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Dynamic pricing: How it can work for restaurants

04 November 2016 by
Dynamic pricing: How it can work for restaurants

It's the norm in the hotel sector, but now restaurants are getting in on the dynamic pricing act too, as Katie Pathiaki explains

Spending in restaurants may still be on a high but in this post-Brexit world and with sterling at a six-year low against the euro, restaurateurs could be forgiven for worrying about what's around the corner, which is why some are considering a more radical approach to keep diners opening their wallets.

One way in which operators are pre-empting what is traditionally the slowest month of the year is by applying variable pricing to their bookings. "It's supply and demand," explains Paul Rawlinson, owner of fine-dining restaurant Norse in Harrogate, Yorkshire, which introduced dynamic pricing in April.

Norse owner, Paul Rawlinson
Norse owner, Paul Rawlinson
"In a way, it's one of the most basic systems ever invented. When demand is higher, you can charge more, and when you need to get people through the door, you offer a bit of extra value."

This kind of pricing has been used, and accepted, by consumers booking flights, train tickets and hotel rooms for decades. But now restaurants are beginning to employ similar techniques to offer discounts depending on the time and day of the reservation to increase footfall and reduce no-shows.

Tock

Rawlinson uses a system called Tock, created by Chicago restaurateur Nick Kokonas of three-Michelin-starred Alinea, Next and the Aviary. It requires customers to pay in advance for a non-refundable ticket covering the price of the meal, including a tip.

Alinea (photo credit by Rebecca Siegel)
Alinea (photo credit by Rebecca Siegel)

"At the weekend we take a deposit and people can choose their menu, which is charged at full price," Rawlinson says. "Mid-week reservations are booked and paid in full before the meal through Tock. Usually, our four-course menu is £40 and eight-course is £60, but mid-week diners who pay in advance can get the four-course for£25 and the eight-course at £45, depending on what time they eat."

Tock was originally created as a way of discouraging no-shows. Before enforcing the system at Alinea, Kokonas was losing over £200,000 a year in booked but empty tables.

By selling tickets, restaurants can spread diners throughout the week and have the freedom to decide how many tables they want to release to the public per day.

Clove Club (photo credit Ewan Munro)
Clove Club (photo credit Ewan Munro)

e Clove Club in London's Shoreditch uses Tock as an alternative to taking credit card details over the phone. "It's interesting how people remember a date a lot more when there's a certain amount of money associated to it," says owner Daniel Willis. "Some people are very indignant about paying for a meal before eating it, but a lot of people were empathetic once they understood the reasoning."

"Lunch has always been quite tricky for us and I'm sure we could stimulate

business from variable pricing. When it becomes accepted, it's going to be like dominoes in the fine-dining sector."

ResDiary

ResDiary is an online reservation platform with ticketing ability. It is used at Heston Blumenthal's Fat Duck in Bray, Berkshire, and has a reporting suite

that lets restaurants know when they are busy and when they are not. Operators

can work out the days and times when they need to encourage extra business and the packages to offer to optimise this.

Mike Conyers, chief executive and founder of ResDiary, says: "Consumers are increasingly getting used to this style of reserving a table as certain operators push the concept of visiting their restaurant as an 'experience'. With the increase of third-party booking sites and paying in advance for things like afternoon tea, it is becoming mainstream."

resdiary-online-payments
resdiary-online-payments

However, dynamic pricing does not come without risk. Unless the strategy is clear, the uncertainty about price may cause diners to avoid visiting a restaurant at all. "I think what is important is the way you frame it," Rawlinson says. "It's not about charging customers more on busier nights, but making sure they pay less as an incentive for their flexibility. I think it's a concept everyone understands.

"I want the discount to be the reason that they have come in, because the whole point in offering it is to increase footfall. I'd rather people knew what the situation was and chose a time to dine. It's important to us to be honest because it makes a connection to guests and it makes them feel a part of what we are doing."

Conyers also advises that honesty and transparency are crucial. "Our venues that use variable pricing often make it clear during the reservation process that they are doing so," he says. "This allows diners to take advantage of less expensive or busy time slots."

SimpleERB

Managing revenue and footfall can be influenced by more than raising and lowering the price to respond to demand. SimpleERB (electronic reservation book) is an online restaurant diary and management tool that also aims to simplify the voucher system. Instead of accepting paper vouchers, SimpleERB directs customers to click a URL to claim their vouchers, enabling the restaurant to allocate a set amount per night. For example, if a restaurant releases 500 vouchers it may allocate 20 to a Monday, but only two to a Saturday night.

"I think the jury is out on whether ticketing is the way forward," says SimpleERB founder Ronnie Somerville. He believes that restaurants are already savvy about dynamic pricing, although they don't explicitly advertise it.

"What restaurants are doing now through a whole plethora of channels is offering vouchers, meaning they are giving variably priced meals but in a different way. Customers on a Monday night are not going to be eating off

the same Á la carte menu as Saturday night - they will be choosing special offers or they will be using a voucher. So restaurateurs are offering value, but not in the face of the customer."

Happy hours, early bird and prix fixe meals are common examples of restaurant deals aimed at increasing footfall. It's typical for restaurants and hotels to offer 'special packages' at different times of the day. However, Kokonas believes that creating several different experiences for diners is unfair.

He says: "That means that the people who pay more on a weekend would actually get less. That's not good. I'd rather come up with one awesome experience and simply vary the pricing."

Fixed pricing is consistent and reassures the customer, and makes sales forecasting and stock replenishment easier, but it doesn't allow for adjustments. If costs are higher than expected one month, the shortfall can't be made up if customers continue to pay the set amount.

Conyers thinks that variable pricing is a great way to fill spots that are traditionally quiet, but it's important for restaurants to stay in control during the discounted periods. He says: "Restaurants need to ensure that they have their customer yield properly controlled on nights where they are putting on lower-priced menus. Operators can be tempted to use fewer staff due to the difficulty of making profit on these quieter nights. But that can mean that diners have a bad experience and are unlikely to return for a full-priced meal.

Using well-controlled yield management means that guests are spaced out over the evening, staff are more attentive and upsell the little added extras that turn a profit."

Although Rawlinson is happy with Tock, he says it's important for businesses to evaluate all the options before making the jump to dynamic pricing. "Technology moves quickly - before long there will be more options," he says. "Take a look at the technology and at what support is available and be clear in your mind what you want to achieve. And, of course, be clear to your guests about what you are doing."

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