Inflation is hitting restaurants especially hard on the supply side, as they are paying more for ingredients and increased labor costs. From the revenue side, customers impacted by inflationary pressures on food and gasoline are reducing their spending for eating-out.
The combination of increased costs and reduced revenues serves to reduce restaurants’ profit margins.
Restaurants have to seek ways to maintain customer traffic, while still maintaining profit margins. Two techniques gaining popularity are dynamic pricing and barbell pricing.
Dynamic pricing, also referred to as demand pricing, or surge pricing, changes product prices based on demand. The approach is common in several industries, including entertainment, ride share, electricity, airlines, and hotels. Because of its application in many industries, customers are familiar with this approach.
Dynamic pricing has been less common in the restaurant industry until recently, because it is best run as a computerized approach. The transition to digital menus and online ordering has made this pricing model more feasible.
In most cases, a computerized approach uses algorithms or artificial intelligence to automatically set prices—raising or lowering them based on demand. These programs can also decrease or increase the size of the menu, considering factors like profit margins, ingredients availability, difficulty of preparation, and preparation time. Items can also be highlighted, to drive demand and help maximize the profit margin.
This post is based on the Nation’s Restaurant News article, Why Restaurants Are Finally Adopting Dynamic Pricing Strategies, by Alicia Kelso, November 18, 2022; the Restaurant Business Online article, Why Barbell Pricing Is the Strategy Du Jour on Restaurant Menus, by Joe Guszkowski, November 22, 2022; and the YouTube video in the Spotlight. Image source: Shutterstock / NATA FUANGKAEW
1. What are the advantages of dynamic pricing and barbell pricing?
Guidance: Restaurants need to actively adjust pricing to keep traffic flowing, even as many customers are impacted by the inflationary economy. Cutting prices can drive traffic, but it can trim the profit margin. Both dynamic pricing and barbell pricing target price conscious consumers with lower prices on some products, while still charging higher prices on other products or at other times, to maintain profit margins.
2. What is needed to implement dynamic pricing?
Guidance: Dynamic pricing is best implemented where a computer system, using algorithms or artificial intelligence, automatically adjusts the prices. Factors that are used include the actual or forecasted demand, days of the week or time of day, and weather.
3. What factors should be considered when using barbell pricing?
Guidance: The trick is to balance the low-priced end of the menu to draw in price conscious customers, but still attract others to the higher-priced end of the menu to maintain profit margins. Also, it needs to be easy to upsell customers attracted by the lower-priced end of the menu. If the low-priced end is too attractive, the risk is that customers won’t purchase from the high-priced end of the menu.
4. Which tactic—dynamic pricing or barbell pricing—is easier to implement?
Guidance: The biggest difference is what systems are already in place. If a company has digital menu boards and/or digital ordering, it is easier to add-in dynamic pricing. If these systems aren’t in place, they’ll need to be added to implement dynamic pricing.
Barbell pricing doesn’t require either digital menu boards or digital ordering. It can be done in very traditional ways. It will require that menus be updated, and in many cases, it becomes effective when combined with marketing to promote the barbell pricing, as well as using upselling.