Dynamic pricing would add friction to the guest experience, according to Capterra’s 2023 Dynamic Pricing in Restaurants. Sixty-five percent of consumers say dynamic pricing would make the decision of where and when to eat more difficult; 63 percent say it would make it harder to budget their restaurant spending.
The research indicates consumer sentiment on dynamic pricing is overwhelmingly negative, and that most customers are unlikely to utilize it in a way that benefits restaurants. Just 34 percent of consumers think dynamic pricing is good for customers, and 42 percent would order less frequently, if at all, from a preferred restaurant if it began using the technology.
The survey of more than 900 U.S. consumers also found that:
- Customers are attentive and sensitive to menu prices: 81 percent of consumers check menu prices always or often before they choose where to eat, and 51 percent have stopped patronizing a preferred restaurant due to recent price increases.
- Consumers need strong incentives to participate in dynamic pricing: Most consumers would be incentivized to order outside of peak hours from a preferred restaurant only if discounts exceed 10 percent off the original price.
Modern Restaurant Management (MRM) magazine asked Molly Burke, senior restaurant analyst, Capterra, for additional insights on the survey results.
Is dynamic pricing just a better fit for other industries and not restaurants? Is it too risky, particularly now coming out of the pandemic and with people paying more attention to their budgets?
Dynamic pricing is ill-suited to the restaurant industry because consumers’ biological and financial preferences around food–i.e., consistent mealtimes and predictable prices–are at odds with dynamic pricing’s peak-demand price surges.
Restaurants that adopt a dynamic pricing tool should avoid treating it as a 'set and forget' solution, and instead pay close attention to how it’s impacting customer experience.
Our data shows that most people want relatively consistent daily mealtimes, even when they have the flexibility of a hybrid or fully remote job or are incentivized to change those mealtimes with a discount. Furthermore, given record inflation, people are paying close attention to their spending on food. Almost all of them check prices before ordering, and over half have stopped frequenting a preferred restaurant due to price hikes. Introducing dynamic pricing won’t help consumers in this area: 63 percent say it makes budgeting for restaurants harder.
Sixty-five percent of consumers say dynamic pricing complicates the decision of where and when to eat. It introduces an extra calculation for the customer to make each time they look at a menu: Does my hunger level and enjoyment of this restaurant’s food justify the elevated price? Can I hold out for a few hours for a discount? This new point of friction will turn as many as 42 percent of your customers away.
All this said, dynamic pricing is not necessarily a perfect fit for any industry, because they put a premium on convenience. Pricing algorithms also tend to be ignorant of emergencies or bad actors, making them vulnerable to abuse and PR nightmares–take Ticketmaster’s Taylor Swift bot fiasco and Uber’s history of price-gouging during natural disasters and mass shootings, for example. Restaurants that adopt a dynamic pricing tool should avoid treating it as a “set and forget” solution, and instead pay close attention to how it’s impacting customer experience.
What’s the appeal of dynamic pricing for restaurants, if it turns off their guests/potential guests?
Dynamic pricing is appealing for restaurants because in theory, it’s an automatic revenue booster. An algorithm optimizes prices and displays them digitally in real time, saving you and your staff the headache of handling those complicated calculations. Its allure underscores some core problems facing restaurants today: they need automation to compensate for staffing issues, and they need more cash flow to cope with rising operational costs.
In reality, dynamic pricing is far from a silver bullet. If a preferred restaurant were to use dynamic pricing, only nine percent of its customers would be willing to order more frequently, at elevated peak-hour prices, while 36 percent would order from the restaurant less frequently, and six percent would stop ordering altogether.
Sometimes, automation is a much-needed solution for outdated or costly practices, and one that benefits both restaurant and consumer. We saw this with the rise of digital menus during the pandemic–while some customers complained that QR code menus detract from the experience of dining out, that technology saved restaurants time and resources and eliminated a COVID contamination risk. With dynamic pricing, the proposed benefits appear to strongly favor businesses, while leaving customers out in the cold with higher prices.
With dynamic pricing, the proposed benefits appear to strongly favor businesses, while leaving customers out in the cold with higher prices.
How much of a role is tech playing in propelling the concept?
Tech is driving a general push toward automation in the restaurant industry. That includes dynamic pricing, as well as more widely used tools for point-of-sale and scheduling. On the cutting edge, robot cooks and servers are helping make up for a shortage of human workers.
Restaurant technology is certainly an exciting field with immense potential to enhance customer experience and support human workers and business owners. The key is to pay attention to the level of automation your customers are comfortable with, and to communicate tech-driven changes anytime you adopt a tool that alters their experience at your restaurant–think service, food, and payment methods.
Is there anything that could be done to get guests to accept/understand dynamic pricing for restaurants? They do love specials and happy hours already.
If a restaurant decides to adopt dynamic pricing tech, it should train staff on how to communicate this change to customers and explain how it works. Without an explanation for why you’re charging more at different times of day, you risk alienating your customers–they won’t know what the rules are for how and when prices shift, and they’ll simply opt for a competitor with more predictable prices. You’ll also miss out on the ability to incentivize budget-conscious customers to dine with you more frequently during non-peak hours, when prices are lower.
Before you announce your shift to dynamic pricing, make sure you have a good reason to raise prices in the first place. Customers will accept price increases on the grounds of improving the quality of your food, paying employees more, or covering increased operational costs. If customers sense that you’re simply raising prices for the sheer sake of profit, they won’t be pleased.
Restaurants should be warned that for consumers, hearing about dynamic pricing may not be as pleasant as hearing about a new happy hour deal or special. You’ll have to do some verbal gymnastics to frame dynamic pricing as a discount model, rather than what it really is–raising prices during normal mealtimes. You should expect that many of your customers (as many as 52 percent) will interpret dynamic pricing as price gouging.
Is the concept more acceptable to certain age groups as opposed to others?
In terms of whether they would dine more or less frequently at a restaurant using dynamic pricing, there is no significant difference between Gen Z, Millennials, and Gen X and Boomers. Each age group is just as likely to say dynamic pricing is price gouging, and that it’s not good for customers.
You should expect that many of your customers (as many as 52 percent) will interpret dynamic pricing as price gouging.
Interestingly, Gen Z is significantly more likely than older generations to say dynamic pricing makes it more difficult to decide when and where to eat and to budget their restaurant spending. If restaurants are hoping to capture young consumers, using dynamic pricing is not the way to go.
Is there a way to flip the script and use the data to appeal to budget-conscious consumers?
Yes, you can incentivize some budget-conscious consumers by framing dynamic pricing as a discount model. However, keep in mind that these customers will expect steep discounts of 11 percent off or more in exchange for ordering outside of peak hours. If you take that approach, you should do the math to figure out whether your restaurant can attract enough non-peak hour customers to make up for both the discounts and the share of customers that will stop ordering from you altogether in response to the price changes.
Did any of the research results surprise you?
While it was not shocking to see that dynamic pricing for restaurants is a generally unpopular concept among consumers, there were some surprising results in this research. For example, I expected to see more interest in dynamic pricing from hybrid and remote workers, who typically have more flexibility with mealtimes than in-person workers. However, neither group was significantly more likely than in-person workers or the average consumer to say they’d order from a participating restaurant more often. Additionally, remote and hybrid workers were just as likely as in-person workers and the average consumer to equate dynamic pricing with price gouging.
What is the best advice for restaurant owners to take away from the survey?
Dynamic pricing is an exciting innovation in the restaurant tech space. It’s worth taking the time to consider whether it’s right for your restaurant, given its unfavorable reputation among customers and its potential for serious financial impact.