Smoothing Out Demand, Wendy’s, Dynamic Pricing And The Price-Beleaguered Customer

If you thought pricing was a sleepy part of your brand-business strategy, time to wake up. Pricing strategy is front-and-center in today’s marketing. Pricing strategy is incredibly, economically impactful. Pricing strategy changes the way customers perceive brand value.

Continuous price hikes, reference pricing, price indifference point are altering customer-perceived trust and value. Add dynamic pricing to this list.

Dynamic pricing, according to its proponents, smooths out demand, which tends to generate more profit. Dynamic pricing helps with margins which are an obsession with brand-businesses. With dynamic pricing, brand-businesses can generate demand during slow periods while easing demand during busy periods.

In March 2024, Wendy’s announced a dynamic pricing scheme. After some commentary on TiK Tok, Wendy’s became the target of an extraordinary backlash. Wendy’s recanted, backtracking on its proposed “demand” pricing. However, dynamic pricing is already embedded in fast food menu boards. We may not notice this, but price changes are subtly affecting our purchases. And, interest in dynamic pricing grows as already in-place technology, as well as AI capabilities, make the ability to strategically shift pricing seamlessly on menu boards, apps and electronic “tags” on grocery items ubiquitous.

With brand-businesses continuously raising prices, dynamic pricing is now a hot topic of consumer interest generating lots of observations in the business press, newspapers and the Senate floor.

Dynamic pricing has been around for a long time. Before Uber’s “surge” pricing, airlines were – and still are – heavy users of dynamic pricing. As are gas stations, utilities and commuter trains and buses. 

Off-Peak and Peak prices vary. If you are planning a trip and book a flight in advance of your start date, you pay a lower price than the person who makes the reservation the day before the flight. If you take a Metro North train from Greenwich CT, to New York City at 10 AM, your ticket price will be lower than if you traveled at rush hour.

Utilities urge customers to do their laundry at night to save money. Utilities also suggest using cold water rather than hot water. At certain restaurants, the price of an item served at lunch and also served at dinner will vary as the lunch price will be lower than the dinner price.

Happy Hour is a form of dynamic pricing as are the Early Bird specials that seniors and families with kids prefer. Taco Bell runs a Happier Hour.

There are many people who believe that dynamic pricing is good for businesses and good for the customer. In an interview on CBC Radio One, a Wharton professor described how dynamic pricing benefits both customers and the brand-business. He said, 

“I think in dynamic pricing … is good for everybody. In theory, dynamic pricing can be good for every firm in every industry.

“As a customer, it’s actually good for you. Think about it. … When firms do dynamic pricing then they have the flexibility to lower the price, too, right? So, it’s not just the raising the price. Which means that for the people who are willing to pay higher prices, they probably get charged at high prices with different services. And, for the people who are not willing to pay a high price, you get access to the goods. I think that ultimately it’s good for everybody and it’s good for the society. 

And, I think that it just takes some getting used to. If you look into the airline industry, for instance, after deregulation, before there was deregulation, the price was fixed. There was a constant, right. But after that, of course, people were very unhappy about the fact that prices vary over time. But, over time, they learned that in fact it was good for them. Simply because if you’re vigilant, if you pay attention to prices, then you can actually get some really low-price tickets.

“(We see dynamic pricing in the) … service industry … definitely, I mean, fast food restaurants …. And, in the grocery stores with electronic price tags …. I cannot see any industry where you cannot do it. In fact, if you look at a car business, when you buy a new car, it has been dynamic pricing for a long time. It’s just that we don’t talk to each other about car purchases and how much price we are paying, right? So, I think that (dynamic pricing) will come to a lot of different places where we would not expect.”

Those economists and marketers in favor of dynamic pricing believe that with fast food, dynamic pricing is an aid to operating at lower costs. Dynamic pricing also provides a competitive advantage because, in general, the store is charging lower prices on average compared to what is currently charged. 

How is this possible? 

At off-peak times, the restaurant must still pay crew members and cover fixed costs. To be profitable, a restaurant must figure out how to recoup those sunk costs.  One way is to raise prices during peak times. The basic principle of dynamic pricing is that offering lower prices during slow hours allows a restaurant to attract more customers. From the restaurant’s standpoint, prices are, on the average, lower even when charging higher prime-time prices because the total restaurant average price is now based on attracting more lower-priced customers.  This is called “smoothing out demand.”

