Surge pricing is a growing phenomenon in the food and beverage space. More establishments are adopting this method of pricing due to inflation, which has resulted in higher operational costs.
With inflation impacting everyone, consumers have become more conscious of the prices of goods and their spending. Therefore, traditional pricing models for restaurants have become outdated and are no longer sustainable.
To combat inflation, restaurants and other food establishments have turned to surge pricing as the solution. Discover more about what this pricing model entails, its impact on the customer experience, and how it’s being implemented with digital signage.
What Is Surge Pricing?
Surge pricing, also referred to as dynamic pricing or time-based pricing, is a revenue pricing management strategy that involves varying the price of a product or service to reflect changing market conditions. This method differs from traditional pricing, which involves counting the costs of expenses needed to operate to determine a final price.
How Surge Pricing Works
Surge pricing uses algorithms to dictate pricing at a given moment. In the context of the food and beverage industry, surge pricing allows restaurants to adjust the prices for their menu options in real-time based on demand. For example, during off-peak hours, food establishments might decrease their prices to attract more customers. Conversely, they might also slightly increase their prices to offset rising costs.
In addition to peak hours, other factors influencing surge pricing can include:
- Demand patterns
- Special events
- Consumer behavior
- Social trends
The food and beverage industry is not the first to adopt this kind of pricing model. For example, businesses in the ridesharing and hospitality space have been utilizing surge pricing to establish prices for their customers for some time. Even though the industry and services are different, the same concept of increasing prices during busy times applies.
Pros and Cons of Surge Pricing for Restaurants
Since surge pricing directly and dynamically adjusts prices according to market dynamics, the model offers a range of benefits for restaurants and other food establishments. By anticipating demand and increasing prices during those times, establishments can optimize their revenue.
Additionally, surge pricing helps to diminish inefficiencies within an operation or even eliminate them. The pricing method even helps address capacity management by preventing running out of stock when surge pricing is applied.
While surge pricing can be very beneficial for companies that want to offset inflation, it does have some pitfalls. When restaurants apply surge pricing too often or at inconsistent times, consumers might view this as a form of price gouging. The potential fallout of this perception is customer dissatisfaction and an impact on reputation. A diminished reputation threatens loyalty and could result in lost sales.
Surge pricing should be combined with extensive market research to ensure it accomplishes its goal without risking consumer backlash. Price increases using the surge method should only happen when the data encourages such a move.
Food places can further decrease the risk of consumer backlash by putting price caps in place for menu items. Having a maximum set price per category or food product group will limit the likelihood of negative price perception.
Impact on Customer Experience
Restaurants that have yet to adopt surge pricing may be concerned about how their customer base will respond. When surge pricing is in effect, consumers have two decisions. They can either still buy the product or decide to postpone their purchase due to the surge in price. When the need for the product remains high enough, and the surge in price continues to fall within a desired price point, consumers will continue transactions regardless of the price increase.
To mitigate the negative effects on customer satisfaction while maximizing revenue, food establishments should employ the following strategies:
Explain the Reasoning
One reason why customers are so reluctant to accept surge pricing is because they don’t understand the reasoning behind it. To avoid confusion and customer dissatisfaction, restaurants should communicate their logic. Be transparent by using simple language and providing examples that illustrate pricing principles.
Monitor Customer Reaction
Routinely gauging customer feedback can help minimize backlash due to surge pricing. Restaurants should closely monitor the consensus reaction to price surges and how sales are affected. This action will help restaurants understand better their customers’ satisfaction level and indicate whether their pricing algorithm needs adjusting.
Offer Alternative Options
Offsetting surge pricing by offering alternative options is an effective way of minimizing the risk of customer dissatisfaction. For example, give your customers a choice between similar products with different prices.
Implementing Surge Pricing with Digital Signage
Food establishments can seamlessly incorporate surge pricing into their operations with digital signage. Digital outdoor menu boards and digital indoor menu boards can display dynamic menu content and attract customers’ attention.
Restaurants can also use these digital menu boards to seamlessly adjust prices and even offer explanations for these changes. Businesses want to seize the benefits of surge pricing but also want to be transparent about fluctuating prices. Ultimately, digital signage can help communicate these changes in real time, creating a better customer experience.
Restaurant Surge Pricing with DSA Signage
As inflation and rising operation costs continue to be a concern, more and more restaurants are implementing surge pricing. Although this pricing method can be very beneficial for food establishments, the risk of customer dissatisfaction looms large. To minimize the risk of consumer backlash, restaurants must be transparent and open about their newly adopted pricing strategy.
This can be accomplished with digital signage solutions from DSA Signage. Showcase your pricing to your customers with the reasoning behind it while also displaying attention-grabbing content. Our team can help you identify which technology works best for your restaurant as you transition to surge pricing. Contact us today to learn more about digital signage offerings or to request a quote.
