Restaurants: Why Traditional Dynamic Pricing Doesn’t Work for Restaurants

Why it is the topic trending:

• Failed Experiment by a Major QSR: A recent high-profile attempt by a top-five burger quick-service restaurant to test dynamic pricing resulted in significant negative customer backlash, forcing the brand to clarify their intentions. This failure has brought the topic to the forefront of discussion within the restaurant industry.

• Study on Consumer Perception: A study involving over 500 consumers revealed that a significant majority (71%) do not view dynamic pricing in restaurants positively, highlighting a major concern for restaurant operators.

• Industry Hesitation: Research with over 100 restaurant brands indicates that most are not considering implementing dynamic pricing in the near future due to worries about consumer reaction.

• Contrast with Other Industries: The article contrasts the successful use of dynamic pricing in industries like airlines and ridesharing with the challenges it faces in the restaurant sector, prompting an exploration of the underlying reasons for this difference.

• Alternative Pricing Strategies: The article proposes customized promotions and strategic use in online channels as more effective alternatives, suggesting a shift in how restaurants should approach pricing strategies.

Overview:

The article explores why traditional dynamic pricing, a strategy successful in industries like airlines, faces significant resistance and failure in the restaurant sector, particularly for QSRs. A recent study and a public failure of a major burger chain highlight negative consumer perception as the primary reason. The article argues that the basic parameters for dynamic pricing aren't a good fit for restaurants where the initial decision to visit is made before viewing dynamically changing prices, leading to customer dissatisfaction. Instead, the article suggests that customized promotions and strategic implementation in online ordering channels are more effective and consumer-friendly approaches for restaurants to optimize pricing.

Detailed Findings:

• A top-five burger QSR tested dynamic pricing last year and faced significant negative customer reaction, being likened to surge pricing.

• A Simon-Kucher study with 500-plus consumers showed that 71 percent of frequent QSR diners do not view dynamic pricing positively.

• The same study indicated that 62 percent of restaurants worry about how consumers will react to dynamic pricing.

• Consumers make their initial decision to visit a restaurant before seeing dynamically changing prices, unlike in airlines or ridesharing where price influences the initial demand.

• Dynamic pricing in restaurants can lead to unhappy customers, especially during peak times with the highest prices and longest wait times, resulting in a poor customer experience.

• The concept of dynamic pricing works well in industries where it can influence the initial demand (e.g., airlines, ridesharing), but this is not the case for physical restaurants.

• Consumers view happy hours, customized promotions, and weeknight specials as positive price differentiation methods, contrasting with negative views of peak pricing, dynamic pricing, and surge/demand pricing.

• 81 percent of consumers view customized promotions as an acceptable price differentiation method.

• 64 percent of consumers would visit more often if restaurants offered customized promotions, while they would visit less often if real-time in-store price fluctuations were introduced.

• Restaurants view driving higher traffic in off-peak times as their top business objective for differentiated pricing, almost four times more often than increasing prices during peak times.

• Online ordering channels like third-party delivery platforms and in-app purchases are seen as the right testing grounds for dynamic pricing in the restaurant industry, where price fluctuations can influence the decision to visit or order.

• In-store or drive-thru menus are not considered suitable for dynamic pricing as customers have already arrived and are less likely to change their purchase decision based on minor price fluctuations.

• In-store sales typically make up the large majority of restaurant revenue (approximately 80 percent), limiting the overall impact of dynamic pricing in online channels for most QSRs.

• The article recommends that restaurants first optimize their pricing basics, prioritize consumer experience by avoiding real-time in-store dynamic pricing, leverage online channels for testing dynamic pricing if desired, and develop customized promotions as a preferred strategy.

Key success factors of product (trend):

• Consumer Acceptance: Strategies that are perceived positively by consumers, such as customized promotions and happy hours, are more likely to be successful in the restaurant industry.

• Strategic Channel Application: Applying dynamic pricing in online channels where consumers are more accustomed to price variability and where it can influence their decision to order or visit.

• Focus on Value Perception: Ensuring that pricing strategies are seen as fair and providing value to the customer is crucial for maintaining trust and loyalty.

• Data-Driven Personalization: Utilizing customer data to offer relevant and appealing customized promotions can drive traffic and revenue without negative backlash.

• Clear Communication: If dynamic pricing is implemented in any form, clear and transparent communication with consumers about how and why prices might change is essential to manage perceptions.

