At a time when many restaurants are grappling with tight margins squeezed by inflationary pressures, dynamic pricing offers a lifeline that could breathe life into the commercial viability of a restaurant business.

At its core, dynamic pricing involves adjusting menu prices based on demand. Imagine a world where you arrive 30 minutes before the table next to you and pay a different price to them. This model, akin to the pricing strategies we are very accustomed to in hotels, would see the price of a dish change according to demand for a seating time.

However, its impact on the customer experience remains a topic of intense debate. Will diners accept fluctuating prices for their favorite dishes, or will the unpredictability sour their appetite? Moreover, the operational challenges of implementing such a system loom large, raising questions about the feasibility and acceptance of this bold approach in the culinary world.

In this edition of Elite RM Dispatch, we delve into the parallels of the hotel industry dynamic pricing journey and how the learnings can be applied to restaurants, setting the table for a transformative shift in how we dine out.

Nelson Mandela famously once said, "it always seems impossible until it's done". And such was the case for dynamic pricing in the hotel industry back in the late 1990s into the early 2000s. Many experts articulated in great detail why it worked for airlines but would never work for hotels.

At the time, it felt like there were more reasons NOT to pursue it, than to carry on and realize the full potential. Fortunately, the hotel industry had some warriors (Maria Taylor & Michael Heyward in Accor Asia-Pacific) leading the charge who remained steadfast in the face of intense opposition, and today, dynamic pricing is common-place. I believe the same will apply in the restaurant scene as it is adopted over time but there are gradual steps required to make it happen.

Using the hotel industries learnings as a starting block for restaurants, let's consider the parallels and the potential challenges ahead.

Technology is not ready

In the early 2000's when dynamic pricing was introduced in Australia, my role was in hotel distribution. I would load hotels rates into various central reservation systems (CRS) and onto the global distribution systems (GDS) for the world to access. We would conduct an annual solicitation of prices from hotels and our team spent three months loading them live for the year ahead.

When the suggestion of changing rates on a daily basis was raised, we were initially uncertain how this could practically be implemented across various distribution systems and the same could be said for the restaurant industry today.

In reality, we didn't implement the fully dynamic model we know today driven by advanced algorithms and integrated technology. It began with a humble excel spreadsheet using 4 demand/price levels against a rudimentary forecast. The manual, elementary origins of dynamic pricing taught us the basic logic of demand based variable rates and is what laid the foundation for the sophistication we see today.

There are many moving parts and multiple stakeholders to the technology stack being ready. While I know there are crusaders out there working on next generation POS, the restaurant industry would benefit from starting simple and doing what they can with what they have rather than aiming for the ultimate result from the outset.

Data capture

A great starting place would be to avoid attempting to untangle the complex web of advanced technology integrations and simply begin with the data that exists in the point of sale system (POS). A basic record capture of covers by half hour slots is a good start (can be 15 min slots if preferred). Initially, it is about collecting a repository of useful, usable data to create a reliable forecast.

Below is an example of a basic data collection template. Unlike hotels, capacity is often variable in a restaurant according to table configuration and even licensing. In the outset, it would be wise to avoid the fringe cases and land on a common maximum capacity.

Understanding the demand patterns begins with the collection of actualized data

Forecast

Once you have at least 4 weeks of useful covers data captured, you can begin to create a logical covers forecast, however, this alone won't give the restauranteur enough information for pricing decisions. A forecast determining pricing needs to consider total demand irrespective of capacity.

For example, on a Saturday night in high season, many restaurants could fill their seats 2 or 3 times over at peak dining times but they are constrained by the maximum number of covers they can physically seat.

In the hotel industry, we use the phrase "unconstrained demand forecast". This assumes the restaurant had an endless supply of space, tables, and seats. It is this demand number that determines the pricing for a given time slot.

With an unconstrained forecast, we can begin to consider pricing decisions

Pricing

Pricing was once described to me as capturing the value of a product in the mind of a consumer. Value is such a variable term when it comes to pricing. For someone wanting to dine on a Saturday night at a restaurant next door to a stadium where they will see the Elton John farewell tour for their birthday, they will be willing to pay a premium to realize that value. They may not be willing to pay the same price on a cold Tuesday night in February with the stadium lights off and no events taking place. You see, they are not only paying for the food, but for the convenience and the experience.

Our first small step into hotel dynamic pricing was to implement seasons with day of week pricing and special event dates. In reality, it wasn't dynamic pricing as we know it today, but it allowed us to gradually educate the market about gaining greater value by purchasing off peak nights and limiting the unconstrained demand on peak nights. If someone was booking a restaurant on the night of the Elton John farewell tour but were not attending the tour, they could either move to another date or dine in another location.

As the price is increased, the demand decreases allowing the restaurant to raise the average check for peak seating times and shift price sensitive demand to the lower seating times increasing total covers.

For this to work in the restaurant industry, reservation websites need to clearly label and identify the value dining periods at the time of reservation. A shift is required in the way seating times are presented and marketed. A process that requires careful consideration and tactful, leading marketing.

To understand the perils of getting this step wrong, we need only consider the Uber experience. Uber infamously introduced 'surge pricing' in 2011 which was designed with two purposes in mind; 1. to encourage riders to travel in lower demand periods but also to entice drivers to hot spot areas earning more money. The phrase 'surge pricing' positioned value in consumers mind in the wrong way. While surge pricing had a sound logic, it wasn't received well by the customer. By highlighting the surge, Uber drew the customers attention to the increase in pricing and not the better value discounted proposition off peak.

