January 9, 2019 |
Dynamic pricing is a strategy where prices of products and services continuously adjust in response to real-time supply and demand. In the eCommerce industry for example, this strategy has been in place for a while and retailers like Amazon are updating their prices every couple of minutes. In the hospitality world, demand pricing is widely used by hotels to adjust the cost of rooms and packages based on the supply and demand needs at a particular moment of the season. The goal of dynamic pricing is to maximise revenues by boosting occupancy levels.
In the F&B industry, a couple of restaurant pioneers throughout the globe are already experimenting with dynamic pricing. One of the more famous ones is the 3-michelin starred Alinea in Chicago. The restaurant is charging diners different prices depending on the day and time of their visit. You would pay more for a Friday dinner at 8:00pm than on a Monday at 9:30pm and this allows them to control their flow better and maximise their revenues. Alinea famously tweeted during one Super Bowl: “Don’t care about football tonight? Come eat at Alinea instead. US$165 super bowl special.” They sold out all tables on that night.
Another example is the posh British-Russian Soho hangout Bob Bob Ricard in London. They started offering discounted meal prices during their off-peak times such as weekday lunches or Monday dinners. Bob Bob Ricard’s owner Leonid Shutov has a background in the advertising industry and he benchmarked his idea from other businesses that use dynamic pricing as he says: “Airlines for example wouldn’t be able to exist, the business model wouldn’t work unless you could balance supply and demand. Everything that we have taken that is widely accepted in the modern economy and applied to restaurants, seems to have worked.”
The dynamic pricing approach is all about the laws of demand. There could be 250 diners and a 3-page long waiting list on Saturday evening but only a handful of diners on Monday. Dynamic pricing is trying to balance these inequalities out against each other and maximising the space use in the restaurant. When prices drop, customers are willing and able to buy more. So, by charging different prices for the same meal a restaurant can cater to different diners at different times and sell more food overall.
Thinking about a similar approach, apps like TasteBud for example give restaurants the possibility to vary their discount policies. A customer’s final discount depends on the day and time of visit, the overall demand and even the user’s buying history. Once a potential diner places an order, he will see which price is offered to him at that moment. If you try the app throughout the day you would be paying a completely different price during quiet afternoon hours around 4pm than during the far busier lunchtime.
Of course, this model would also work the other way around where restaurants could introduce “surge pricing” in the same way Uber and Lyft are doing it for their drivers during peak times. The cost of a meal would rise and fall based on the actual demand taken from each venue’s reservation system.
As with all pricing strategies, there are clear advantages and disadvantages when using a dynamic pricing system. Restaurants who want to implement and experiment with it must therefore be extremely careful not to overdo it, as they are running the risk of completely alienating their client base which would result in the opposite effect that the restaurateurs hoped for initially.
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