Key takeaway:

Traditional dynamic pricing, which fluctuates in real-time based on demand, is not well-suited for the restaurant industry due to negative consumer perception and the nature of restaurant visits. Customized promotions and strategic use of dynamic pricing in online ordering channels offer more promising avenues for restaurants to optimize their pricing strategies.

Main trend:

The "Cautious and Personalized Pricing in Restaurants" or "Consumer-Centric Price Differentiation."

Description of the trend (please name it):

The "Cautious and Personalized Pricing in Restaurants" trend reflects a shift in the restaurant industry away from broad, real-time price fluctuations (dynamic pricing) in physical locations towards more strategic and consumer-centric approaches. This trend emphasizes the importance of understanding and respecting consumer perceptions of pricing fairness, favoring methods like customized promotions and targeted offers based on customer data. While exploring dynamic pricing, the focus is on online channels where it can influence demand without negatively impacting the in-store experience.

What is consumer motivation:

Consumers are motivated by:

• Perception of Fairness: They expect a degree of price stability and transparency when dining at restaurants and may perceive real-time price fluctuations as unfair or opportunistic.

• Value for Money: They appreciate deals, discounts, and promotions that offer them a sense of getting good value for their money.

• Personalized Experiences: Customized promotions that align with their preferences and past behavior make them feel valued and understood by the brand.

• Predictability: They prefer predictable pricing when deciding where and what to eat, especially in physical locations.

What is driving trend:

• Negative Consumer Feedback: The backlash against the attempted dynamic pricing by a major QSR highlights the risks of implementing unpopular pricing strategies.

• Data and Technology Availability: Restaurants now have access to more customer data and technology that enables personalized promotions and targeted offers.

• Understanding of Consumer Psychology: A growing understanding of how consumers perceive different pricing methods is guiding restaurants towards more palatable strategies.

• Focus on Long-Term Customer Loyalty: Restaurants are prioritizing strategies that build trust and encourage repeat visits over short-term revenue gains that might alienate customers.

What is motivation beyond the trend:

Beyond the specific pricing strategies in restaurants, these motivations reflect broader consumer preferences:

• Desire for Fair and Transparent Pricing: Across industries, consumers value pricing practices that they perceive as honest and equitable.

• Appreciation for Personalization: Consumers generally respond positively to personalized experiences that cater to their individual needs and preferences.

• Aversion to Perceived Price Gouging: Consumers are sensitive to price increases during periods of high demand that feel exploitative.

Description of consumers article is referring to:

• Age: The study focused on 500-plus consumers who regularly dine at QSRs, suggesting a broad age range of fast-food patrons, likely including Millennials, Gen Z, Gen X, and some Baby Boomers.

• Location: Primarily consumers in the United States, given the mention of the top-five burger QSR and the context of the DailyMail.com article it was likely published in (though the study itself could be broader).

• Lifestyle: Individuals who frequent QSRs, indicating a likely busy lifestyle where convenience and affordability are important factors in their dining choices.

• Shopping preferences: They prefer pricing methods like happy hours and customized promotions that offer perceived value. They are likely sensitive to price changes that feel unpredictable or unfair.

• Are they low, occasional or frequent category shoppers: The study specifically focused on "frequent QSR diners," implying consumers who visit these types of restaurants regularly.

• What are their general shopping preferences-how they shop: While not explicitly stated, their negative reaction to dynamic pricing in restaurants suggests they appreciate a degree of price consistency and transparency in their dining experiences. They are likely receptive to personalized offers.

Conclusions:

The restaurant industry is approaching pricing with caution, recognizing the significant impact of consumer perception. Traditional dynamic pricing in physical locations is largely viewed negatively. The trend is towards leveraging customer data to offer personalized promotions and potentially experimenting with dynamic pricing in online channels where consumers are more accepting of price variability. The focus is on maintaining consumer trust and driving traffic through strategies that are perceived as fair and value-driven.

Implications for brands:

• Prioritize Positive Consumer Perception: Carefully consider how pricing strategies will be received by consumers and avoid methods that are likely to be viewed negatively.

• Invest in Data Analytics for Personalization: Utilize customer data to develop effective and well-received customized promotion strategies.

• Exercise Caution with In-Store Price Fluctuations: Avoid implementing real-time in-store dynamic pricing that could damage consumer trust.

• Explore Online Channel Pricing Opportunities: Consider testing dynamic pricing models in online ordering platforms where it might be more readily accepted and can influence demand.

• Communicate Pricing Strategies Transparently: If any form of dynamic pricing is used, ensure clear and open communication with customers.

Implication for society:

• Consumer Power in Pricing: This trend highlights the influence of consumer perception on business practices, forcing industries to be mindful of how pricing strategies are viewed.

