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[22 comments]

BrainTrust Query: Should Restaurants Change Prices By the Hour?

December 28, 2012

Through a special arrangement, presented here for discussion is a summary of a current article from Applied Predictive Technologies' Food For Thought blog.

Like an empty hotel room or airline seat, a restaurant table without guests is lost revenue. The New York Times recently reported that some restaurants are now introducing variable pricing models to capitalize on changes in demand by day and by hour.

The premise is that the price of dinner at 8 p.m. on Saturday should cost more than at 5:30 p.m. on a Monday. The Times reports that restaurants are "betting that consumers, used to paying extra for holiday-weekend flights, V.I.P. seats at the theater or umbrellas on the street after the first raindrop hits, will also pay more for their Friday-night dinners out."

Social tools are helping, such as a Groupon or Gilt City coupons to support slow days or hours. A mobile app, Leloca, sends out first-come, first-serve deals when, for instance, a restaurant faces a host of open tables with a sudden cancelation. A website, Savored, offers discounted meals based on reservation time.

"The challenge that every single restaurant is faced with is the elasticity of demand from consumers," Ben McKean, Savored's co-founder and CEO, told the Times. "In an off-peak hour, you might get only a couple people who want to go to the restaurant, and in a peak hour you might get people out the door." Restaurants are "leaving so much on the table," he said.

As restaurants explore variable pricing by day and daypart, executives will be faced with important decisions about how to choose the best pricing strategies. For example:

  • Does increasing prices on the weekend simply shift demand to other days?
  • Can we selectively increase the price of certain items during specific times?
  • Should we explore daily deals to boost slow hours?

These types of questions present an exciting avenue for testing over the next few years.

Discussion Questions:

What are the pros and cons of variable pricing for restaurants? How would you expect diners to react to such pricing tactics?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

What do you think of the potential around variable pricing to maximize sales at restaurants?

Comments:

While I applaud charging more at the most highly prized times, when chasing the discount crowd you've certainly created a new market, but is it a profitable one? People who only eat on the cheap are much less loyal and, I've found, much more likely to complain if everything isn't up to the full price dinner.

Why not actually market your business to customers who know you? Why not come up with a changing menu at different times that attracts people who know you to come back? Why not make a daily video of what's for lunch and post on social media, your website or sent via an email to your list?

There are hundreds of ways to build excitement and repeat business in your restaurant—attracting the discounters isn't.

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Bob Phibbs, President/CEO, The Retail Doctor

As long as I can remember, luncheon menus were less expensive than dinner menus. Pre-theatre menus offered a value that you couldn't get during other hours. Early bird specials are the butt of many jokes, but bring in the patrons. Fine restaurants around the country offer prix fix dinners Monday through Thursday that they don't on Fridays and Saturdays. Please tell me how variable pricing differs and why diners won't compare that offering with the other options on the table.

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Joan Treistman, President, The Treistman Group LLC

Not sure about New York, but where I live, customers would get trained only to patronize when the prices are low. Many restaurants already have been doing this for years by offering lower prices at lunch or early bird specials for dinner.

Reminds me of one of Fresh & Easy's failures. They would mark down the price of produce as the shelf life was expiring. Customers just waited until the price was marked down to buy the product.

Bottom line is if a restaurant serves good food, customers are lined up to get in all the time and will go out of their way to come. If a restaurant has to offer lower priced specials to get customers, the restaurant's problem is not pricing, their problem is with the food and service.

David Livingston, Principal, DJL Research

I agree with both Joan and David on this issue: First, "early bird specials" are a long-standing version of "variable pricing." (Likewise "prix fixe," pre- and post-theatre, and so on.) Second (to David's point), variable pricing can't correct underlying problems with food and service after the initial trial. This is one of the lessons of Groupon and other "daily deal" sites: Offers like this may incentivize trial (at lower margins) but not necessarily repeat business if the product isn't there.

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Dick Seesel, Principal, Retailing In Focus LLC

High fixed costs and variable demand by daypart drove restaurants early on to try off-peak ideas like happy hours and early-bird specials (as Joan notes).

Today, restaurants have the benefit of new media and analytics to do much more, such as...

  • Vary strategies by location, reflecting different traffic composition (business, family) demand levels and competitive situations
  • Look beyond overall traffic shifts to item shifts. Off-peak promotions may not only increase traffic but also trade-up to higher priced items. Combining discounts with combination meals can grow average check
  • Experiment with the variety of impulse-technology options from time-restricted daily deals to location-based mobile spot deals
  • Vary not just the price but the experience—offering meal pairings, chef visits, limited specials, and the like

Unlike travelers, who tend to get annoyed by the complexity of high peak pricing for airlines and hotels, diners are more conditioned to different prices because the rules are simple and clear. Diners are also more likely to frame their choices by the attraction of discounts rather than the turn-off of peak prices.