The restaurant industry isn't aiming to serve two masters when marketing dynamic pricing, so the right way for a restuaranteur to position it is to focus on the savings. Highlighting discounts to customers willing and able to be flexible directs volume into the lower periods and away from the peaks. For example, something akin to the below mock up would need to be considered and vigorously tested across various distribution channels. A shift from a single price menu to variable pricing by seating time would require a shift in technology and how it is presented to the customer.

Promotions and value identified at time of reservation educating the market and enticing to lower demand periods

The technology triangle: Marketing, Menus, and POS

There is a Chinese proverb that says the best time to plant a tree was twenty years ago, the second best time in now. The same can be said for point of sale partners, marketeers, and restaurant menus.

Marketing technology

The first hurdle is to begin the education process with the consumer which, in many respects, has already begun. Consumers are accustomed to variable prices in other areas of their lives such as airplane tickets, their energy bills, hotels, taxis, interest rates etc. And early bird dining menus have been around for many years in restaurants, so variable pricing isn't a new concept.

The application of variable menu pricing by seating time is the mindset shift consumers are not accustomed to. That process should be planned carefully and implemented robustly.

Even if a restaurant is not planning to dynamicaly price anytime soon, educating the consumer to book in the off peaks should be a higher priority than it is today. Think about how reservation times are displayed on your own website and how you market to foot traffic. Elevate the education process of rewarding off peak dining to lay a basic foundation you can build on down the line.

Digital menu technology

There are several ways to approach the menu such as QR codes, mounted digital screens, or tablet devices - that decision will depend on the brand identity of the restaurant. QR codes have been met with mixed reactions but many high-end restaurants already use tablets to elevate the experience with more dynamic content.

Irrespective of how a restaurant chooses to adopt, without a digital menu, the possibility to implement dynamic rates does not exist, so this must be addressed to take advantage of the strategy. There are some immediate processes required that link the reservation/table No. to the right menu but this is not an insurmuntable challenge.

Point of sale (POS) technology

There are already POS suppliers blazing a trail of dynamic pricing and even revenue management suppliers that support the decisions. Most POS are not there yet especially the traditional suppliers. Beginning the discussion with your POS partner can never be too soon.

Even if you're not intending to implement immediately, planting the seed with your POS developers allows them to consider the framework of their existing efforts knowing this may be coming down the line. In the current age of AI, development is becoming more efficient so this should not be a showstopper. If it is, change supplier.

Consumers: The real change

The change required in technology is truly dwarfed by the change needed in human behavior and expectation, both for the guest and for restaurant staff alike. It's why the marketing should be discussed and the change-process for consumer be commenced now. Gradually educating the market allows time to embed concepts before hitting them with the full package.

When we implemented dynamic pricing back in the early 2000's, one brand within the portfolio resisted the change more than any other and that was the budget brand. The marketing team were steadfast that the price was the brand - a precarious position in any business vertical.

For at least 5 years after dynamic pricing was implemented, only 3 seasons were allowed per year and the billboard mounted on the side of the hotel displaying the price remained in place. Today, that same brand is perhaps the most dynamically priced brand of them all and eventually benefited the most. In my recent podcast with Nigel Maule, he described the shift to dynamic pricing as 'war' with the exec team but it delivered millions in upside changing perceptions forever.

The learning for restaurant brands is not to 'assume' outcomes of implementation but to 'test'. The decision to test is not terminal and gently approaching the subject with a goal to learn will not bring the restaurant to its knees. Leave preconcieved ideas at the front door, test objectively, and problem solve with a goal to succeeding. You will be surprised.

Will Dynamic Pricing be a Thing for Restaurants?

It should be. The fundamentals of dynamic pricing apply to restaurant seating times as they do any other capacity constrained industry. Dynamic pricing has the ability to entice demand into trough periods increasing total covers and optimize the peak demand periods through price. Carefully implemented, using learnings from those that have gone before, will ensure it is nuanced and delivered with finesse.

Ultimately, restaurant dynamic pricing is already on its way in and will increase the commercial viability of many establishments. Like a well laid mis en place, good leadership and advanced soft skills will dictate how well dynamic pricing is introduced and recieved.

Let's hope for a smooth service.

Comments:

Max Starkov
Hospitality & Online Travel Tech Consultant & Strategist

F&B revenue management should start using dynamic rates, it’s no brainer! Why the same appetizer, salad or main dish cost the same on a Tuesday evening (super low demand at many restaurants) and Saturday evening (super high demand). At 6pm and 8pm? Or meal pricing for the last available table at the restaurant? The same questions for pricing for drinks and cocktails at the bar. Analytics can easily identify high vs low demand.

At the minimum, F&B should introduce variable pricing using the simplest formula for differentiated pricing: Ex. Standard demand=100%; high demand=120%; low demand=90% of the standard price, etc.

And then, just imagine what could be achieved by using an AI-powered F&B RMS and dynamic pricing based on real-time demand.

Rob Paterson was a 15-year veteran of Revenue Management before entering the C-Suite and eventually being named CEO of Best Western Hotels Great Britain in 2018, a role he occupied for almost 4 years. He now resides in the US speaking professionally on leadership and administrates the Elite Revenue Management Community. To learn more about how Rob can help elevate yours' and your company's performance, check out the services page and schedule a call or join one of the upcoming podcasts listed below.

The Elite Revenue Management Group is a community for modern RM professional to hone their soft skills. The group is administered under the Grind Leadership Academy offering free live tutorials, networking opportunities, tailored and specialized coaching programs, and career advancement. Elite Revenue Management is accepting new members from RM professionals now.