Are You Ready for Dynamic Pricing?

demand-based pricing

I’m frugal, so I rarely fly without researching affordable flights. Around town, I’ll opt for the metro when Uber and Lyft take advantage of rush hour pricing, even if it adds time and energy. But for work, convenience is key. I’m still price conscious, but it’s not my number one motivator. That is why the travel industry utilizes demand-based pricing. Customers can navigate for better deals when convenient, but accept the steeper price when demand is high.

Demand-based Pricing

Demand-based pricing, using econometrics and yield management strategies, has long been used by the travel industry and their digital engagement channels to allow for dynamic modifications to prices.  Today, restaurants are rapidly adding online ordering, mobile apps, and digital menu boards. These enable the industry to leverage this same dynamic pricing capability. This year McDonald’s invested more than $300 Million in Dynamic Yield, a technology company that uses data to help brands increase revenue through personalized customer experience and recommendations. While McDonald’s main focus is on personalization, dynamic menu pricing is clearly on their roadmap. It should be for ALL restaurant brands.

But you don’t have to invest $300 Million in an acquisition to make better pricing decisions now. Jayne Strickland, SVP Enterprise Analytics at Fishbowl, outlined how starting with the basics moves brands in the right direction and prepares them for future pricing strategies:

Step 1- Move beyond traditional cost based and competitor pricing practices

• Many brands only use cost-based pricing strategies (determine cost and then add a desired margin) or competitor-based pricing (price above or below the competition depending on the value the brand believes it provides). These strategies have merit. They are certainly part of any pricing decision, but a demand-based econometric method will enable price managers to make smarter, more fiscally responsible decisions. Demand-based econometrics runs historical data through an applied statistical algorithm and assesses customer reaction to past price changes, identifying where greater and lesser degrees of risk lie. If you have two years of POS data with observable price changes, you likely have what’s needed to understand the price sensitivity of your system.

Step 2- Align data requirements with your innovation

• Are you building a mobile app? Have online ordering and delivery? Are digital menu boards in your future? All of these channels provide the forum for dynamic pricing. Alongside the investment in smart technology, parallel planning of data architecture, integrations and KPIs enable you to understand the performance and contributions of your investments.

Step 3- Prepare Your Data

• Does your historical data reside on a plethora of POS systems? Historical data is critical to understanding past behavior and paves the way to future predictions. If you don’t know where your data is, talk to your POS provider. Determine what data you have so when the time comes, you can use it to make better pricing and menu decisions.
• Are you cataloging and categorizing your product and store data in a way that can be easily mined for insights? Group your menu items in an orderly manner within your POS. POS menu mapping can get ugly. Clean and organize that data now, so you have a foundation of data integrity when you move to more advanced pricing strategies.
• Seek out partners or internal resources that know and understand econometric menu pricing. This is KEY when preparing for any analysis work and especially for strategic pricing analytics.

Plan your own steps to stay ahead of the curve, maximize your revenue, improve profit and maintain guests. Eventually guests will demand more from restaurants not only when it comes to pricing but in the overall experience. Make sure that you’re taking steps NOW to be ready for the future!

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This blog was written by Fishbowl’s Tama Looney.