• Potential for More Personalized Offers: The shift towards customized promotions could lead to more tailored and relevant deals for individual consumers.

Implications for consumers:

• Likely Absence of In-Store Surge Pricing: Consumers can likely expect that restaurants will avoid implementing real-time price hikes in physical locations due to negative feedback.

• Potential for More Personalized Discounts: They may receive more offers and promotions tailored to their individual preferences and purchase history.

Implication for Future:

The future of restaurant pricing will likely be characterized by a focus on personalized offers and strategic use of online channels for any form of demand-based pricing. Restaurants will prioritize building long-term customer relationships through pricing strategies that are perceived as fair, transparent, and value-driven.

Consumer Trend (name, detailed description):

• Name: Preference for Fair and Personalized Value in Dining

• Detailed description: Consumers in the restaurant industry increasingly prefer pricing strategies that are transparent, perceived as fair, and offer personalized value, such as customized promotions and loyalty rewards. They tend to react negatively to pricing methods like surge pricing or dynamic pricing that they perceive as unpredictable or exploitative.

Consumer Sub Trend (name, detailed description):

• Name: Online Price Fluctuation Acceptance

• Detailed description: Consumers show a higher degree of acceptance towards price variations in online ordering channels for restaurants compared to in-store or drive-thru menus, likely due to familiarity with such models in other digital services and the understanding that it can influence delivery availability.

Big Social Trend (name, detailed description):

• Name: Growing Scrutiny of Pricing Practices

• Detailed description: Consumers across various industries are becoming more aware of and vocal about pricing strategies, particularly those that they perceive as unfair or lacking transparency. This increased scrutiny puts pressure on businesses to adopt pricing models that are perceived as ethical and customer-centric.

Worldwide Social Trend (name, detailed description):

• Name: The Personalization Economy

• Detailed description: Across numerous sectors globally, there is a growing trend towards personalization, where consumers expect and prefer products, services, and marketing that are tailored to their individual needs, preferences, and past behavior. This extends to pricing, where customized offers are often favored.

Social Drive (name, detailed description):

• Name: The Desire for Reciprocity and Fairness in Transactions

• Detailed description: Consumers generally expect transactions to be fair and reciprocal, where the price paid reflects the value received. Pricing strategies that deviate from this perceived fairness, such as unpredictable price surges, can lead to negative reactions and a breakdown of trust between the consumer and the business.

Learnings for brands to use in 2025 (bullets, detailed description):

• Prioritize Customer Trust: Recognize that consumer trust is paramount and avoid pricing strategies that are likely to erode it.

• Invest in Data and Personalization Capabilities: Develop the ability to gather and analyze customer data to create effective personalized promotions.

• Communicate Clearly and Honestly About Pricing: Be transparent about any pricing strategies and avoid surprising customers with unexpected price changes.

• Test and Iterate on Pricing Strategies: Continuously monitor consumer response to different pricing methods and be willing to adapt based on feedback and data.

Strategy Recommendations for brands to follow in 2025 (bullets, detail description):

• Develop Robust Loyalty Programs: Implement or enhance loyalty programs that allow you to gather customer data and offer personalized discounts and rewards.

• Utilize Mobile Apps for Targeted Promotions: Leverage mobile apps to send customized offers and promotions to customers based on their location, past purchases, and preferences.

• Experiment with Dynamic Pricing in Online Ordering: If considering dynamic pricing, focus on testing it within your online ordering channels, clearly communicating any potential price variations.

• Focus on Value-Driven Promotions: Design promotions that are perceived as offering genuine value to the customer, such as bundled deals or discounts on frequently purchased items.

Final sentence (key concept) describing main trend from article (which is a summary of all trends specified): The restaurant industry is recognizing that consumer perception favors cautious and personalized pricing strategies over traditional dynamic pricing in physical locations, emphasizing fairness, value, and targeted promotions to drive traffic and maintain customer loyalty.

What brands & companies should do in 2025 to benefit from trend and how to do it: Restaurant brands should prioritize building customer trust by focusing on transparent and fair pricing, investing in data analytics to offer personalized promotions through loyalty programs and mobile apps, and cautiously exploring dynamic pricing only within online ordering channels while avoiding unpredictable in-store price fluctuations.

Final note:

• Core Trend:

  • Name: Cautious and Personalized Pricing in Restaurants

  • Detailed description: Emphasizing consumer perception, personalized promotions, and cautious online dynamic pricing over traditional in-store fluctuations.

