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Dynamic pricing in restaurants: how to optimize your revenues? πŸ’°

6 min

Finding the right balance between what a customer is willing to spend and the revenue a restaurant needs is not a simple matter. Indeed, there are many parameters to consider 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, operating costs), others in the very short term (value perceived by the customer depending on the time of day, production capacity of the restaurant, use-by date, etc.).

Fortunately, with the help of technology, new methods have appeared in the last few years, notably "Dynamic pricing".

This "Yield Management" method, well known in the transportation and hotel sectors, is based on a simple principle: adjust prices automatically by offering discounts when traffic is low to stimulate demand, and raise prices when traffic is high to boost profitability. All this while taking into account the maximum number of possible variables.

One of the major barriers to implementing a dynamic pricing strategy in the restaurant industry has long been the logistical complexity associated with this type of practice (printed menus, costly communication, etc.). This barrier has been completely removed by the rise of online sales channels, whether it be delivery, take-out or onsite.

But how to implement a successful Dynamic pricing strategy in your restaurant?

Without further ado, more details πŸ‘‡

The secret of Dynamic pricing in the restaurant industry: promotional offers 🎁

Before jumping into implementing an aggressive pricing strategy, it is important to understand the restaurant industry context.

The customer's reaction to the price change βš οΈβ€

How would a customer react if he was asked to pay 8€ for a burger one day and the next day the same burger was posted at 10€? He would probably feel cheated and taken for a fool, wouldn't he?

Conversely, how would this same customer react if the burger was posted at 10€ (-20%) the first day and the next day it was 10€? He would certainly say that this is 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 situation are however the same but the customer's reaction is totally different... And rightly so because to practice Dynamic pricing in the restaurant business, there is a real cultural context to take into account.

In the first case, the customer is caught off guard, he thought he would see a certain price when he arrived and this price is finally higher than his expectations. In the second case, the customer has been "warned" of the price variations and therefore knows the usual prices. He will be able to come back knowing the facts. And that makes all the difference.

How the platforms work πŸ“²

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 their products on their menu? Probably not much... It won't show up more in the platforms' algorithm and it will go unnoticed except for a few customers who will be frustrated at not understanding these changes.

On the other hand, if a restaurant owner has a promotional offer as in the previous case, the platforms will put it forward for the simple reason that it is an excellent argument to get new customers and optimize the chances of orders on their site.

As you can see, the implementation of a dynamic pricing strategy in the restaurant sector requires the intelligent use of promotional offers.

So what are the first steps to follow in order to set up a promotional strategy that is relevant and adapted to your restaurant?

All the keys to building your dynamic pricing strategy πŸ”‘

Demand analysis πŸ”

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.

Attendance at a facility depends on many factors:

- The location (commercial area, offices, residential area...).
- The type of restaurant offered (fast-food, casual, gastro...).
- The type of cuisine offered (French, American, Asian, Italian...).
- The seasonality (summer, winter, school vacations...) etc.

Depending on these factors, attendance will vary over the course of a day (noon, evening, edges of service, between services) or a week (Monday-Friday, weekend).

Demand can also change depending on the consumption pattern:

- On site.
- To go.
- By delivery.

Let's take the example of a burger restaurant located in an office area on a weekday. It may have a higher take-out and onsite demand at lunchtime than at night, and a delivery demand that follows the same trend:

Sales per hour and consumption pattern of a burger restaurant located in an office district on a Thursday, excluding school vacations.

Once the peaks and troughs of attendance have been identified, the second step is to measure the evolution of its production capacity.

Measuring the capacity of your restaurant? πŸ“

First, let's agree that there are two types of capacity:

  • Physical capacity 🍽

It corresponds to the total number of covers that can be served in the dining room during a service. This capacity depends not only on the size of the restaurant, but also on the average service cycle (the time that usually elapses between the arrival of a customer and his departure).

πŸ’‘ 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 service from 6:30 to 10:30 p.m. (240 minutes) and a service cycle of 90 minutes.
The calculation would then be: (60 x 240) / 90 = 160.
β†’ The physical capacity of the restaurant would then be a maximum of 160 covers here.

  • Production capacity πŸ§‘

This is the number of places that can be served by your kitchen staff.

Measuring the maximum production capacity of your kitchen team will allow you to know the maximum number of covers that can be prepared for all sales channels (on site, take out, 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 on non-restaurant channels such as take-out and delivery.

The production capacity of a restaurant can be stable or variable as the services and the week change.

Let's take the previous example of the burger restaurant. This one has a stable and linear production capacity on each of the services with a break between 3pm and 6:30pm. It is 400€ per hour at noon and 300€ per hour in the evening:

We can see that the restaurant's production capacity is greater than its demand and that it therefore has a production margin left.

This production margin is costly for the restaurant because it means that it pays fixed charges that are often important (rent, electricity, personnel) and that it does not exploit the full extent of its business. What can be done to increase demand and thus reduce the production margin?

Closing the gap between demand and production capacityπŸ’‘

The strength of online sales channels lies in the possibility they offer to restaurant owners to connect with thousands of potential consumers at the snap of a finger. With marketing tools such as promotional offers or sponsored ads, any restaurant can strongly influence its visibility at the times that are most convenient for it .

β†’ The key, then, is to use the leverage of online sales to increase profitability and close the gaps between its footfall and total production capacity.

Let's go back to the same pattern, but this time with a demand for delivery that has been boosted by the implementation of promotional offers:

We can see that the sales in delivery have significantly increased, boosting the cumulative sales of all channels and thus reducing the production margin.

This difference between the cumulative sales of all channels in the first graph and the cumulative sales of all channels with offer in the second graph is the additional gross margin generated by the restaurant owner:

Additional gross margin per hour for the same restaurant that used promotional offers to increase its delivery sales during low demand periods and thus its cumulative sales across all channels.

Thanks to a good use of promotional offers on the slots with a remaining production margin, the restaurant owner was able to increase his delivery turnover tenfold and thus increase his gross margin.

In other words, he was able to take advantage of the power of online sales channels to go after sales that he would not have made without it and when it suits him best.

The importance of adjusting your strategy in real time βŒ›οΈ

This works perfectly well in theory, but the practice is sometimes a little different. Indeed, the frequentation of a restaurant can be quickly impacted by an unforeseen event (construction, a sudden change in weather, an event, etc.) and this is difficult to anticipate. Moreover, being busy with many other tasks, it is operationally very difficult for a restaurant owner to act immediately.

πŸ’‘ In the event of an unforeseen event that results in a drop in sales, a targeted offer will help offset this drop by increasing demand on online sales channels.

The use of a solution directly connected to the restaurant's cash register allows instant detection of peaks and troughs of frequentation and to trigger an adapted promotional offer in real time. The objective is to be as close as possible to your maximum production capacity to optimize the profitability of your business.

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Wuillaume Dalle

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