Consumers pay more for a flight to Florida or a hotel room during peak vacation times. They spend more money on a rush-hour Uber ride, perhaps gritting their teeth, and rely on apps like ParkWhiz or ParkMobile to book spots for their cars at premium prices.
But a reaction on social media this week to media reports that fast-food chain Wendy's had plans to raise menu prices during its busiest times showed that U.S. consumers have limited choices about where, when and for what they will trade more money for convenience. It looks like a Dave's Double Combo or a Frosty are out of the question.
Wendy's clarified its intentions Wednesday, distinguishing between the company's “dynamic pricing” strategy and “surge pricing” practices, which charge higher prices during times of high demand. The company said any fluctuations it plans to test in the future “would be designed to help our customers and restaurant employees.”
Here's a look at the differences between dynamic pricing and escalation, which industries use them, and some of the more subtle ways companies factor price fluctuations into their bottom line.
WHAT IS THE DIFFERENCE BETWEEN DYNAMIC PRICE AND SURGE PRICE?
Dynamic pricing and escalation are models in which prices are continually adjusted based on a number of factors, sometimes within minutes. Dynamic pricing can include both increasing and decreasing prices depending on market conditions, season and changes in supply. Experts say surge pricing is a subset of dynamic pricing and simply involves price increases based on supply and demand.
WHICH INDUSTRIES USE DYNAMIC PRICING?
Dynamic pricing has been around in some industries for almost as long as they have had technology to quickly adjust prices.
For example, airlines regularly raise and lower their fares depending on the time of year, expected increases in customers, and forecasts of how many seats they can fill at different times. For example, flights on Sundays and Fridays tend to be more expensive than flights in the middle of the week. Airlines even have a name for this practice: yield management.
The same applies to hotels with room reservations. For this reason, you may be able to get better deals during hurricane season or right after major holidays when travel tends to slow down. Today, however, the actual calculations that go into reservation prices are much more complex.
Other places where dynamic pricing is evident include concerts, sporting events, parking, and street meters. Utilities use dynamic pricing to limit usage during times of high demand that could lead to blackouts, notes Daniel Freund, an economics professor at the Massachusetts Institute of Technology.
Neil Saunders, chief executive of research firm GlobalData, said that while dynamic pricing is already commonplace, the sadness over Wendy's shows how sensitive consumers are to price fluctuations.
“Dynamic pricing is common in travel and accommodation. There is a fixed level of supply,” Saunders said. “But if a burger is $5 one minute and $6 the next minute, and then it goes up and down again, they're just going to be upset. And they’ll probably go somewhere else.”
HOW COMMON IS DYNAMIC PRICING IN RESTAURANTS?
Experts say it doesn't happen often. But more restaurants are charging more for items customers order through third-party apps like Uber Eats and DoorDash, according to Jason Goldberg, chief commerce strategy officer at Publicis Groupe, a global marketing and communications company.
Debbie Roxarzade, founder and CEO of Las Vegas-based restaurant Rachel's Kitchen, uses technology from a startup called Sauce Pricing to help price prices for third-party app users based on algorithms and personal traffic at the nine restaurants to adapt to the chain.
For example, a sandwich that would cost $12 on the regular menu might rise to $12.60 for a delivery customer during peak times, but drop to $11.05 during slower times such as after lunch, Roxarzade said .
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“It helps to streamline operations and keep things fresh, clean and more consistent, rather than having a big spike in demand and then very low sales at other times,” she said.
Roxarzade emphasized that their physical locations do not use such dynamic pricing methods.
What is it like in retail?
Amazon and other online retailers raise and lower prices depending on supply and demand as well as competitive pressure. During the Black Friday and Cyber Monday shopping boom, the strategy goes into overdrive.
Shoppers know that prices for a popular toy may rise due to increased demand before the holidays, while prices for well-known games and puzzles may fall, Goldberg said.
But companies that “exploitatively” raise prices on routine items based on the time of day is not good practice, Goldberg said.
“We do not participate in price increases,” Amazon said in an emailed statement to The Associated Press. “Retail prices are constantly fluctuating. Our prices change based on our efforts to compare and match low prices with competitors.”
Amazon is currently facing a lawsuit from the Federal Trade Commission accusing it of various unfair practices, such as overcharging sellers and preventing price gouging.
Amazon called the lawsuit “misguided” and said that if the lawsuit is successful, it will force Amazon to actually engage in practices that actually harm consumers and the many companies that sell on its store, such as the need to offer higher prices.
DO GROCERY STORES USE THE STRATEGY?
Even before the coronavirus pandemic, grocers and restaurants were experimenting with technology to make price changes easier. However, due to severe labor shortages, the pandemic prompted more restaurants and stores, especially grocers, to switch to digital pricing.
Walmart Inc. and other grocers have expanded the use of electronic shelf labels, freeing employees from manual labor so they can better serve customers. Restaurants had another reason to forgo printed menus and instead use QR codes that diners could scan to access the menu: They were concerned about physical interactions during the peak of high COVID-19 infection rates.
Analysts say companies see a greater need to rely on digital pricing during times of high inflation.
“It's not like they can increase the price hourly, but they do occasionally change the prices up and down,” Goldberg said. He pointed out that changing prices for a grocer that typically has 20,000 items in each store can be cumbersome when it relies on labor.
WILL CONSUMERS ACCEPT DYNAMIC PRICES?
Experts predict it will be difficult to change public attitudes toward dynamic pricing, especially in fast-food restaurants. At the same time, charging customers a fee for choosing a seat or checking a suitcase for a flight wasn't always as common as it is today.
It is also possible to approach dynamic pricing in a way that defuses consumer discontent, said Freund from MIT.
“Instead of saying we will apply price increases during peak demand periods, they could say we will explore applying discounts during off-peak periods,” he noted. “And of course these two statements are equivalent.”
Hamilton reported from San Francisco. Dallas airline writer David Koenig contributed to this report.