The response to Wendy’s recent announcement on dynamic pricing has been intriguing, to say the least. Let’s delve into the situation from a research perspective.
Here’s all that Kirk Tanner, the CEO of Wendy’s, said in the earnings call.
“We expect our digital menu boards will drive immediate benefits to order accuracy, improve crew experience and sales growth from upselling and consistent merchandising execution. Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and day-part offerings along with AI-enabled menu changes and suggestive selling. As we continue to show the benefit of this technology in our company-operated restaurants, franchisee interest in digital menu boards should increase further supporting sales and profit growth across the system. We will continue setting the pace in generative AI and now have rolled out Wendy’s fresh AI in several restaurants where we see ongoing improvement in speed and accuracy.”
But, then look at some of the media reaction. Mentions of surge pricing, having to pay more, prices changing, just like Uber etc. and even a call for a boycott of Wendy’s because of this pricing policy change. It seems like Wendy’s has been trying to do some recovery and is saying that it’s not surge pricing.
The Media Reaction: What Went Wrong?
Let’s take a look at this from a research perspective. There are two things at play here: the pricing term used and the framing.
A few months ago, I did a study on pricing terms such as surge pricing and dynamic pricing and asked respondents whether they had a positive or negative reaction to the terms. Not surprisingly, surge pricing had the most negative response, followed by demand-based pricing and dynamic pricing. Interestingly, prices framed as a discount such as loyalty discounts and happy hour were viewed favorably.
So, what’s going on here? Let’s go back to prospect theory. I talked about this in an earlier QSR article, but it’s worth taking a look at it again.
Daniel Kahneman and Amos Tversky developed a very powerful theory called prospect theory. Prospect theory is all about how people make decisions based on the potential value of losses and gains rather than the final outcome.
Let me give you a simple example. Let’s say I gave you a choice between $50 or a 50 percent chance of getting nothing and a 50 percent chance of getting $100. Chances are that you’d choose the sure $50.
But, what about if I gave you a choice between losing $50 or a 50 percent chance of losing nothing and a 50 percent chance of losing $100. Most people would choose the second option.
What’s going on here? The value of the two choices is exactly the same, but why do we choose those options? That’s exactly what prospect theory is all about. In the first example, we view the sure $50 as a gain; while in the second example, we view losing $50 as a loss. OK, that’s interesting, but how does this relate to pricing?
Think about their findings—that people prefer things framed as a gain rather than as a loss. Let’s look at pricing and rate fences. Assume you decide to use day-of-week pricing and charge higher prices on the weekends. You could either say that you’re charging 20 percent more on the weekends or you could say that you’re charging 20 percent less during the week. They’re the same, but which would customers prefer? That’s prospect theory in action!
Framing Matters: Insights from Prospect Theory
Let’s go back to the coverage and reaction to Wendy’s rather benign announcement. All of a sudden, the news media turned it into a “loss” for consumers and the reaction has of course been quite negative.
What could have been done to prevent this? Again, let’s go back to prospect theory. ALWAYS frame things as a gain for customers. Rather than saying that you’re going to charge more at certain times, talk about the discounts or special promotions that customers can get.
Considering adopting the “rack rate” and “full fare” principles from the hotel and airline sectors. Set your standard prices as the baseline—never exceeding this rate. Instead, offer discounted prices during specific times of the day or through targeted promotions.
Make sure customers are aware of when they can get better prices. No surprises here! My research confirms that customers don’t like feeling blindsided by pricing changes. Keeping them in the loop maintains trust and keeps them happy.
Start small. Dip your toes in the water with a few trial runs before diving in headfirst. Testing things out lets you see how customers react and gives you a chance to fine-tune your approach. Oh, and keep it simple—skip the jargon like “surge pricing” and “dynamic pricing” to avoid confusion. Starting small helps minimize risks and gives you room to learn and adjust as you go.
Moving Forward
While it’s natural to feel apprehensive about implementing strategic pricing, particularly given recent events like Wendy’s experience, restaurants shouldn’t let fear deter them from exploring new pricing strategies. Negative reactions can be instructive, offering valuable insights for smarter decision-making and risk mitigation.
Moreover, every restaurant’s situation is unique, and what works for one may not necessarily work for another. By carefully evaluating your restaurant’s specific circumstances and customer base, you can tailor pricing strategies to suit your needs and minimize potential backlash.
Why should restaurants try this out? Because it’s an opportunity to provide greater value to customers while effectively managing demand. Implementing innovative pricing strategies allows restaurants to tailor offerings to customer preferences, optimize revenue, and enhance overall customer experience. By strategically pricing their products and services, restaurants can spread demand more evenly across peak and off-peak times, ultimately leading to improved customer satisfaction and business performance.
Sherri Kimes is an Emeritus Professor at Hotel School at Cornell and specializes in pricing and revenue management. She has actively involved with teaching, conducting research and consulting in restaurant revenue management for the past 25 years. She is passionate about helping restaurants increase profitability. She can be reached at sk@sherrikimes.com.