Of course, as Wendy’s learned, and as other marketers should be aware, customers do not care about your pricing strategy.  Customers do not care about smoothing out your demand over the course of a day. Nor do customers care about your sunk costs or your profit. Customers are concerned about affordability, transparency and fairness at any time of day.

Economists also view “costs” as not just money, but money, time and effort. This perspective is very different from customers’ perceptions. Customers faced with a menu board of variable price x time offerings are not thinking about the “costs” of time and effort, such as waiting or navigating a menu board.  However, money, time and effort do mentally affect how customers perceive value, even though customers may not notice at the time. At that moment of purchase, customers only see higher prices at the times when they are most desirous for or able to satisfy their hunger. Consequently, when waiting for a peak-time meal, the frustrated customer probably feels that there should be a discount for the waiting time not a price premium. Furthermore, if the wait-time is long and the meal is just OK, the costs relative to the experience are higher, eroding the customer’s perceived value of the brand.

Look at the situation from the customer’s perspective. If you only have thirty minutes to grab a lunch meal, you are only thinking about that thirty minutes and your lunch meal. Marketers are insensitive if they think that customers say to themselves, “Gee, I don’t mind the higher price because at the end of my day, I can enjoy Happy Hour.” Marketers are misguided if they believe customers are more flexible with lunch or dinner times just because societal trends highlight multiple meals a day at odd hours along with grazing. Most people have a specified lunch time. Even your doctor’s office gives employees an hour mid-day for lunch and the phone message tells you so. 

At the point of purchase, a customer’s mindset is also not focused on the brand’s loyalty program. In fact, the Wendy’s situation shows how shallow are people’s connections to loyalty programs. Brands may see loyalty programs as dynamic “personalized” pricing, but probably customers do not. Customers see their points as rewards for regular, frequent usage. Customers are still going to be miffed at higher prices at peak times because those loyalty points will only stretch so far to cover the increased cost of the meal or snack.

Another issue to contemplate. Dynamic pricing makes sense to marketers. But, restaurants are food deliverers – food that you want when you are hungry. Hunger is a universal need. Customers do not care about dynamic pricing from the standpoint of “smoothing out” demand when they are hungry. Nor do customers see the price differences between off-peak and peak as fair when they are hungry.

When it comes to dynamic pricing and food, a professor at Guelph University in Canada commented on the Wendy’s issue, the potential problems with dynamic pricing, grocery stores and food.

“Well, the reality is with a rideshare we can decide to go with a taxi. We can decide to go with someone, something else. With food, we cannot defer a purchase. We can’t decide not to fly there for a holiday because it’s too expensive. We can’t defer a purchase, so we’re much more sensitive to food price increases.

“So, I think the fact that we can’t defer food purchases, the fact that we are currently in an affordability crisis, the fact that grocers are already receiving negative perceptions, makes dynamic pricing beyond what we’re doing already, a dangerous thing to do. I can’t see the grocers seeing this as a smart initiative.”

It is possible that customers may respond poorly to dynamic food pricing. But, the more important issue is that marketers view dynamic pricing from manufacturer’s perspectives. This is sad since a prime role of the marketer is to be the voice of the customer.

When customers think about dynamic pricing they tend to perceive unfairness, opaqueness and “scam” writ bold. The blowback on dynamic pricing is not a customer flaw. Many in the communications industry see marketers’ poor framing of dynamic pricing. Right now, customers do not see the benefits. What customers do see are brand-businesses thinking about making more money at the customer’s expense. This was certainly the case with Wendy’s.

Sure, it is great to secure a lower airfare, but, it means I need to make decisions months in advance.  Sure, I like the idea of a lower-priced meal, but, that means I have to eat dinner at 4:30 or 5:30 PM. My kids’ after school activities do not finish until then or later.

And, with prices for everything already rising into the stratosphere, any additional price hikes – whatever you wish to call these, are seen as gouging. At Wendy’s, the peak-time price seemed exorbitant while the lower price at off-peak seemed to be the normal price. Wendy’s could have communicated that the peak meal-time price was the great normal price and the off-peak time was a great brand at an even more affordable price. But that did not happen.

It is possible that food needs different terminology and communications if dynamic pricing is to be employed. On the other hand, until prices settle down, customers are going to be extra sensitive when it comes to higher prices.