• Core Strategy:

  • Name: Value-Driven Personalization in Pricing

  • Detailed description: Utilizing customer data to offer tailored promotions and discounts that are perceived as fair and valuable.

• Core Industry Trend:

  • Name: The Rise of Data-Informed Pricing Decisions

  • Detailed description: Restaurants increasingly relying on customer data and analytics to inform their pricing strategies and promotional activities.

• Core Consumer Motivation:

  • Name: Desire for Fairness, Value, and Personalization in Pricing

  • Detailed description: Consumers seeking transparent, equitable, and tailored pricing experiences when dining out or ordering food.

Final Conclusion:

The reluctance of the restaurant industry to adopt traditional dynamic pricing underscores the critical importance of understanding and respecting consumer perceptions in pricing strategies. The trend towards cautious and personalized pricing, leveraging data and technology, reflects a focus on building long-term customer loyalty by prioritizing fairness, value, and individual preferences over potentially alienating real-time price fluctuations in physical locations.

Core Trend Detailed: Cautious and Personalized Pricing in Restaurants

• Description: This trend signifies a deliberate and thoughtful approach to pricing strategies within the restaurant industry, moving away from the broad, real-time price adjustments of traditional dynamic pricing in physical locations. Instead, restaurants are prioritizing consumer perception and opting for more subtle and value-driven methods like customized promotions, targeted offers based on customer data, and strategic experimentation with dynamic pricing only in online ordering channels. The core of this trend is to maintain consumer trust, enhance the perceived value, and drive traffic and revenue without alienating customers through unpredictable price fluctuations in-store.

• Key Characteristics of the Trend (summary):

  • Emphasis on Consumer Perception: Prioritizing how pricing strategies are viewed by customers to avoid negative reactions.

  • Focus on Personalization: Leveraging customer data to offer tailored discounts and promotions.

  • Cautious Approach to Dynamic Pricing: Avoiding real-time in-store price changes and potentially testing it only in online channels.

  • Value-Driven Strategies: Emphasizing offers and promotions that provide clear value to the customer.

  • Building Customer Loyalty: Aiming to create long-term relationships through fair and rewarding pricing practices.

• Market and Cultural Signals Supporting the Trend (summary):

  • Negative Reaction to Dynamic Pricing Tests: The public backlash against a major QSR's attempt at dynamic pricing served as a significant warning.

  • Strong Consumer Preference for Promotions: Studies show consumers view customized promotions and discounts favorably.

  • Availability of Customer Data and Technology: Enables personalized offers and targeted marketing.

  • Understanding of Consumer Psychology: Recognition that unpredictable pricing can lead to feelings of unfairness.

  • Focus on Long-Term Customer Relationships: Restaurants are increasingly prioritizing loyalty and repeat business.

• How the Trend Is Changing Consumer Behavior (summary):

  • Increased Engagement with Loyalty Programs: Consumers are more likely to participate in loyalty programs to receive personalized discounts.

  • Greater Expectation of Tailored Offers: Consumers may anticipate receiving promotions that are relevant to their past purchases and preferences.

  • Potential for Channel-Specific Pricing Perceptions: Consumers might become more accustomed to seeing price variations between in-store and online ordering options.

  • Heightened Awareness of Pricing Strategies: The discussion around dynamic pricing may make consumers more conscious of how restaurants implement their pricing.

• Implications Across the Ecosystem (summary):

  • For Brands and CPGs: Need to provide restaurants with tools and data analytics capabilities to facilitate personalized promotions.

  • For Retailers (Restaurants): Requires investment in data infrastructure and marketing platforms to effectively implement personalized pricing strategies. Emphasis on training staff to understand and explain pricing policies.

  • For Consumers: May experience more tailored and relevant discounts and promotions, enhancing the perceived value of their dining experiences. Likely continued price stability in physical restaurant locations.

• Strategic Forecast: The "Cautious and Personalized Pricing in Restaurants" trend is expected to strengthen further. Restaurants will likely continue to invest in technologies and strategies that allow them to understand their customers better and offer more personalized value. While dynamic pricing might find a niche in online ordering, the focus in physical locations will remain on maintaining positive consumer perception through transparent and rewarding pricing practices.

• Final Thought: The restaurant industry's careful approach to pricing reflects a fundamental understanding of the importance of the customer experience and the potential damage that unpopular pricing strategies can inflict on brand loyalty. The trend towards personalized value signals a commitment to building stronger, more trusting relationships with consumers.

Source: https://www.qsrmagazine.com/story/why-traditional-dynamic-pricing-doesnt-work-for-restaurants/