Times are tough in hospitality and tourism. Economic pressures have increased and demand has fallen. All this is bad news for a business. How a business thrives is the result of many components. But how to price properly can be fundamental for everyone.
What can be the cure for hard times?
Facing the challenges could be a solution the introduction of a demand-based approach to menu pricing. For the food service sector, catering and tourism businesses, a combination of market conditions creates challenges. Record inflation is putting a strain on these sectors that is difficult to survive without consistent economic action.
Torsten Olderog Price expert Professor of Economics at AKAD University Stuttgart, Germany outlined the situation: “Continuous price adjustment is a common practice in most areas. It requires constant attention and calculation, which can be the stake for the survival of an economically based business. Catering operators are looking for new solutions that they can introduce to alleviate the pressures on them and increase profits. Many believe that dynamic pricing could be the way forward. Put another way, demand pricing or time-based pricing, which means that businesses can at any time on demand change their prices.”
“Dynamic pricing means that instead of applying a one-size-fits-all pricing based on what is called a ”happy equilibrium', we calculate based on market conditions or customer preferences. This method can significantly increase a company's revenue and margin."
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Continuous price adjustment
If the right approach is taken, this pricing model can be applied in most sectors. Markets need to be analysed in a very differentiated and precise way. Here, even small differences in willingness to pay and preferences are relevant and can make a difference. Prices must then be continuously adjusted to these differences. Uber is one of the ride-sharing companies that apply dynamic pricing. They also take into account an automated machine system that incorporates elements such as weather and traffic conditions. Prices are changed on a regular basis, reviewing multiple aspects on an ongoing basis. This solution has also proved successful in running Amazon's online retail network, where prices are updated every ten minutes or so. In the United States, tickets for various sporting events are offered at variable prices, depending on demand. The issue of dynamic pricing is now also being addressed in the hospitality industry, where all prices are rising, with fresh produce to rent, energy costs, and even human resource costs are constantly changing.
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Years of price stability are a thing of the past
A decade of price stability, which can be called stable because of its predictable trend, is not at all predictable in the long run. A completely new dynamic in the pricing of the catering market must now be found. On the one hand, the survival and for a profitable operation all operators have to raise prices, but they also need to be continuously adjusted. All this must be done to ensure that profit margins are maintained at an appropriate level.
So what does it look like in practice?
Dynamic pricing in the hospitality sector is complex. Prices limit sales but also increase profit margins. The staff involved are usually very good at estimating how much sales will be reduced if, for example, prices are increased by 5%. And then they can also estimate how the contribution margin will evolve if we adjust the price dynamically. It is important to look at the long term change in sales, because the short term reactions of consumers often reverse after a short period of time. This requires a comprehensive monitoring of policy changes, the market, supplier performance, increases in overheads, changes in demand, and fluctuations in customers' ability to pay.
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Tips on what to do
- Special prices should be introduced for popular (busy) meal times and special, slower days. Prices should be lowered for less busy periods, even on the same day. Setting the right price structures is essential to avoid days with negative omens.
- Operators should also be careful not to change prices too often in a way that is to the detriment of transparency for guests.
- High profile events, which are a sure source of revenue, should not be overpriced, as a negative guest experience will not pay off in the long run.
- Weekly changing menus must be created, adapted to the prices of the raw materials. The prices of meals can also be changed weekly.
- Daily individual offer. Taking into account the basic ingredients of a restaurant, it is advisable to offer a daily menu, calculated on a daily basis. Taking a whole month into account, this method is a lot of work, but it pays off. In this case, you can actually work with profitable prices.
As the food service world has struggled over the past few years with the disruption caused by the epidemic and now the economic crisis, it is unlikely that restaurant operations can return to „business as usual” in terms of prices. Once a system has managed to incorporate dynamic price changes into the day-to-day running of the business, it is certain that there will be no return to static prices. The benefits are obvious, of course it is not a quick fix, but in the long term, it can be a remedy to maximise revenue for businesses.
Source : https://www.ktchnrebel.com/dynamic-pricing-foodservice/
