Restaurant ManagementStrategy & Operations

Dynamic Pricing Leads to Serious Losses: Busting the Top 3 Myths Surrounding This Emerging Tech

Molly Burke profile picture
By Molly Burke

Published
8 min read
Header image for Molly's report on restaurant dynamic pricing, Feb 2023

Dynamic pricing tech is taking off. There’s one problem: Consumers hate it.

According to some experts, the latest salve for the cash-strapped restaurant industry is dynamic pricing. Adoption of dynamic pricing tools is expected to climb in other industries—in fact, Gartner predicts that the top 10 global retailers will leverage the technology by 2025[1]

Restaurant owners looking at dynamic pricing’s existing success in the hotel and airline industries may be thinking: “Why not us?” 

But according to Capterra’s 2023 Dynamic Pricing for Restaurants Survey*, just 34% of U.S. consumers think dynamic pricing is good for customers. Without careful monitoring and customization of this technology, as well as transparent communication to customers about how they work, it could be disastrous for restaurants. 

Using insights from hundreds of U.S. consumers, we’ll bust three prevailing myths driving the dynamic pricing hype so you can make better decisions on tech investments for your restaurant.  

/ Key insights

  • Dynamic pricing could be financially disastrous for restaurants: Just 14% of consumers would order more frequently from a restaurant that adopted dynamic pricing, whereas 36% would order less often, and 6% would stop ordering altogether. 

  • Customer perception of dynamic pricing is negative: Only 34% think dynamic pricing is good for consumers—the majority (52%) say it’s equivalent to price gouging. 

  • Customers are attentive and sensitive to menu prices: 81% of consumers check menu prices always or often before they choose where to eat, and 51% have stopped patronizing a preferred restaurant due to recent price increases. 

  • Dynamic pricing adds friction to the customer experience: 65% of consumers say dynamic pricing makes the decision of where and when to eat more difficult; 63% say it makes it harder to budget their spending on restaurants. 

  • Consumers need strong incentives to participate in dynamic pricing: Most consumers would be incentivized to order outside of peak hours from a preferred restaurant only if discounts exceeded 10% off the original price.

What is dynamic pricing for restaurants?

Dynamic pricing is the strategy whereby a business raises or lowers its prices based on demand. During periods of high demand, some customers will pay a premium for a given service, while their budget-minded counterparts have the option to book the service for a lower rate when demand cools (at what is often a less convenient time). 

A low-tech version of dynamic pricing is a time-honored tradition in the restaurant industry: think daily specials, happy hours, and “market price” entrees. 

Algorithm-driven dynamic pricing tools expand on these practices. The software collects real-time data on a restaurant’s customer demand and capacity, then toggles prices up and down throughout the day to strike a balance while maximizing profits. For example, during the lunch rush, the dynamic pricing algorithm bumps prices up. Then, as orders slow to a trickle between 3 p.m. to 6 p.m., the algorithm knocks prices back down—either back to original prices or to further discounted prices. Prices rise again when the dinner rush hits, and so on. 

Myth #1: Dynamic pricing will maximize restaurant profits

Fact: Dynamic pricing might cost your restaurant serious money and customers.

To understand the potential impact of dynamic pricing software in the restaurant industry, Capterra surveyed 901 U.S. consumers about their dining habits and how their behavior could change if dynamic pricing were introduced at their preferred restaurants. Each respondent currently either dines in-person or orders takeout at least weekly (many do both). 

We found that consumer sentiment on dynamic pricing is overwhelmingly negative, and that most people are unlikely to use dynamic pricing in a way that benefits restaurants. More on sentiment later—for now, let’s focus on the financial implications of these results. 

Dynamic pricing adoption stat for the blog article "Dynamic Pricing Leads to Serious Losses: Busting the Top 3 Myths Surrounding This Emerging Tech"

Here’s what would likely happen if the average restaurant began using dynamic pricing:

  • A small number (9%) of customers would be willing to order more frequently at elevated peak prices.

  • 32% would order as often as they did before and pay peak prices.

  • Up to 42% of your weekly orders would disappear instantly, as customers ordered less frequently or not at all. 

The question then becomes: Could you find a peak price that is high enough to make up for the automatic loss in weekly orders, without scaring away the would-be big spenders? Unlikely—65% of those willing to pay peak prices would balk at increases exceeding 10% over original prices. 

/ The bottom line

If your restaurant were to implement a dynamic pricing tool, it would take an immediate hit. And that’s before considering the fact that a few negative reviews can magnify the impact of permanently losing a handful of regular customers.

Myth #2: Customers won’t notice dynamic price increases 

Fact: In this economy, consumers are vigilant about prices and budget.

On the consumer side of things, automated dynamic pricing introduces a transparency issue. With old-school dynamic pricing, customers generally knew which items would change prices, and when. With the new, automated technology, the software is determining price changes behind the scenes, then publishing the new prices on digital menus. When prices fluctuate, it’s harder for customers to predict what they’ll pay and plan around those prices. 

Restaurant owners might think that consumers won’t notice a $1 price hike that will net the restaurant 10% more in profit, but that thinking is flawed. As retailers have learned in recent years, customers are generally aware of sneaky price hikes, and they don’t appreciate them. 

According to our survey, 81% of consumers check menu prices always or often before they choose where to eat, and half of consumers notice when restaurant prices change over time. That attentiveness costs restaurants: In the past year, over half of consumers have stopped ordering from a preferred restaurant due to an increase in menu prices. 

