Dynamic Pricing for Restaurants: Benefits and Challenges

People are accustomed to paying more for certain goods and services when demand is high, especially for weekend and peak season hotel stays and airline travel during the holidays. Now restaurants are getting into the “dynamic pricing” act as their food, beverage, labor, and other costs rise, adjusting their menu prices up and down based on real-time market conditions. While dynamic pricing isn’t exactly new to this industry (think happy hour, early-bird specials, and two-for-one deals), it’s becoming an ever-more viable option for restaurants of all sizes with the introduction of digital technology that analyzes real-time demand, personalizes promotions, and automates pricing changes. The goal: Fill otherwise empty tables, increase sales, and boost profitability.

What Is Dynamic Pricing?

Dynamic pricing is the process of charging customers different amounts at different times for the same items based on various external factors. The determining factors can include the time of day, the day of the week, seasonality, supply and demand levels, volume of inventory, what the competition is up to, and changing customer behaviors. When implemented correctly, dynamic pricing can generate additional revenue for the restaurant. Mishandled, it could lead to outspoken customer backlash and negative publicity.

Key Takeaways

• Dynamic pricing can boost restaurant sales during typically slow periods of the day or week by incentivizing customers with lower prices.
• It’s intended to maximize revenue by raising prices when demand is high, such as a popular night of the week or a special time of year.
• Restaurants must plan this pricing strategy carefully so as not to alienate customers.
• Dynamic pricing isn’t practical without investing in the right technology.

Dynamic Pricing for Restaurants Explained

It’s no secret that it often costs more to stay in a hotel on a Friday or Saturday night than on other nights. Or that the cost of travel increases around holidays and school breaks. Indeed, the concept of dynamic pricing has been around for years. It can be seen in the transportation and entertainment industries, too: Taxicabs and ride-sharing services, such as Uber and Lyft, charge higher rates at more heavily trafficked times; train tickets cost more during peak business hours; even sports arenas charge different prices for the exact same seats depending on which opponent is coming to town.

The restaurant industry is the latest sector to begin seriously experimenting with dynamic pricing. Dynamic pricing is a way for restaurants to maximize revenue in the face of rising food, labor, overhead and other costs. It’s important to remember that dynamic pricing doesn’t simply mean that a restaurant will hike up its prices during peak hours—though the “surge pricing” practice certainly is an option. Rather, dynamic pricing is essentially about adjusting menu prices up or down to account for the price elasticity of demand, which reflects customers’ sensitivity to price changes. When demand is highly elastic, sales revenue increases when prices are cut. When it’s inelastic, price changes have no discernible effect on patron spending.

Benefits of Dynamic Pricing for Restaurants

The adoption of dynamic pricing may prove to be a boon to the restaurant industry, as it continues to deal with rising costs, economic fluctuations, and increased competition from food-delivery apps. Value-conscious customers, as well as those willing to pay more in exchange for convenience, often appreciate it, too. What’s good for the customer is usually good for the business. The main benefits include:

• Revenue maximization: The strategy behind dynamic pricing is straightforward: to maximize revenue and boost profits. This can be accomplished by lowering menu prices during off-peak hours to encourage more customers to come in and charging more during peak hours to optimize demand and offset increased expenses, such as the cost of adding staff during busy times.
• Customer flow management: Restaurants are at their busiest during customers’ typical dining times, with downtime occurring between breakfast and lunch and lunch and dinner. Dynamic pricing can improve the flow of traffic across the day. For example, by offering discounts or bundled offers, a restaurant can incentivize customers (new or old) to come in between peak periods. What the establishment might lose in profit margin could be counterbalanced by higher volume—after all, 50 customers buying $5 appetizers at 4 p.m. is equal to 25 people paying $10 at 8 p.m.
• Waste reduction: Restaurants generate millions of tons of food waste every year. One contributing factor is poor inventory control—in other words, overstocking, especially food that expires quickly. For example, a restaurant that serves seafood might lower the price of certain dishes as the week goes by and expiration dates near. Doing so can help compensate for lost revenue due to eventually having to discard food.
• Customer segmentation: Strong customer relationships are critical for all businesses, and restaurants, which rely on their “regulars” for prolonged success, are no exception. The better a restaurant can understand its customers’ preferences and motivations—what they order, how and when they order, their willingness to try something new, etc.—the more effectively it will be able to manage dynamic pricing. In practice, this might manifest itself as marketing off-peak deals or tailoring rewards programs to a target group.

