Time to talk about dynamic pricing

When hints by government departments of potential fuel shortages hit the news, the natural result was drivers descending on garages to fill their tanks. The inevitable outcome was many forecourts having to quickly put up the shutters when they ran out of supplies. What did not happen was any increase in prices in accordance with the normal economics of supply and demand.

This is because people don’t like such activities, as it smacks of profiteering. This was the conclusion of a report published by researchers Daniel Kahneman, Jack Knetsch and Richard Thaler in 1986, which recognised that when there is a risk of a product running out, companies do not raise prices but simply let the shelves swiftly run down to empty. 

It is deemed far better to have empty shelves than to be seen profiting from a situation of high demand and then be savaged by the media. It’s for this reason that the supermarkets and convenience stores have suffered stock shortages of various products, and certain items have had to be removed from restaurant menus at various times during covid-19.

As the hospitality industry faces higher costs from multiple directions – we all know the growing roll-call of inflation-drivers – there maybe needs to be a more intelligent, flexible way of dealing with pricing rather than the blunt instrument way it has largely been dealt with to date. For many companies, the extent of their dynamism with pricing is to charge more for dinner than for lunch. The problem for businesses is that everybody seems to regard any sort of dynamic pricing-type activity – or yield management, as the airlines call it – as being sinister and all about ripping off the public.

Asda recently announced its plans to roll-out electronic shelf edge labels (ESLs), citing the cost savings it will achieve from changing prices on its miles of shelving in a matter of minutes from a central stock file, rather than having people wander the aisles to handle the laborious task manually. What it has also made clear is that dynamic pricing is not part of its strategy – even though it knows that ESLs would enable it to change prices throughout the day to clear short-dated stocks, thereby reducing waste. And, of course, potentially increase prices where there is a significant uptick in demand and deter widespread stockpiling.

The opportunities for the likes of Pret A Manger and other foodservice operators in introducing such labels is obvious, and is enhanced significantly when you consider the ability to add QR codes onto the ESL to show nutritional information. There has also been work undertaken to include near field communication (NFC) tags onto some labels, thereby enabling individuals (such as those with subscriptions) to simply swipe their phone and be shown a different price to that shown on the label.

Introducing intra-day price changes is certainly a challenge right now, but JD Wetherspoon does employ a dynamic-type arrangement which involves it charging marginally different levels for food and drink at each of its pubs. This is done to ensure it is the cheapest in specific areas, so those pubs in areas where there is a high density of Indian restaurants will have very competitively priced curry dishes. This has been described by critics as predatory activity, but there are certainly lessons to be learned from how it cleverly uses data and crunches the numbers to constantly optimise pricing across its estate.  

One way to introduce price movements is to completely remove any sinister perceptions and bring in a bit of fun by making it a part of the theatre of the venue. Years ago, a visit to fish restaurant Geales in London’s Notting Hill would be enhanced by its blackboard listing fish prices at the point of the catch and showing its impact on the price of the dishes based on these raw material movements. An early example of gamification, I reckon. Pesca restaurant in Amsterdam has a similar dynamic arrangement in place for its fish dishes.

Such activity might be seen as a bit gimmicky, but if it moves the dial on the public (and media’s) acceptance of dynamic pricing, then the hospitality industry – and the technology providers in this space – can make some progress towards adopting a more intelligent approach to pricing, which in turn might go some way to easing the economic pressures the sector is likely to undergo for the foreseeable future.

Glynn Davis, editor of Retail Insider 

This piece was originally published on Propel Info where Glynn Davis writes a regular Friday opinion piece. Retail Insider would like to thank Propel for allowing the reproduction of this column.