Restaurant spending stats for the blog article "Dynamic Pricing Leads to Serious Losses: Busting the Top 3 Myths Surrounding This Emerging Tech"

Second, the lack of transparency in pricing changes eliminates your ability to recoup a potential total loss of a given customer’s order—if you don’t tell customers how and why prices are changing, then they won’t know they can save money by ordering from you during odd hours. Let’s say you did inform customers about your use of dynamic pricing. As we’ve seen above, if given the option to either spend more at your restaurant, or wait a few hours to spend less, as many as 42% of consumers will simply order elsewhere. 

/ The bottom line

With inflation still high and a recession coming, it’s dangerous to assume that consumers aren’t keeping track of each dollar they spend on food. Now is not a good time to experiment with a tool that could give budget-minded consumers pause the next time they view your menu.

Myth #3: Customers will accept dynamic pricing in restaurants because airlines and hotels already do it

Fact: Consumers understand that dynamic pricing is technically fair—that doesn’t mean they like it. 

It’s misguided to use the precedent of hotels and airlines as a justification for dynamic pricing for two reasons: It’s biologically irrelevant, and consumers already don’t like it. 

The “freedom of choice” that customers experience when dynamic pricing is applied to hotels and flights does not translate to food. A suite with an ocean view is not a human need, and can be sacrificed for more affordable, less flashy accommodations with little effect on the human body’s core functions. The same cannot be said for a lunchtime meal ordered between the hours of 12 and 2 p.m. 

Meal times stat for the blog article "Dynamic Pricing Leads to Serious Losses: Busting the Top 3 Myths Surrounding This Emerging Tech"

People typically want to eat within regular mealtimes. While most consumers will make concessions to suit their busy schedules, the proportion of people who truly don’t care what time of day they eat is small—less than a quarter overall. Even hybrid and remote workers, who typically have more wiggle room to take meal breaks, are no more willing than the average consumer to move their meal times around dramatically.  

Then, there’s the issue of consumer sentiment on dynamic pricing. It’s been a tough few years for consumers, with the pandemic, inflation, and a coming recession. Corporations’ price-optimization foibles have made prime-time news during this period: see Uber’s ill-timed surges, hotels capitalizing on weather refugees, and the Taylor Swift-Ticketmaster disaster. The economy has taken consumers for a ride with prices for everything from toilet paper to gasoline to homes. 

As a result, today’s consumer is both stretched thin financially and wise to pricing hijinks—they are mindful of their budgets, watchful of shifting prices, and quick to identify scams. They see price optimization for what it often is: optimization for the sake of optimization, irrespective of customer experience.  

Even after being presented with the concept of dynamic pricing in restaurants as a discount model, just over a third of survey respondents say it is good for customers, while over half equate it to price gouging. 

Negative view of dynamic pricing stat for the blog article "Dynamic Pricing Leads to Serious Losses: Busting the Top 3 Myths Surrounding This Emerging Tech"

/ The bottom line

While the logic behind algorithmic dynamic pricing may work in other industries, it does not neatly translate to food and dining. Nudging your customers to make the economical—rather than biological or emotional—decision about when and where to eat ignores the psychological and practical reasons why people choose to dine out in the first place. Consumers can smell the lack of humanity in that strategy from a mile away.

How to use dynamic pricing technology responsibly

All in all, 65% of consumers say that the dynamic pricing model makes the decision of where and when to eat more difficult, and 63% say it makes it harder to budget their restaurant spending. 

It’s risky to add friction to the online ordering process, considering how easy it is for customers to find other options through review sites, delivery apps, and even social media. You may be better off investing in other forms of automation, such as employee management tools, performance analytics software, or digital loyalty programs

However, if you’re determined to add dynamic pricing to your restaurant’s tech stack, here are a few ways to do so with less impact on customer experience. 

  1. Tell customers how and why prices will change. People don’t want to be surprised by their dinner bill, and they don’t want to pay more money for no reason. Customers find it acceptable for restaurants to raise prices on three grounds: to improve food quality, to increase employee compensation, or to cover increased operational costs. You should communicate early and often with customers about how your menu prices change, and let them know that their dollars are going toward improvements that will ultimately improve their experience. 

  2. Set narrow ranges for price changes. The average customer will pay no more than 20% over regular price to order during peak hours with dynamic pricing. Your prices should stay within a reasonable range so customers can learn what to expect at different times of day. 

  3. Be ready to pivot. Dynamic pricing may not work for your restaurant, and it’s important to reconsider using it if your business starts to take a hit. Watch performance closely for indications that revenue, order totals, or order volume are trending downward. Be sure to explore free trial options from dynamic pricing software providers before you make a big investment.   

Dynamic pricing in restaurants is not a new concept, but it remains to be seen whether its most recent iteration will play well with consumers. Our data indicates that early adopters of algorithmic dynamic pricing should approach the technology with extreme caution. If you do decide to upgrade your menu pricing software, Capterra can help you find the best option with our directory of the best food costing software

Looking to add additional innovative tools to your restaurant’s arsenal? Check out these options from Capterra: 


Methodology

*Capterra's 2023 Dynamic Pricing in Restaurants survey was conducted in January 2023 among 901 U.S. consumers to learn more about their preferences and budget for meals purchased from restaurants. Respondents were screened for frequency of meals purchased from restaurants; respondents must either order takeout at least once a week or dine-in at restaurants once a week.


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About the Author

Molly Burke profile picture

Molly Burke is a senior analyst at Capterra, covering the retail and restaurant industries, with a focus on how emerging technology is transforming the customer experience and sales. Drawing from her prior experience working with small eCommerce brands and solopreneurs, Molly delivers insights that help business owners navigate the ever-shifting landscape of retail and digital customer experience. 

Her research on generative AI, social media, and other tech trends has been featured in The New York Times, Vogue, BBC, CNBC, Forbes, and the Financial Times, among other publications.

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