Where Is Surge Pricing Headed?

"Restaurants thinking about implementing surge pricing need to balance the revenue upside with the potential brand backlash," says Savneet Singh, CEO of PAR Technology. "While third-party delivery companies were expected to commoditize food like airline tickets, the opposite happened: people became more attached to their favorite brands. Food is visceral in a way that airline seats aren't. Trying to apply surge pricing models in restaurants is still very early and I think we’ll see brands take a cautious approach to figure out what ‘sells.’"

Is it possible for restaurants to have the best of both worlds and maximize revenue and still capture customer loyalty?

Modern Restaurant Management (MRM) magazine asked Singh to elaborate on his views on where  the pricing model is headed in the QSR landscape. 

After the Wendy’s dynamic pricing fiasco, where does the industry stand on dynamic/surge pricing? How can a brand recover from a misstep?

The industry is going to be tepid. While surge pricing might make all the sense in the world, a PR miss can be massively distracting. I think we’ll see brands really take their time, study the successes and failures of others and slowly wade into the strategy. Some brands will absolutely avoid the idea now, and others might go all in, but for the most part, I think the industry needs some proof points of success before we see momentum build back up.

Brands that may have erred in their communication and rolled out a surge strategy have to work quickly to earn back trust. The fastest way to do this is to hit it upfront. Be candid about the mistake (if there was one) and open about your underlying “why” and your plan for the future. Humans are a forgiving tribe when treated honestly.

What should other restaurants take away from that as a cautionary tale?

Bring marketing along for the ride! Surge pricing can make a ton of logical sense. We pay for surge items almost every day (taxis, planes, etc.), but food is a bit visceral, and we’ve been trained to buy it in a certain manner. I think marketing teams can work side by side with the tech and business teams to come up with the brand promise that resonates most with customers. That partnership will hopefully bring the customer voice to the table while at the same time understanding the challenges of the business. Together, you can end up with the right solution. 

Surge pricing can make a ton of logical sense. We pay for surge items almost every day (taxis, planes, etc.), but food is a bit visceral, and we’ve been trained to buy it in a certain manner.

I don’t think this is the end surge pricing by any means, but brands must understand the risk and dimensionalize the upside. 

Will customers always be resistant to dynamic pricing at restaurants? Can marketing help to personalize and emphasize the value proposition aspect?

Yes, and yes! I think education is the key. We all expect surge pricing from third-party delivery firms but are offended when the brands we love apply it to us. It’s an odd dynamic that will take some time to get right. Marketing organizations can help bridge that divide and, importantly, bring the customer's voice to the decision-making table.  

What are best practices for restaurants regarding pricing, particularly when the margins are tight and guests are choosing best values?

When margins are tight, and guests are seeking the best values, brands can:

• Be transparent about the reasons behind price adjustments, such as increased ingredient or labor costs.
• Focus on providing a great experience and high-quality food at a price that feels fair to customers. Emphasize the value they deliver, not just the cost.
• Offer personalized discounts and deals to loyal customers or during slower periods to encourage visits without sacrificing margins across the board.
• Analyze their menu to identify high-margin items and best-sellers, then consider reducing portion sizes or adjusting prices on less profitable items.
• Leverage data analytics, customer relationship management (CRM) tools and customer feedback to better understand diner preferences and price sensitivities across locations or during specific times. 
• Double down on customer service and loyalty programs to create a strong emotional connection. When customers feel valued, they may be less price-sensitive.
• Managing costs is crucial, but it's equally important to preserve brand reputation and customer relationships.

Do you think dynamic/surge pricing models will be more commonplace in the next few years?

Who knows! That’s the fun of it. I think we’ll see growth from where we are today, but food still occupies a unique aspect of our brain and heart space. It hits both the functional and emotional. That makes these decisions far more complicated. We all know how it feels when we feel treated unfairly at a restaurant—for some reason, it creates this intense visceral reaction. So restaurants that go down this path really need to invest in the education and the emotions of their customers to get it right. And I expect many to all-out avoid it. 

At the end of the day, a restaurant's most valuable asset is its brand promise. Ensuring the promise is not encumbered with pricing changes is the fine balance all restaurants are walking.  While maximizing revenue is crucial, jeopardizing brand equity for short-term gains is extremely risky. There will inevitably be some form of surge pricing, but today, with the current backlash, I don’t see larger brands being the early adopters quite yet. Just like any menu change, I think we’ll test markets and models before anything takes off.