The lesson from Wendy’s is that just because businesses can use dynamic pricing, it doesn’t mean customers will like it – especially if they’re more aware that it’s happening. — Designed by Freepik (www.Freepik.com)
When word got around that the burger chain Wendy’s would start surging prices in 2025 in the United States, the backlash was swift. What followed was a swarm of media coverage, outraged customers, late-night TV jokes and a bevy of spicy memes.
It seemed the fast food chain’s alleged dastardly plans were dead on arrival. That is, they might have been if surging prices for your Frosty and fries were what Wendy’s was really planning to do.
Wendy’s quickly clarified that it wasn’t surge pricing after all; it was actually using “dynamic pricing”. That distinction is key, but it’s still business-school speak that’s not clear to most people.
“I think they didn’t think through how people would interpret that phrase,” says Robert Shumsky, a professor of operations management at Dartmouth University’s Tuck School of Business.
Here’s the difference: Surge pricing uses real-time supply and demand data to raise – and only raise – prices. If you’ve ever tried to get a rideshare during rush hour, you’ve experienced how surge pricing hikes up the cost of your fare.
Dynamic pricing, on the other hand, uses real-time supply and demand data to fluctuate prices up or down.
Rather than raising prices in response to high customer demand, as the public assumed, Wendy’s says it plans to use artificial intelligence (AI) algorithms to lower prices during slow times, according to a statement from Wendy’s to NerdWallet on Feb 27.
All of this is to say that what Wendy’s is doing isn’t all that new. Consumers are already paying for goods and services set by dynamic pricing in lots of industries – including food and hospitality.
However, technology is making it much easier to alter prices in real-time using an algorithm. And the availability of that resource has its appeal to businesses that hadn’t previously been able to price based on real-time factors.
On the surface, the most puzzling piece of the reaction to Wendy’s is that its competitors – McDonald’s and Burger King – already do dynamic pricing in the US. They, along with Starbucks, offer promotions during slow parts of the day and offer perks (and even lower prices) for ordering via apps.
The lesson from Wendy’s is that just because businesses can do that, it doesn’t mean customers will like it – especially if they’re more aware that it’s happening.
“I think the big question now is whether there’s a change in consumer acceptance over time,” says Shumsky.
“When it’s rolled out in an industry, either it’s going to be rejected or it’s kind of become the norm, right? It became the norm in some industries, but as you saw from the reaction to Wendy’s fiasco, sometimes that doesn’t work very well.”
All around you
Anyone who has ever booked an airline ticket or a hotel room has already paid an amount set by dynamic pricing. These industries were, and still are, the dominant space for the model.
But those prices are primarily set based on seasonal factors. For example, more people travel in the summer months, so airline tickets are more expensive in the summer.
Other influences on pricing include patterns of consumer behaviour – the longer you wait to book a flight, the more you’ll pay.
Hotel bookings and Airbnbs tend to cost more on weekends. Amusement parks like Disney World and Disneyland set prices based on historical data, such as how long lines take at the Jungle Cruise during peak months.
But the algorithms used in dynamic pricing are more sophisticated than they once were, and AI can analyse more data than ever before.
Data can be collected about the weather at any moment, rather than what’s typical during a season.
Algorithms can factor in the volume of customers in real time, as opposed to relying on long-standing consumer patterns.
Ecommerce has also been doing this for quite some time. Amazon, for example, automates pricing based on real-time data about consumer behaviour, supply, demand and competitor offerings. All of that data analysis churn allows for rapid price changes.
Driven by digitalisation
More advanced algorithms mean dynamic pricing can be deployed easily and efficiently. In turn, businesses that use AI-enabled dynamic pricing may have more certainty over what they should charge at any given time.
But on the flip side, it also means consumers may have less accurate expectations about what they’ll be charged.
Restaurants, for example, have always had happy hours and other common, mostly minor, price fluctuations, says Zach Brown, assistant professor of economics at the University of Michigan.
Unexpected price changes are relatively new for restaurants, and consumers might be annoyed and confused to find the cost of an item higher than expected.
Digital menus have made price changes even easier.
Think of QR-coded menus that were widely adopted for sanitary reasons during the pandemic – many restaurants are keeping those around because it’s a lot easier to change up a menu online than it is to print a new one.
Those digital menu boards that Wendy’s plans to introduce next year are what make its dynamic pricing implementation possible.
“I think the issue historically has been that technology was just not available,” says Brown. “You can program software to do it for you, so you don’t even need a manager thinking about what prices to set.”
Shumsky says: “At grocery stores, they had to, by hand, go around and stick tags on things. Now they can electronically change them, and that makes price changes easier to roll out in real time. There’s also certainly better algorithms behind the scenes to monitor demand and supply and to adjust prices in real time.”
Prices end up being lower for some people and higher for others, says Brown. “You end up with kind of winners and losers,” he says.
“I will say that these things typically benefit sophisticated consumers. Maybe they’re checking the price online and they’re saying, ‘OK, let’s go now because prices are lower’.”
All of that data gathering and analysis done by AI doesn’t end with setting prices. The technology can also directly influence shopping habits and encourage cross-selling, says Shumsky.
Again, it’s typical for ecommerce brands to use algorithms to offer targeted advertisements and sales to consumers – one scroll through Instagram will show you how that’s deployed.
But brick-and-mortar retail is trying to catch up, and the same AI tech that’s used for dynamic pricing can help guide customers toward products and deals, too.
