Why Retail Category Managers Should Own Dynamic Pricing  

March 8, 2024

By Phil Lempert, SupermarketGuru, Consumer Trend Tracker, Food Trends Editor, NBC’s Today, and Author

Retail category managers are responsible for analyzing industry and consumer trends, developing long-term strategies for product categories, and managing relationships with vendors. Dynamic pricing in supermarkets and foodservice operations undermine the importance and insights of these category managers.

Wendy’s new CEO, Kirk Tanner, said that the chain plans to roll out dynamic pricing enabled by new digital menu boards ignorer to charge higher prices at high demand times in the restaurants. The announcement was met with a barrage of customer outrage on social media with some even calling for a boycott of the chain.

Quickly, Wendy’s responded with a statement. “To clarify, Wendy’s will not implement surge pricing, which is the practice of raising prices when demand is highest. We didn’t use that phrase, nor do we plan to implement that practice.” The Wendy’s spokesperson continued to say that “We said these (digital) menu boards would give us more flexibility to change the display of featured items. This was misconstrued in some media reports as an intent to raise prices when demand is highest at our restaurants. We have no plans to do that and would not raise prices when our customers are visiting us most … Any features we may test in the future would be designed to benefit our customers and restaurant crew members. Digital menu boards could allow us to change the menu offerings at different times of day and offer discounts and value offers to our customers more easily, particularly in the slower times of day.”

Dynamic pricing isn’t a new concept. It is simply a strategy that adjusts prices in real time in response to market demands. Airlines and hotels have utilized it for decades, adjusting prices based on demand, time of booking, and other factors. Ride services including Uber and Lift have made surge pricing commonplace and is now accepted by most riders, as irritating as it may be. However, its application in the food industry is relatively recent and could undermine category managers. The advent of sophisticated data analytics and the proliferation of digital technology have enabled supermarkets and restaurants to adopt this model.

Supermarkets and restaurants have had a more straightforward approach to pricing: cost-plus pricing, where a fixed margin was added to the cost of goods sold with category managers and buyers negotiating with CPG brands for promotions to increase sales and demand throughout the year. However, as competition has intensified and profit margins thinned, the food industry is now exploring how to expand more flexible pricing strategies.

Actually, supermarkets were among the first to adopt dynamic pricing. Initially, this involved simple strategies like discounting perishable goods as they neared their expiration dates, or limited-time Blue Light specials at Kmart. However, as technology has evolved, so will the sophistication of these strategies. Today, supermarkets use complex algorithms that consider factors such as purchase history, inventory levels, competitor pricing, and even weather forecasts to adjust prices in real time. For example, a supermarket might lower (or raise) the price of barbecue-related products if a sunny weekend is forecasted, capitalizing on increased demand.

Restaurants, particularly fast-casual and fine-dining establishments, have also started embracing dynamic pricing, albeit more cautiously. Discount pricing during happy hours seems to have disappeared as the foodservice sector, seemingly is embracing dynamic pricing. Often taking the form of time-based pricing for reservations, sometimes even charging a non-refundable fee to make reservations, where dining at off-peak times is cheaper, or instituting surge pricing during high-demand periods.

Some restaurants have gone further, adjusting menu prices in real time based on ingredient costs, item demand, and other factors. This approach requires a delicate balance, as frequent price changes can confuse or frustrate customers. Which, in my opinion, is a very short-term strategy that will lead to the loss of customers, adding even more risk to an already fragile restaurant business that historically shows approximately 60% of restaurants failing within the first year of operation, and 80% failing within five years of opening.

Now we are witnessing a shift towards dynamic pricing by the digitalization of the shopping experience as supermarket operators study the practices of Amazon and QVC. Online shopping platforms and smart in-store digital price tags allow for seamless price adjustments, making dynamic pricing more viable and less labor-intensive. The question is, how will shoppers respond? Will they be accepting of the practice and simply adjust their shopping and eating times to benefit from less peak time pricing decreases? Or, as in the furor that Wendy’s experienced, see consumers object strongly and avoid these retailers altogether?

The backbone of dynamic pricing in the food industry is technology. Point-of-sale systems, inventory management software, and customer relationship management platforms collect vast amounts of data that feed into pricing algorithms. The rise of mobile apps and online ordering has provided additional data streams and opportunities for dynamic pricing. Artificial intelligence and machine learning are increasingly being used to refine these algorithms, making price adjustments more accurate and timelier. These technologies can analyze complex datasets, predict trends, and automate pricing adjustments, reducing the need for manual intervention. Just because we have the technology to institute this practice doesn’t mean we should.

As dynamic pricing becomes more prevalent, supermarkets and restaurants must navigate ethical considerations and customer perceptions. There’s a fine line between smart pricing and price gouging, especially for essential goods like food with food inflation becoming one of the most pressing issues and concerns for consumers. Transparency about pricing practices and ensuring that price fluctuations remain within reasonable bounds are vital to maintaining customer trust.

We face the risk that dynamic pricing could exacerbate inequalities if not carefully managed. For instance, surge pricing during emergencies or in underserved areas could make food unaffordable for some segments of the population and further erode consumer confidence in our food supply.

There is no doubt that dynamic pricing is poised to become even more sophisticated and widespread in the food industry. As Internet of Things (IoT) devices become more common, supermarkets and restaurants will have access to real-time data streams (e.g., from smart appliances and wearables) that could further refine pricing strategies. However, these technologies’ practices hinge on the industry’s ability to balance profit motives with ethical considerations and customer satisfaction.

There is also much discussion and controversy about personalized pricing, where prices are adjusted based on individual customer profiles. It is commonplace for supermarket circulars to offer different prices based on the demographics of each store’s radius or zip code, and we see shoppers traveling to another area to avail themselves of cheaper prices at the same chain. As the technologies for personalized pricing becomes more sophisticated this raises privacy concerns and could also lead to pricing strategies that could harm, or benefit, businesses and consumers.

Dynamic pricing is in its infancy in the food industry, evolving from simple discounting tactics to sophisticated, data-driven strategies. However, as the industry navigates this new terrain, it must remain vigilant about ethical considerations and customer perceptions to ensure that dynamic pricing serves to enhance, rather than undermine, the value proposition to consumers.

Retail category managers must be the caretakers of dynamic pricing in the food industry — and approach the practice with care and responsibility.