revenue per customer, total sales volume, visit frequency and satisfaction ratings.

After analysis, adjust your strategy accordingly. Should you arrive at a successful pricing model, slowly expand it to more dishes and, if your run a chain, additional stores.

Using Technology to Create Dynamic Pricing Strategies

For variable pricing strategies to be truly effective, you’ll need to have in place a reliable, fully-integrated system. These are some of the areas in which technology can be a game-changer.

Data Collection

To avoid the pitfalls of guesswork, you’ll need access to precise information about demand trends and customer behaviour. Fully-integrated systems are especially useful in this regard because they continuously sync data across all ordering points, from front of house POS and handheld terminals, to delivery apps and websites.

All of this data is available via a single, centralised platform which eliminates the kind of data fragmentation that plagues traditional restaurant management systems. The result is comprehensive, reliable customer data that allows you to make impactful pricing decisions. The latest systems gather data is real-time which also enables you to make quick adjustments in response to sudden demand changes.

Cost Management

All-in-one restaurant management systems also extend to back of house operations – essential for understanding and controlling costs. The more advanced systems provide detailed cost metrics relating to labour, ingredients, suppliers and general operations. With access to comprehensive data, you’ll be able to determine the impact of dynamic pricing on your business and whether it’s actually a strategy worth implementing.

Forecasting

Forecasting is another area in which technology can be of enormous help, particularly with next-gen systems that utilise artificial intelligence and machine learning. By identifying patterns and trends such as weekend rushes and seasonal fluctuations, tech forecasting facilitates proactive pricing adjustments. This will help you to account for low periods and make the most of demand surges as and when they arise.

Menu Management

Dynamic pricing is most effective when you focus on high margin dishes. Identifying these requires a comprehensive menu management solution that ensures you fully understand dish-level profitability. Unsurprisingly, menu management tools are common features with most ePOS and restaurant management systems.

For some platforms, it’s even possible to run ABC/XYZ analysis - invaluable for making targeted pricing decisions. In practice, ABC/XYZ involves categorising items according to their profitability and demand predictability. In doing so, you can determine which dishes would benefit most from variable pricing.

For instance, high profit, stable-demand dishes would likely be able to sustain higher prices during peak times. Less-profitable dishes with volatile demand could by priced lower or strategically promoted to stimulate sales. In short, ABC/XYZ analysis provides clarity with regards to pricing decisions, allowing you to maximise profits and at the same time, manage customer expectations.

Price Management

Price management can be tricky, especially for chain-restaurants and those with websites which rely on multiple menus. This kind of operational headache can be avoided with modern tech platforms that allow for instant real-time pricing updates which make it easy to roll out prices across entire chains or for specific stores with certain customer types in mind. It’s also possible to schedule price changes in preparation for specific dates.

Thinking of employing a dynamic pricing strategy for your restaurant? Syrve can help: https://www.syrve.com