FILE PHOTO: A Wendy's fast food restaurant is seen in Los Angeles, California U.S. November 7, 2017. REUTERS/Lucy Nicholson/File PhotoLucy Nicholson/Reuters
Woonghee Tim Huh is professor and chair of the operations and logistics division at the UBC Sauder School of Business and the Canada Research Chair in operations excellence and business analytics.
Steven Shechter is a professor in the operations and logistics division at the UBC Sauder School of Business and the WJ VanDusen Professor of business administration.
Wendy’s WEN-Q has announced that it would introduce dynamic pricing to its U.S. market – and then has seemingly backtracked.
Some have compared this plan of Wendy’s to Uber’s surge pricing, where prices can shoot up two or three times based on demand and available capacity. Sure, dynamic pricing has long been used in the airline and hotel industries, but for pricing burgers and fries at a fast-food restaurant?
The fast-food chain faced backlash from a large base of price-sensitive fast-food customers. Indeed, some on social media called for boycotts.
So, on Wednesday, Wendy’s said its dynamic pricing plan would not raise prices during busy times. The plan, the company said, would only “allow us to change the menu offerings at different times of day and offer discounts and value offers.”
Whether or not that was always the plan, Wendy’s was wise to disavow surge pricing. Especially so considering that the American market is likely a test bed for rolling out dynamic pricing internationally.
The benefits of surge pricing to the company are clear. Restaurants cannot simply hire extra workers just for one to two hours around noon to meet peak demand. So, by increasing prices during peak times, there will be less congestion. It is the same idea that many governments around the world expressed during the early days of COVID: flatten the curve.
But just as many accepted restrictions to our freedom for the public good, would we embrace higher lunch prices?
Surge pricing is unpopular among customers of ridesharing platforms. Yet, Uber can get away with this since it does not keep the extra money from surge pricing; most of it goes to the drivers. Uber can argue that higher prices are needed to increase the number of drivers during peak times. But Wendy’s would presumably keep extra revenue from surge pricing.
There are other ways Wendy’s is different from Uber. An Uber rider has to worry only about one price, based on where she is and where she wants to go, but a Wendy’s customer has to deal with an extensive menu. Also, a meal consists of many items, so there are more decisions to make. With dynamic pricing, figuring out what to buy can take an extra mental toll. For example, when all prices increase by 20 per cent, a customer who typically buys a Big Bacon Classic may have to make a decision to choose a Jr. Cheeseburger instead.
Also, Uber customers know the surge factor before ordering a car, but a Wendy’s customer may have to drive or walk to a location to then find out about the price increase. How would you feel if you buckled in your kids and drove to Wendy’s only to find out that the Kids’ Meal was double the price? Wendy’s could update their pricing on an app, but then the price might change during the travel time.
Alternatively, the restaurant can preannounce time-dependent prices, which may be lower during off-peak hours. In other words, the price can change over time, but the restaurant commits itself to the price schedule in advance. Predictable prices make it easier for customers to plan ahead. “Happy hours” (giving a price discount in the late afternoon) is an example of the inverse of this practice in other restaurants.
But to provide prices in advance does not address the fundamental issue that food would be more expensive at certain times, and that the extra money doesn’t go to workers but the company.
Dynamic pricing will be unpopular, and even more so for markets such as Canada. Canadians have less disposable income than Americans since our taxes are higher. Instead of Wendy’s, we would choose to go to Harvey’s or Tim Hortons. Potential confusion around price changes and higher pricing in peak times run counter to the ethos that fast food should be simple and affordable.
This issue of principle is important. Higher prices will reduce demand, leading to shorter wait times. Lower-income customers may feel they are getting priced out of affordable meals to reduce wait times for those who can afford the higher prices. People do not like to use money as a gatekeeper.
Introducing dynamic pricing to a fast-food chain’s predominantly budget-conscious customers has significant risks. Wendy’s was wise to tread extra carefully. It has evidently received a Frosty reception.