The results from my recent survey are in and in this series of articles we’ll be talking about some of the findings. We now have a total of 142 respondents who shared their definitions of dynamic pricing, their thoughts on where dynamic pricing had the most potential, the potential challenges they foresaw and they talked about the likelihood that dynamic pricing would be adopted in the industry.
In my last article, I talked about the “why” of dynamic pricing, but in this article we’ll be talking about the "where’ of dynamic pricing." Specifically, where is dynamic pricing most likely to be applied?
MORE FROM THE AUTHOR (AND THE SURVEY):
I wanted to know about which ordering channels that respondents thought had the most potential for dynamic pricing as well as which revenue streams they considered to be the the most likely. Let’s talk about the ordering channels first.
Not surprisingly, digital orders led the way for ordering methods (89 percent of respondents), followed by kiosks (51 percent) and menuboards (42 percent). Why do I say not surprisingly? Well, according to the Square 2022 “Future of Restaurants” report, 88 percent of operators would consider exchanging physical menus for digital and according to the National Restaurant Association, operators in all six segments think that digital and QR menus will become more common in the future.
So, why the interest in digital? The answer is pretty straightforward. Depending on the POS system used, it can be relatively straightforward for a restaurant to change prices. But, it’s more than just that. By having the wealth of data that digital menus can provide, operators can more clearly understand demand variations and be able to quickly react to these variations by changing prices. As pointed out in my last article, it’s not always just about raising prices, but lowering prices may attract customers to slower periods. This coupled with an effective loyalty program and/or messaging platform can make it even more successful.
Another interesting trend is the growth in digital orders. During the pandemic, digital orders more than doubled until they accounted for about one-third of all orders. Lest you think that was a short term phenomenon, digital orders still account for about one-third of all orders. I saw a similar trend in Singapore.
Would digital menus work for all segments? Well, it depends. According to the National Restaurant Association, two-thirds of consumers prefer paper menus in a table service menu. But, in Europe, a large percentage of menus in table service restaurants are digital.
But what about consumers and digital menus? What do customers think of digital menus? According to the NRA study, 58 percent of consumers said that they would access a menu with a QR code and 64 percent would order using an app. Not surprisingly, younger people are even more open to this tech-driven approach. And, according to Square, 11 percent of consumers would avoid a restaurant without a digital menu.
Based on all of this, it makes sense that digital would be considered the most likely ordering channel for dynamic pricing.
Kiosks and menuboards were also commonly mentioned areas. Again, depending upon the POS system, it’s possible to change prices on kiosks and electronic menuboards. And, kiosks are popular with consumers. According to Paytronix, 79 percent of customers prefer to order from kiosks or online rather than from staff. And, it’s not just for fast food. About half of customers prefer this for casual dining and about twenty percent prefer it for fine dining.
I asked a similar question about which revenue streams held the most potential for dynamic pricing. Again, not surprisingly, delivery was top (86 percent) followed by curbside and drive-through (62 percent each).
This makes sense since the large majority of delivery orders are made digitally. In addition, delivery customers tend to be driven by their desire for convenience and as a result are often less price sensitive. But, other than for the pizza segment, delivery is not the dominant revenue stream for most restaurants. In fact, it only accounts for about 10 percent of the overall restaurant market. Still, it’s a great place to start. It’s not surprising that many of the dynamic pricing providers have focused in on this area.
Curbside and drive-through were also considered to be promising channels. Interestingly, of the 33 percent of orders that were digital, over half were for takeout as opposed to delivery and curbside.
The Top Three
I also asked respondents to rank the areas which they felt had the most potential for dynamic pricing. Delivery was No. 1 (42 percent of respondents ranked it first), followed closely by digital (40 percent) and menuboards (12 percent).
Let’s talk a bit more about digital. Digital ordering is definitely not limited to delivery. In fact, in much of Europa and Asia, digital menus are quite commonplace, even in full service restaurants. Are digital menus likely to be more widely adopted in the U.S.? Well, according to recent studies, that trend has already started. While I’m talking about digital menus, I want to emphasize that given that some customers prefer paper menus, it’s important to give them a choice. For those customers who don’t want to order digitally, have traditional menus available.
Digital menus not only allow you to vary prices, but also give you the opportunity to dynamically change your menu. Think about this. During busy periods, you might be able to reduce the menu size so that you are better able to leverage your kitchen capacity and also use some simple menu design tools to help drive customers to your more profitable items. DynamEat does just this. During busy periods, an operator can choose to offer a reduced menu with an emphasis on high margin items and on menu items that don’t take too long to prepare. The net result of this is not only one of increased profit, but also allowing the restaurant to more effectively leverage their availability capacity.
In the next article, I’ll be talking about some of the challenges that operators anticipate with dynamic pricing and discuss ways in which these might be addressed.
After that, I’ll be providing an overview of what people have tried and discussing the likelihood of the industry adopting dynamic pricing practices.
Sherri Kimes is an Emeritus Professor at Hotel School at Cornell and specializes in pricing and revenue management. She is passionate about helping restaurants increase profitability. She can be reached at firstname.lastname@example.org.