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Dan Frechtling, Vice President, Global Product Management, hibu, PLC

This may be harder to sell consumers than initially imagined. What looks good to restaurants on paper may not be able to alter ingrained consumer expectations and habits.

I like the idea of offering deals to entice consumers to dine at off-peak hours or on slower days. This could be done through discounts, special meals or bundles.

Changing the price of a meal based on time of dining may not be well received.

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Max Goldberg, President, Max Goldberg & Associates

The pros are potentially increased revenue. The cons are greed and consumer disenchantment.

This "Restaurant Quest" reminds me of a quote in this morning's paper morning by a Delta Airlines executive: "We are just at our infancy of how many other products we can sell." Like the Church Lady would say, "Ain't that special?"

While "early bird specials" will continue in eateries ... eating out on Saturday night will be like paying a premium price for a first class seat on an airline. But if you want a linen napkin or a salad fork they will cost even more.

We have arrived at the age when the consumer is now expected to pay more for any and all shortcomings in our management acumen.

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Gene Hoffman, President/CEO, Corporate Strategies International

David is right on the mark with the "Early Bird" menu. I live in South Florida where it is a way of life. People know when and where to go to get the bargain meals. On the other side of the coin; people not interested in fighting that crowd, but wanting a good meal, are willing to wait it out and pay more.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

This is another silly discussion. What is wrong with a business charging whatever it wants, whenever it wants? If a restaurant can move a customer to 6 p.m. rather than turning them down at 8 p.m., doesn't it make sense for both the restaurant and the customer?

There has to be an incentive, of course, and price isn't a bad one. But, the reality is, those who want to dine at 8 o'clock or 9 o'clock will not accept 6 o'clock at any price.

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Gene Detroyer, Professor, Independent

Restaurants use variable pricing now—lower prices at lunch, happy hour prices, early dinner hour pricing, and specials of the day as well as using coupons. Why is the concept of variable pricing new?

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

Everyone understands early-bird specials. But instituting a more complex pricing schedule will have some unintended consequences.

There's a chance that customers will be seated, take a look at the menu, then leave because pricing isn't what they expected.

There's also the risk of customers feeling as if they've been "gotcha'd." It's the same feeling they get when they find that regularly-priced cereal now comes in a box that would befit Barbie, or that sinking feeling when you realize that your ice cream now comes in a "cheater pack."

Tread carefully here!

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Cathy Hotka, Principal, Cathy Hotka & Associates

There are many good comments here on the existing methods of variable pricing (such as prix fixe menus mid-week, early-bird specials, cheaper lunches, etc.), which I won't repeat.

Instead, in the interest of a lively year-end discussion, I'll pick a fight with two BrainTrusters (BrainTrustees?), both of whom I greatly respect: Bob Phibbs and David Livingston.

Bob's argument (to paraphrase)—that a restaurant should focus on a better experience and better marketing rather than attracting disloyal deal seekers—is too narrow. I agree 100% that a retailer should create excitement and buzz around its full-price offering, but that doesn't preclude the same retailer from *also* figuring out how to better utilize unused capacity. A luxury hotel that can rent 92% of its rooms at $400 a night still has a choice about whether it will let the last 8% of its rooms go empty. A service like HotelTonight lets them unload the last few rooms at a price that's a deal for the flexible traveler while being better than an empty room for the hotel: win-win.

Similarly, David's arguments that "customers would get trained only to patronize when the prices are low" and "[i]f a restaurant has to offer lower priced specials to get customers, the restaurant's problem is not pricing, their problem is with the food and service" also miss the mark. The discussion here is not about a restaurant that has empty tables at 7:30 on a Saturday night, it's about one that has empty tables at 5:15 on a Tuesday night, or 1:30 on a Sunday afternoon. If a restaurant is already full at peak times, and it can still make money at lower prices, then it *wants* to train some customers to patronize at those off-peak times when prices are low. This doesn't mean the restaurant can be crazy about it ($15 3-course pre-fixe at 6 PM, $40 entrees at 7 PM), but intelligent discounts that incentivize some patrons to shift their schedules or encourage new patrons who can't afford regular prices to come in the door are a great idea.

