If you followed this summer’s public debate surrounding ride sharing, specifically the car service Uber, you might have heard the term “surge pricing.” The term incensed high-ranking government officials, but surge pricing illustrates the most basic of economic concepts: When demand is high, charge more.
Airlines and hotels have been surge pricing for years. But other than a “market price” for fresh fish or other rare commodities, the restaurant industry has largely stayed away. All this could soon change as mobile ordering gains momentum. Uber raises pricing on the fly based on real-time data gathered via mobile devices, the primary source for ride requests. Digital ordering for restaurants allows a similar opportunity by enabling fluid pricing. If, for example, a concert lets out at Madison Square Garden, Uber might charge higher rates to encourage drivers to come to the area. The local burger shop might also experience a flood of mobile orders. Algorithms via mobile device data could calculate that demand and create real-time price increases for the restaurant, while direct connections to POS systems allow changes in price to be displayed across the digital ordering interface — website, mobile app or in-store kiosk. Moreover, all this can be accomplished without human intervention and in real time.
Varying price to drive demand is nothing new to restaurants — just look at the wave of deep discounting in recent years. Similarly, daily-deals services like Groupon offer discounts to drive traffic. Even daypart-based pricing, charging a lower price for a cheeseburger at lunch, for example, is a way operators change pricing to drive demand. So what’s new about surge pricing? In surge pricing, the arrow of causality reverses direction. Demand drives price, rather than price driving demand, a reversal that could reap rewards for the industry.
Managing supply and demand based on real-time data isn’t just a moneymaking tactic (as Uber is quick to point out). Uber manages its finite number of cars by incentivizing its drivers during peak times — an incentive made possible by dynamic pricing.
These days, the restaurant industry is smack in the middle of the minimum wage debate. What if fast casual workers could earn extra pay? Surge pricing could create a scenario in which operators subcontract trained workers who earn a fixed percentage of sales, just like Uber. Using mobile ordering, an operator could see a traffic spike and blast out a message to his workforce offering greater pay if workers pitch in during a real-time surge in demand. The combination of digital ordering and surge pricing could make that a reality. Surge wages could also help ensure consistency in an operator’s profit margin, while maximizing employee wages and throughput capacity.
Demand-driven pricing also can support marketing programs that smooth out the demand curve. Imagine pushing promotional offers to loyal customers during certain off-peak times of day. I’m not talking about a premeditated Early Bird Special or Happy Hour. I’m talking about a real-time knowledge of surge demand and forecasting excess capacity. Operators with multiple units could level off demand throughout a city, showing a range of prices at locations across a metro area at different times of day (think about flying out of a metropolis like New York City and choosing flights from JFK, LaGuardia or Newark). That may seem silly for an individual order, but it could be meaningful to the operator and the customer in the case of a catering order in which the customer is less sensitive to which franchise prepares the order for pickup or delivery.
The bottom line is this: The combination of surge and off-surge pricing could positively affect the bottom line, allowing restaurants to push as much demand through their four walls as possible, every day, while managing labor costs and employee satisfaction. It’s hard to believe, but all this operational magic is in your pocket — and the pocket of your customer. It’s as simple as mobile ordering.
Noah Glass is the founder and CEO of online and mobile ordering pioneer Olo. Since 2005, Olo has raised $13.75M from PayPal and leading venture capital firms. Olo has been featured on Good Morning America, The Wall Street Journal, and ABC World
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