Finding the right balance between what a customer is prepared to spend and the revenue a restaurant needs is no simple matter. There are many parameters to take into account when establishing a pricing strategy, and the road can be long and winding.
To make matters worse, these parameters can change constantly. Some in the long term (cost of raw materials, running costs), others in the very short term (value perceived by the customer depending on the time of day, restaurant production capacity, use-by date, etc.).
Fortunately, with the help of technology, new methods have appeared in recent years, in particular the so-called ‘dynamic pricing’ method.
This ‘Yield Management’ method, well known in the transport and hotel sectors, is based on a simple principle: automatically adjust prices by offering discounts when traffic is low to stimulate demand and raise prices again when traffic is higher to boost profitability. All this while taking into account as many variables as possible.
For a long time, one of the major obstacles to implementing a dynamic pricing strategy in the restaurant sector was the logistical complexity associated with this type of business (printed menus, expensive advertising, etc.). This barrier has been completely removed by the rise of online sales channels, whether for delivery, takeaway or on-site.
So how do you set up a successful Dynamic Pricing strategy in your restaurant?
Without further ado, here are more details 👇
The secret of dynamic pricing in the restaurant industry: promotional offers 🎁
Before throwing yourself headfirst into implementing a dynamic pricing strategy, it's vital to understand the context of the restaurant sector.
Customer reaction to price changes ⚠️
How would a customer react if they were asked to pay £8 for a burger one day and the next day the same burger was sold for £10? They'd probably feel cheated and taken for a fool, wouldn't they?
On the other hand, how would the same customer react if the burger was sold at £10 (20% off) on the 1st day and the next day it was £10? They would certainly think that this was normal, that there was simply an offer the day before and that this is the very principle of Happy Hour.
The sales prices between the 1st and 2nd situations are the same, but the customer's reaction is totally different... And rightly so, because when it comes to dynamic pricing in the hospitality industry, there is a real cultural context to take into account.
In the first case, the customer is caught off-guard: they thought they would see a certain price when they arrived, but it turns out to be higher than they expected. In the second case, however, the customer has been ‘warned’ about the price variations and therefore knows the usual prices. They will be more likely to return knowing the facts. And that makes all the difference.
How platforms work 📲
Another important point to consider is the practices of online ordering platforms. What happens if a restaurant owner directly changes the gross selling price of his products on his menu? Probably not much... It won't stand out any more in the platforms' algorithms and it will go unnoticed except by a few customers who will be frustrated not to understand these changes.
On the other hand, if a restaurant owner is running a promotional offer as in the previous case, the platforms will highlight it for the simple reason that it is an excellent argument for attracting new customers and maximising the chances of orders being placed on their site.
As you will have realised, the key to a dynamic pricing strategy in the restaurant sector is the clever use of promotional offers.
So what are the first steps you need to take to put in place a promotional strategy that is relevant and appropriate for your restaurant ?
All you need to build a dynamic pricing strategy 🔑
Analysing demand 🔍
One of the first keys to establishing a dynamic pricing strategy is to understand your restaurant's traffic and its ability to respond to it.
The number of visitors to an establishment depends on a number of factors:
- Location (shopping area, offices, residential area, etc.)
- Type of restaurant (fast-food, casual, gourmet, etc.)
- Type of cuisine (French, American, Asian, Italian, etc.)
- Seasonality (summer, winter, school holidays, etc.)
Depending on these factors, traffic will fluctuate throughout the day (lunchtime, evening, edges of service, between services) or week (Monday-Friday, weekends).
Demand can also change according to consumption behaviour:
- On site.
- Takeaway.
- Delivery.
Let's take the example of a burger restaurant located in an office area on a weekday. It may have a higher demand for on-site and takeaway orders at lunchtime than in the evening, and a demand for deliveries that follows the same trend:
Once the peaks and drops in traffic have been identified, the second step is to measure the evolution of its production capacity.
Measuring the capacity of your restaurant? 📏
First of all, let's agree that there are two types of capacity:
- Physical capacity 🍽
This is the total number of covers that can be filled in the restaurant in one service. This capacity depends not only on the size of the restaurant, but also on the average service cycle (the usual time that elapses between a customer's arrival and departure).
💡Physical capacity = (Number of seats x Total duration of a service) / Duration of service cycle.
Let's take an example:
A restaurant has 60 seats with a service from 6.30pm to 10.30pm (240 minutes) and a service cycle of 90 minutes.The calculation would then be: (60 x 240) / 90 = 160.→ The restaurant's physical capacity would then be a maximum of 160 seats.
- Production capacity 🧑
This is the number of covers that can be served by your kitchen staff.
Measuring the maximum production capacity of your kitchen team will tell you the maximum number of covers that can be prepared for all sales channels (on-site, takeaway, delivery).
The difference between your physical capacity and your production capacity defines the production margin you have left. This production margin can be used to sell your products through other channels, such as takeaways and deliveries.
A restaurant's production capacity can be stable or variable as services change and the week progresses.
Let's take the previous example of the burger restaurant. It has a stable, linear production capacity for each of its services, with a break between 3pm and 6.30pm. It generates £400 per hour at lunchtime and £300 per hour in the evening:
We can see that the restaurant's production capacity is greater than its demand, so it still has a production margin.
This production margin is costly for the restaurant because it means that it is paying fixed costs that are often high (rent, electricity, staff) and that it is not exploiting the full potential of its business. So what can be done to increase demand and reduce the production margin ?
Filling the gap between demand and production capacity💡
The strength of online sales channels lies in the opportunity they offer restaurant owners to make contact with thousands of potential consumers at the click of a button. Thanks to marketing tools such as promotional offers and sponsored ads, any restaurant can strongly influence its visibility at the times that suit it best.
→ The key is therefore to use the leverage of online sales to increase profitability and close the gaps between its footfall and its total production capacity.
Let's go back to the same chart, but this time the demand for deliveries has been boosted by the use of discount offers:
We can see that delivery sales have increased significantly, boosting cumulative sales across all channels and reducing the production margin.
This difference between the cumulative sales of all channels in the 1st graph and the cumulative sales of all channels with an offer in the 2nd graph is the additional gross margin generated by the restaurant owner:
Thanks to the effective use of promotional offers in slots with a remaining production margin, the restaurant owner has been able to increase his delivery sales tenfold, thereby boosting his gross margin.
In other words, he has been able to take advantage of the power of online sales channels to pick up sales that he would not otherwise have made, and at a time that suits him best.
The importance of adjusting your strategy in real time ⌛️
This works perfectly well in theory, but in practice it can sometimes be a little different. Restaurant traffic can be rapidly affected by an unforeseen event ( construction work, a sudden change in the weather, an event, etc.) and this is difficult to anticipate. What's more, with so many other tasks to deal with, it's operationally very difficult for a restaurant owner to take immediate action.
💡 In the case of an unexpected event leading to a drop in sales, a targeted offer will help to compensate by boosting demand on online sales channels.
The use of a solution directly connected to the restaurant POS means that you can instantly detect peaks and drops in traffic and trigger an appropriate promotional offer in real time. The aim is to be as close as possible to your maximum production capacity, thereby optimising the profitability of your business.
