Fast-food fans were aghast when news broke last week that burger chain Wendy’s would be testing out surge pricing — a mostly reviled strategy of raising prices during busy times made famous by Uber. Why it matters: It’s getting easier to use technology to monkey around with prices, but that doesn’t mean customers will like it. State of play: In an earnings call earlier this month, Wendy’s CEO Kirk Tanner said the company was planning to test “dynamic pricing.” That’s a commonly used practice of changing prices more frequently using algorithms, machine learning and AI. - His remarks went unnoticed at first but then were picked up by a few big news outlets, they used the term “surge pricing.” The backlash was quick.
- Late on Tuesday, the company put out a statement clarifying that it didn’t plan to raise prices during busy hours — but would use digital menus to change offerings during the day and offer discounts during slower times.
- That of course means that prices would be higher at high-demand times, but typically consumers don’t view that as price-gouging — happy hours and early bird specials are seen as good deals.
The big picture: People are accustomed to dynamic pricing in certain areas. Flights are more expensive on Dec 23rd than on the Dec 25th. These kinds of price adjustments are more common than you might realise, and they’re growing in popularity as more companies pop up to help retailers try it out. - Dozens of US restaurants have quietly implemented surge pricing, including barbecue chain Tony Roma’s, the New York Post reports. As more menus move to tablets, the process has gotten easier to implement.
- Retailers like Kohl’s, Best Buy and Grocery chains have used digital price tags that make it easy to change prices.
The bottom line: Wendy’s didn’t handle this well, says Vicki Morwitz, a professor at Columbia Business School. It seems executives didn’t think sufficiently about how consumers would react or about the best way to use dynamic pricing. - That’s crucial. There has to be a human overseeing the rollout and watching the algorithm, she says.
- Changing prices a lot can be “unsettling,” the HBR professors write. Just look at how vexing the recent period of inflation has been.
The Wendy’s dust-up mirrors one of the Coca-Cola Company’s worst PR debacles, in 1999, says Morwitz, the Columbia professor. - Back then Coke considered raising vending machine prices when the temperature rose. People thirst for a cold drink on a hot day, “so it is fair that it should be more expensive,” the company’s then-chairman said.
- People hated the idea, and the word “gouging” came up a lot, Pepsi quickly took the opportunity to say it would never do such a thing — and Coke walked it back.
- Dynamic pricing is not new news in the UK hospitality market, it’s been deployed for decades, however the communication of such practice is a minefield as a number of well known national operators have since found out in recent years.
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