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Ben Sprecher, Business Development, Google

Lunch menus, pre-theatre and early-bird specials are long-standing proof of the validity of variable pricing in the restaurant business. Adopting the inverse—peak hour table premiums—may still take some getting used to, however.

I can sympathize (just a wee bit) with the desire by restaurant operators to pump more or larger rings through their very finite nightly transaction funnel. This has traditionally been accomplished through higher dinner menu prices where the market will bear it.

If the customers are one-percenters competing over scarce tables, prices may be no object. But price image can be a fickle master. Owners know instinctively that they must balance gross margins against the ability to keep tables full over the long haul.

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James Tenser, Principal, VSN Strategies

There are more restaurants than people in this country, and many of them don't last a year. Competition is fierce, and many deals are available to eat out these days. I take advantage of the early bird deals at Texas Roadhouse, and other pre-dinner hour offers, but I don't go out of my way for them. Even Ruth's Chris has a $39.95 price fix menu, which is fantastic, and saves a bundle of money. Enjoy the deals!

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Tony Orlando, Owner, Tony O's Supermarket & Catering

Restaurants have been playing with pricing for as long as I can remember. And they will continue to play for years to come. With new tools available and discount services like Groupon etc, they will need to think very carefully about what and how they use them.

Like Cathy mentioned, customers don't like to be gotcha'd so it will be up to the restaurant to make it very clear what the customer can expect. They will also need to test the various offerings and tools before putting too many eggs in one basket. Good food and good service will always be a no-brainer for success!

Lee Kent, Brings Retail Executives Together to Meet.Learn.Profit, RetailConnections

Many already do—it's called luncheon price versus dinner price.

As to some kind of demand-driven dynamic pricing model—I'd say that's an idea who's time should never come.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

As many others have said, of course variable pricing in restaurants isn't new. And it isn't just lunch/dinner pricing, early birds and pre-dinner rates... for most restaurants, couponing is a long-standing way to attract the marginal price sensitive guest.

What's new here are two things:

  1. There are many more tools at restaurants' disposal to price differently, ranging from the examples Casey mentions to digital ad targeting to 1000-pt tables on OpenTable. The digital world is making flexible what used to be fixed (Early Bird = 4:30 to 6, Mon-Fri).

  2. The tools to measure the attributable impact of pricing programs are much better. Too often in restaurants, as in retail, redemption of deals/coupons is equated with success. Same is true with "butts in seats" at early bird. The problem is: what would have happened anyway, without the deal? If the butts (or most of them) still would have been in the seats at 5:30, then the Early Bird rate is a loser. Likewise if the customer would have ordered the pizza anyway, without the coupon.

Measuring incrementation in restaurants is hard, but much better tools exist today, enabling restauranteurs to be foxes instead of hedgehogs (in Nate Silver speak), and ultimately to home in on the few but powerful variable pricing moves that actually work.

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Jonathan Marek, Senior Vice President, Applied Predictive Technologies

The issue here is one of perception. If the lower price seems like a discount (off the "normal" price), it will work, but if instead the higher price seems like a premium, then it won't.

'notcom'

Variable pricing exists now, but to a more limited traditional degree: happy hour pricing, lunch menus etc.

Given the overpopulated US restaurant space, the industry imperative should be to test everything. But customers need to be conditioned to change. Chains should try store location distinct pricing first. Independents already have this flexibility.

John Gordon, Principal, Pacific Management Consulting Group

One variable pricing I didn't see is the children's menu, which we have found provides the right amount of food for my 91 year old mom.

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Steve Montgomery, President, b2b Solutions, LLC

I am surprised by the comments. How are restaurants any different from other retailers?

Variable pricing at restaurants isn't new. Most already promote with 'Chef's Specials' promotional evenings, 'Early-bird' specials, 'Happy Hour,' etc. Two points to consider:

  • A table is perishable like a hotel room.
  • Restaurants make a substantial margin on drinks. If people aren't visiting to eat then they're not drinking either.

An excellent restaurant in Miami named Perricone's has been promoting $10 Thursday Pasta Night for many years. It is very difficult to get in on a Thursday without reservations. I've been told it's their most profitable night.

Restaurateurs need to be merchants too. Variable pricing is an effective tool.

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Christopher P. Ramey, President, Affluent Insights

The psychographics of diners will vary: some will be ready to take a costly weekend evening meal, whereas some will be ready to dine out on a discount. Location-based social networks can be used to target deals. Diners near the restaurants are more likely to get tempted by a discounted meal. Also considering the short availability of these discounts, there may not be enought time for diners to commute after booking the offer.

Chandan Agarwala, Manager - Strategy and Research, iGATE Corporation

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