Actionable Insights From APT's Retail Practice

The Price is Right: Evolving Variable Pricing Strategies for Restaurants

May 11th, 2017 | Posted by APT in Restaurants

On “The Price is Right,” sometimes all it takes to win big is a little guesswork – but in business, developing a winning pricing strategy is quite complex. For years, organizations ranging from airlines to hotels and restaurants have leveraged variable pricing strategies, adjusting prices based on historic demand during the given day of the week or time of day. For restaurants in particular, this approach is key to effectively driving traffic during off-peak hours. Since an empty table is lost revenue, a menu item that sells for fifteen dollars on Friday evenings could be profitably sold for much less on Wednesdays, for example.

Traditionally, variable pricing strategies for restaurants have included initiatives like happy hours and “Kids Eat Free” programs on slower days of the week. However, as an increasing number of restaurant chains opt for digital menu boards or tablet-based menus, the variable pricing opportunity is evolving. Research from Applied Predictive Technologies’ 2017 State of Business Experimentation Report shows that 65 percent of restaurants surveyed experimented with pricing in the past year, and 10 percent of respondents tested variable pricing-specific strategies.

The increased popularity of digital restaurant technology is enabling more cost-efficient and easy-to-implement variable pricing, allowing restaurants to move beyond shifting price just by day and time to implement real-time pricing shifts based on other factors like weather. But how can restaurant decision-makers ensure that these variable pricing programs are profit-positive?

Implementing any new initiative comes with risks to both the bottom line and brand reputation, but pricing shifts can be particularly sensitive. There are many questions executives must ask themselves before rolling out a variable pricing program, including:

  1. Does the program work overall?
  2. Is it more effective in some locations than others?
  3. Where can we increase price to maximize revenue while minimizing lost checks?

The best way for restaurants to optimize their variable pricing strategy is to conduct test vs. control analysis of potential programs. For example, imagine a chain wanted to increase the price of coffee listed on their digital menu boards based on the weather – specifically, when the temperature dips below 40 degrees. The menu board technology simplifies the logistics of this pricing change, and executives may suspect the demand for warm beverages will rise due to chilly weather, boosting net profits despite the price increase. However, the only way to know for certain if the program will be successful is through testing.

To determine the true incremental impact of the program, the restaurant must first trial it in a small group of locations, and compare their performance to a group of similar locations that do not adopt the pricing strategy. This approach enables restaurants to isolate the incremental impact of the program, eliminating the noise of outside factors like competitor actions, as well as other intervening factors, like simultaneous offers that may also be in effect.

Beyond coffee in cold weather, restaurants may also base variable pricing on peak season for different menu items – for example, ice cream in the summertime. However, restaurants may only offer ice cream in the summer season to begin with, as they already know it will be in high demand during that period. If an item is only offered on a limited-time basis anyway, variable pricing may be less effective.

Another example of variable pricing might be a price increase for popular items like wings or pizza coinciding with certain sporting events. Some restaurant chains also offer bundled meal specials on game days, including drinks and sides at a lower price when combined with entrée orders. Although meal-bundle pricing may seem like a steal for the consumer, guests may end up spending more than they would have without the promotion.

In addition to increasing margin on certain items, promotions also provide restaurants with the ability to take a more sophisticated approach to targeting their offers. For example, while planning a national TV campaign requires significant advance notice, restaurants can use digital technology to quickly and effectively distribute special offers via mobile apps and email campaigns. Promotions can also serve as a more transparent strategy for restaurants to drive sales of popular items without actually changing base prices.

Overall, restaurant technology ranging from mobile apps to digital menu boards is creating a wealth of new opportunities for innovation around pricing and promotions. As technological advances enable restaurants to grow increasingly creative in their variable pricing strategies, they must carefully test these pricing shifts to ensure that they have the intended effect.

To learn more about variable pricing in the restaurant industry, check out this video.

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