Wendy’s, for instance, says AI technology can also nudge customers toward products based on factors like the weather, as the company offered in a statement, “a suggestion of a cool Frosty on a warm summer day”.
AI-driven algorithms are only getting better at optimising what they spit out, and, frankly, that could be concerning, says Brown.
“I do think we need more transparency about what these algorithms are doing,” he says. “Some pricing algorithms are probably innocuous and could even benefit consumers in some cases. Some are probably not.”
Advancing AI analytics
Ashwin Kamlani, co-founder and CEO of Juicer, an AI-driven dynamic pricing company, says that AI makes it easier to take mass quantities of data and run analysis on them, but much of what it spits out is experimental.
“We are trying to see how to make the forecast and analysis of results more efficient and smarter,” he says.
For example, AI can find patterns using historical data in a very gradual and specific way, says Kamlani.
“You need to be able to look for patterns that are repeatable. So how often do we see consistency in the way a certain product is ordered over time to the extent that we can predict, with a certain degree of confidence, that on Thursday between 5pm and 10pm, this restaurant will sell this many chicken wings on DoorDash (a food delivery service) at that location,” he says.
AI can be applied to analyse more than just the chicken wings sales on their own. It can take machine learning to see what external factors might have influenced those sales.
Kamlani says, “Our solution said that this Thursday, based on the fact that there’s a game on and the weather is going to be x, y, or z, and this is what happened in the past and this is what we predicted, how accurate was our forecast? And if we’re off, let’s figure out why we were off and try to fix that so our prediction can get more and more accurate.”
Competitive analysis is expected to make an even bigger difference in determining what prices to set at what time and where.
The problem of unpredictability
There’s a fundamental barrier that businesses have to get past, says Shumsky: consumer expectations.
“From a consumer point of view, having predictable prices has huge advantages: You want to know how much you’re going to spend on something,” says Shumsky. “And if they’re fluctuating, it can be really, really frustrating.”
Experts say that anyone selling goods is likely to use dynamic pricing without much fallout – it’s what buyers have come to expect.
“For everything that’s going to be purchased online, I think dynamic pricing is a real possibility in the future,” says Brown.
Even if dynamic pricing can be deployed more easily and in more business-related industries than ever before, that doesn’t mean it will. If consumers aren’t used to rapid price shifts, they may reject them.
Ticketmaster, the event ticketing goliath and notorious deployer of dynamic pricing, landed itself in hot water with the US Department of Justice for its surge pricing fiascos in recent years, when prices for Taylor Swift and Bruce Springsteen spiked to thousands of dollars per premium ticket.
Artistes like Swift and Springsteen, along with Harry Styles, Paul McCartney, Coldplay and others, have the option to turn off dynamic pricing for their concerts, but they have often chosen not to do so.
When the US movie theatre chain AMC tried to roll out its own version of Ticketmaster’s dynamic pricing model last year, consumers quickly – and loudly – rebuffed it.
All that said, consumer disdain isn’t necessarily so effective if actual demand remains.
Surge pricing for rideshare services in the US like Uber and Lyft has long drawn the ire of users during peak times, even though, as Shumsky points out, higher fares increase the cut of the fare for drivers, which often brings more drivers out to increase the supply of drivers, which eventually declines prices. But let’s face it, nobody likes price surges.
Despite Wendy’s insistence that it never said “surge pricing” and that it’s not going to be doing surge pricing, the damage was done.
Price-sensitive consumers, already bearing the weight of inflationary cost increases over the past two years, were not pleased.
However, despite the backlash to its dynamic pricing plans, Wendy’s doesn’t say it plans to reverse course: Come 2025, you can expect price fluctuations to roll out on digital screens at certain Wendy’s locations.
Other fast food chains may follow, but Brown says he’s interested to see how common dynamic pricing becomes in the restaurant industry more generally.
“I do think there are some people that are annoyed by prices that are constantly changing; they want some certainty,” Brown says.
“I think there are some people who want to go to a restaurant where they’re handed a printed menu. I think it will be awhile before we see an upscale restaurant adopting dynamic pricing – there’s just something a little unsavoury about it. But who knows, maybe in five or 10 years the norms will change.”
Customers at high-end restaurants are used to paying market prices for certain fish, lobster and oysters. However, they might baulk at doing the same for a roast chicken, for example.
Shumsky says much of the services sector is less likely to adopt dynamic pricing models.
“Many services require relationships and trust between providers and consumers, so if you’re changing your prices, you’re violating an implicit contract,” says Shumsky, adding that your massage therapist or physical therapist likely cares more about keeping a client relationship than a few extra bucks. He says healthcare is also unlikely to adopt dynamic pricing.
“There are certain norms that we’re not going to violate here,” says Shumsky. “It hasn’t reached its limit, but I don’t think you’re going to see it everywhere.”
Outsmarting the system
Dynamic pricing can be downright annoying for the consumer, but it also creates an opportunity to milk the benefits. That is, if you’re willing to put the time and attention into it.
Loyalty programmes – often accessed via apps – like those offered by grocery stores, airlines, hotels and fast food chains are a convenient way to keep track of price fluctuations.
And, as mentioned before, those programmes usually offer perks like points toward free items and small discounts for using the app to make purchases.
You can also likely predict slower periods on any given day or week when companies might offer savings. By the same token, you can reasonably anticipate when there’s going to be higher demand and avoid making purchases during those times.
After all, dynamic pricing relies on timing in order to work. If you, the consumer, can strike at the right time, you too may reap the rewards. – Morning Sun,Mount Pleasant, Michigan/Tribune News Service
