Saunders said that even though dynamic pricing is already ubiquitous, the grief Wendy's got shows how sensitive consumers are to price variations. — Bloomberg
NEW YORK: Consumers will pay more for a flight to Florida or for a hotel room during peak vacation times. They fork out more for a rush hour Uber ride, perhaps while grinding their teeth, and rely on apps like ParkWhiz or ParkMobile to book spots for their cars at premium prices.
But a social media backlash this week to media reports that said fast-food chain Wendy’s had plans to increase menu prices during its busiest hours showed a limit to where, when and for what US consumers will trade more cash for convenience. It looks like a Dave’s Double Combo or a Frosty won’t make the cut.
Wendy’s clarified its intentions on Feb 28, drawing a distinction between the company’s “dynamic pricing” strategy and “surge pricing” practices that charge more during times of peak demand. The company said any fluctuations it decides to test in the future “would be designed to benefit our customers and restaurant crew members”.
Here’s a look at the differences between dynamic and surge pricing, which industries are using them and some of the more subtle ways in which companies build price fluctuations into their bottom lines.
What’s the difference between dynamic pricing and surge pricing?
Dynamic pricing and surge pricing are both models that continuously adjust prices based on a range of factors, sometimes within minutes. Dynamic pricing can involve both increasing and decreasing prices, based on market conditions, the season and supply changes. Surge pricing is a subset of dynamic pricing and only involves increasing prices, based on supply and demand, experts say.
Which industries use dynamic pricing?
Dynamic pricing has been part of some industries almost as long as they’ve had technology capable of adjusting prices quickly.
Airlines, for instance, regularly raise and lower fares depending on the time of year, expected customer surges, and projections of how many seats they can fill at various times. Flights on Sundays and Fridays, for instance, tend to cost more than those in the middle of the week. Airlines even have a name for the practice: yield management.
Hotels do much the same with room reservations. It’s why you can score better deals during hurricane season or immediately following big holidays when travel tends to slump. These days, though, the actual calculations that go into reservation pricing are much more complex.
Other places where dynamic pricing shows up include concerts, sporting events, parking facilities and street meters. Utilities use dynamic pricing to limit usage at times of high demand that could threaten blackouts, notes Daniel Freund, a business professor at the Massachusetts Institute of Technology.
Neil Saunders, a managing director with research firm GlobalData, said that even though dynamic pricing is already ubiquitous, the grief Wendy's got shows how sensitive consumers are to price variations.
“Dynamic pricing is common in travel and accommodations. There’s a fixed level of supply,” Saunders said. “But if one minute a burger is US$5 (RM24) and the next minute it’s US$6 (RM28), and then it goes up and down again, they will simply get annoyed. And they’ll probably go elsewhere.”
How common is dynamic pricing in restaurants?
Experts say it’s not common. But a growing number of restaurants are charging more for items that patrons order using third-party apps like Uber Eats and DoorDash, according to Jason Goldberg, chief commerce strategy officer at Publicis Groupe, a global marketing and communications company.
Debbie Roxarzade, founder and CEO of Las Vegas-based Rachel’s Kitchen restaurants, uses technology from a startup called Sauce Pricing to help adjust prices for users of third-party apps based on algorithms and the in-person traffic at the chain's nine restaurants.
For example, a sandwich that would cost US$12 (RM56.86) on the regular menu might rise to US$12.60 (RM59.70) for a delivery customer during peak hours but fall to US$11.05 (RM52.35) during slow times such as after lunch, Roxarzade said.
“It’s helpful to streamline operations and keep things fresh and clean and more consistent instead of having a huge peak in demand and then just very little sales in other hours,” she said.
Roxarzade emphasised that her physical locations do not employ such dynamic pricing methods.
What about in retailing?
Amazon and other online retailers push prices up and down based on supply and demand and competitive pressures. The strategy goes full tilt during the Black Friday and Cyber Monday shopping bonanza.
Shoppers know that prices for a hot toy can go up ahead of the holidays, given a surge of demand, while prices for familiar games and puzzles can go down, Goldberg said.
But businesses “exploitatively” raising prices based on the time of day for routine items isn’t a good practice, Goldberg said.
“We do not engage in surge pricing,” said Amazon in a statement emailed to The Associated Press. “Retail prices fluctuate all the time. Our prices change based on our work to compare and match low prices to competitors.”
Amazon currently faces a Federal Trade Commission lawsuit accusing it of various unfair practices such as overcharging sellers and preventing them from lowering prices.
Amazon has called the lawsuit “misguided” and said if the suit is successful, it will force Amazon to actually engage in practices that actually harm consumers and the many businesses that sell in its store like having to feature higher prices.
Do grocery stores use the strategy?
Before the coronavirus pandemic, grocers and restaurants already were playing with technology to make changing prices easier. But the pandemic pushed more restaurants and stores, particularly grocers, to turn to digital pricing because of severe labour shortages.
Walmart Inc and other grocers have expanded their use of electronic shelf tags, relieving workers of doing the job manually so they can better help out customers. Restaurants had another reason to ditch printed menus in favour of QR codes that diners could scan to access the menu: They were worried about physical interactions during the height of high Covid-19 infection rates.
Businesses have seen more of a need to rely on digital pricing at a time of high inflation, analysts said.
“It’s not that they can raise the price every hour, but they do occasionally change prices up and down, ” said Goldberg. He noted that changing prices at a grocer, which typically has 20,000 items in each store, can be laborious if they have to depend on workers.
Will consumers accept dynamic pricing?
Experts say it's going to be hard to change public attitudes toward dynamic pricing, especially in fast-food restaurants. At the same time, charging customers to choose a seat or check a suitcase for a flight hasn’t always been the routine it is now.
It’s also possible to approach dynamic pricing in a way that defuses consumer resentment, MIT’s Freund said.
“Rather than saying we’re going to use surge pricing at peak demand periods, they could say we’re going to explore giving discounts during off-peak periods,” he noted. “And of course, those two statements are equivalent.” – AP
