On February 15, 2024, during Wendy’s earnings call, the President and CEO uttered this sentence: “Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and day-part offerings along with AI-enabled menu changes and suggestive selling.” Immediately, the press picked up on this and ran with stories that Wendy’s will start charging more at lunch, or your Frosty will be more expensive on hot days. This fiasco got me thinking about dynamic pricing – what it is, where it’s used, and if it’s a benefit to consumers.
What is dynamic pricing?
While you might not realize it, you’ve probably dealt with dynamic pricing in the past. Essentially, it’s a way for a company to analyze past data in conjunction with current supply and demand and change prices to either increase sales (if demand is low) or maintain product availability (if supply is low). Prices may go up or down. Wendy’s was accused of surge pricing, where a company sets a level price but increases that price at times of increased demand.
Doesn’t this make the store manager’s life insane?
No, this isn’t a situation where the store manager is manually changing prices on his menu board. In fact, he may be as surprised at the changes as the customers. Stores have jumped on the digital menu board bandwagon, whereby not only can the menu offerings be limited (for instance if supply of fish sandwiches is low) but where the price can change at a moment’s notice.
Companies have invested in algorithms that use past history as a baseline but bring in current supply and demand to present a price that they believe will correct any imbalances in that supply and demand.
Examples of dynamic pricing
My wife travels for her job. If she flies on a Monday morning with all the other business travelers, it can be more expensive than going out later that day or mid-week. Similarly, if she waits until the last minute to fly, prices are normally much higher. Airlines have long attempted to match supply and demand, and customers have come to expect it.
More recently, you might have encountered restaurants changing their prices listed on delivery apps, like Door Dash. One day you may pay $10 for that $12 meal, another you might pay $15. Or perhaps you’ve noticed electronic shelf labels at the grocery store. The 99¢ per pound apples you purchase may be $1.19 for another customer.
How this might hurt consumers
You can see from the last example that with digital pricing, there’s no longer any assumed level of fairness when you shop. While someone else might purchase an item for $5, you may spend more or less depending on an algorithm. This negative impact on trust is what causes most people concern about dynamic pricing and what caused a lot of the uproar around Wendy’s announcement. Why should customer X pay $4.59 for his burger while customer Z paid $5.25, especially if the cost for these burgers is the exact same amount?
Earlier forms of changing pricing during slow times were easy to understand. Happy hours were set up to fill a slow time by enticing people with lower-priced drinks and food. This makes sense. An algorithm responding to company-specific data (that will never be shared) isn’t as easy to understand, especially if prices change daily, seemingly at a whim.
Finally, this type of pricing can wreak havoc on personal budgets. When you purchase an airline ticket, you usually have the time to compare different combinations of arrival and departure dates and times. If you go into your favorite fast-food restaurant a couple of times per week, and each time it seems that prices are going up, will you really be willing to walk out the door during your 45-minute lunch break to find something else?
How this might help consumers
While I’ve focused on the higher priced side of the scale, true dynamic pricing will offer times when prices are lower. Maybe that means you’re having lunch at 11:15 am versus 12:30 pm, but you could save money by buying at less popular times or purchasing less popular products.
If you’re a regular and join a loyalty program or use the company’s app, you may be able to see the price changes before you’re at the store (so you can decide if it’s worth your 45-minute lunch break to go to your favorite fast-food restaurant). Members of loyalty programs also are offered perks which could include discounts for using the app to make a purchase, or repeat business rewards.
There’s also the possibility that items that quickly sold out in the past are in stock due to dynamic pricing. As a merchant depletes their supply, they can raise prices in the hopes of maintaining some inventory until they are able to receive more.
Ways to navigate dynamic pricing
As if we didn’t have enough to focus on, now your lunch might be influenced by some random price change. There are several of ways you can attempt to manage this, whether in person or shopping online:
Consider the time of day. This might seem simplistic, but if you’re noticing higher prices for your morning coffee or evening beer in an establishment that has a shiny new menu board, consider changing up the times you visit to see if there’s an effect on pricing. You can also ask the staff about times when prices are higher and those when you might save a buck or two.
Track prices for online purchases. Several sites exist that will tell you the historic price of an item on Amazon and alert you if that item goes on sale. While you might not want to use this for toothpaste, if you’re considering a larger purchase (or regularly like to update your jeans wardrobe), consider using these tracking sites.
Clear your cookies and other tracking data. I first noticed years ago that when I saved an item on Amazon to purchase later, it almost always increased in price. Now I write down prices and delete all tracking information as I research a purchase.
Like anything else, some companies will manage dynamic pricing appropriately, and others will simply see it as a way to increase prices (think of how quickly gas stations increase their prices when there’s a rumor of a shortage). As a consumer, be prepared to see changing prices. If they seem arbitrary, vote with your feet and leave the store. And make sure to find out when you can save some money through dynamic pricing and determine if the hassle is worth the savings.
Photo by Lisa Fotios