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A flight to Denver during ski season is bound to be more expensive than the same flight in July, just as a bottle of Champagne is pricier in late December, and a Scottsdale resort is most expensive in January. It’s simple economics —price follows demand.
This “surge pricing” is less common in the restaurant industry. Usually it’s reserved for high-end restaurants charging “market price” for fresh fish or other rare commodities. But digital ordering could open the floodgates, allowing all types of restaurants to command higher prices for in-demand items.
Look at Uber, the popular mobile/on-demand car service. The growing company uses surge pricing to charge riders higher prices when overall demand spikes. As Uber is quick to point out, this is not simply a moneymaking tactic. The approach helps to accommodate the finite number of Uber cars that are available. Uber warns customers about potential hikes in advance, relying on its algorithms to calculate pricing in real time. Now that didn’t stop the tweet storm that happened a few short weeks ago — on New Year’s Eve in New York – but the approach is catching on nevertheless.
Before the hubbub on New Year’s Eve, mobile consultant and Olo advisor Rocky Agrawalblogged about Uber’s demand-based pricing and the surefire complaints it would elicit, noting, "Airlines and hotels have demand-based pricing. So why do people complain about @uber?” He is right —Uber isn’t the first to utilize the tactic, but they did set a precedent, becoming among the first company to modify pricing on the fly, based on real-time data gathered via mobile devices.
Restaurants have something to learn from the Uber example. With more than 8.5 years of operating history from 4 million customers, we have amassed data on demand trends that are beneficial to our clients. Of course, we all eat our meals at about the same time each day, causing big spikes in demand. But beyond popular mealtimes, some restaurants see unusual spikes during certain days of the week and times of the year. For example, burgers surge on Friday afternoons and on weekends (comfort food after a hard week). Salads surge for lunch on Monday and in January (repenting for our dietary sins). Ice cream cakes are most popular on Mother’s Day and Father’s Day. (Pop quiz: Can you guess which of those holidays is more popular? The answer is below.)
Varying price to drive demand is nothing new to restaurants —just look at the wave of deep discounting over recent years. Similarly, daily deals services like Groupon offer discounts to drive traffic. Even daypart-based pricing (e.g., the lunch price for a cheeseburger is lower than the dinner price for a cheeseburger) is an example of restaurants’ using pricing to drive demand. So what’s new about surge pricing? The arrow of causality reverses direction. In surge pricing, it is demand that drives price, not price that drives demand, a reversal that could reap rewards for the industry.
Digital ordering not only generates valuable data, it lays the foundation for surge pricing by enabling fluid pricing. Algorithms can calculate demand and create real-time price increases or decreases, while direct connections to POS systems allow changing pricing to be displayed across the digital ordering interface – on the restaurant’s website, mobile app or in-store kiosk. Moreover, all this can be accomplished without human intervention and in real time.
With digital ordering, the infrastructure is in place. The questions now are: Will restaurants test variable pricing? And, most importantly, what will consumers think?
It is a bit like the potential end of the FCC restriction on in-flight phone calls. In explaining the revised thinking, FCC Chairman and past Olo board member Tom Wheeler said, "When the rationale for a rule doesn't exist, the rule shouldn't exist.” In other words, just because we’ve always done something one way doesn’t mean there’s only one way to do it.
Interested in pursuing a new wave and experimenting with surge pricing? I will further explore the implications of surge pricing and surge demand in my next article.
The answer to the pop quiz: Father’s Day is a more popular cake-ordering holiday, perhaps suggesting that wives are more thoughtful than their husbands.