Challenges of Dynamic Pricing for Restaurants

Moving to a dynamic pricing strategy in an industry where customers, and even employees, may not yet be entirely comfortable with the idea presents its share of initial hurdles—all of which can be cleared through transparent communications and investment in the right enabling technology.

• Customer perception: The notion of having to pay more for the same meal based on the time of day can rub many patrons the wrong way. A recent study suggests that young people may be more accepting of dynamic pricing than older ones. The National Restaurant Association’s Restaurant Technology Landscape Report 2024 found that 61% of respondents were in favor of dynamic pricing, with Generation Z adults (71%) and millennials (67%) showing stronger interest than Generation Xers (58%) and baby boomers (54%). Messaging that clearly explains the pricing can help restaurants avoid customer backlash.
• Complexity in implementation: There are data and technical concerns to address before rolling out a dynamic pricing plan. A restaurant’s software must be able to integrate with and/or manage real-time point-of-sale (POS) and inventory data, analyze customer demand, track competitors’ prices, and then adjust that establishment’s pricing. A restaurant also needs to have digital menu boards that can be easily changed (or automated) to reflect current pricing.
• Staff training: In many ways, the restaurant staff is an extended part of a restaurant’s public relations team. Their interactions with guests, whether it’s a quick-serve, fast-casual, or fine-dining establishment, can greatly influence customers’ satisfaction levels. Thus, staff members need to be upskilled on how to handle conversations with diners about dynamic pricing. And when staff is able to understand the technology that enables dynamic pricing, they’re more likely to become fully engaged in its deployment.

How Dynamic Pricing Works in Restaurants

The COVID-19 pandemic proved to be the push many restaurants needed to digitalize their businesses. QR codes for contactless ordering and payment, online ordering platforms, and mobile payments apps are a few of the ways restaurants have modernized their operations, paving the way for the adoption of dynamic pricing.

Technological Integration

The fastest and most-effective way for restaurants to reap the benefits of dynamic pricing is to implement and integrate technologies that automate the process. That includes POS applications that collect and analyze key performance indicators in real time, as well as advanced enterprise resource planning and inventory management systems. Those systems can inform quick decision-making about how to adjust prices based on a variety of factors (explained below). They’re even more powerful when they use artificial intelligence (AI) and machine learning (ML) algorithms. In addition, integration ensures that prices will be updated across all menu distribution channels and in-store digital screens. There’s also the opportunity for restaurants to send automatic push notifications to customers to let them know when lower-priced deals are about to kick in.

Factors Influencing Prices

For a dynamic pricing model to be effective, it’s a good idea for restaurants to consider the effects of five main variables and determine what makes sense for their particular business.

• Time of day: Most restaurants experience times of the day when they’re busy (think of an ice cream parlor next door to a movie theater following a matinee) and when they’re slow. With dynamic pricing, prices come down to stimulate business when it’s slow and rise during peak hours.
• Day of the week: Certain days of the week are less popular than others for dining out. Generally speaking, Mondays and Tuesdays (right after the weekend) are slower, and then traffic ramps up as the weekend approaches. A dynamic pricing strategy tailored to different days of the week may help drive more people to a restaurant on less popular days.
• Seasonality and holidays: It makes sense that restaurants will try to capitalize on different seasons and holidays to attract more customers. This can be accomplished by simply offering $2 margaritas on Cinco de Mayo or full-price, full-course meals during the holiday season, when customers are more inclined to celebrate—and spend more.
• Supply and demand: As in other industries, the laws of supply and demand influence how much restaurants charge their customers. With dynamic pricing, when supply outweighs demand, such as for perishable inventory such as fish, prices for those meals would come down. And when demand exceeds supply—perhaps bad weather disrupted the delivery of said fish—the restaurant might charge more for what it has on hand. Another consideration is just good ol’ in-house demand. If a restaurant has a popular dish that everyone is clamoring for, there’s a good chance customers will pay a premium price for it.
• Special events and promotions: Happy hour, two-for-one entrees, kids eat free, and early-bird discounts are longtime examples of dynamic pricing promotions in the restaurant industry. Time-limited promotions, flash sales, and weather-based promotions are more modern options. Conversely, restaurants have the opportunity to charge more for being in conveniently close proximity to a sporting event, concert, or industry conference.

Implementation Considerations

Once a restaurant has made the decision to use dynamic pricing, it should think through a few additional points:

• Menu digitization: It’s impractical, if not impossible, to prepare multiple versions of paper menus when individual prices are subject to change. Options for digital menus include LED screens that hang in a visible place for all to see, touch-screen kiosks for ordering, QR codes for contactless orders, and tablets either on the table or brought by a server—any of which will require some level of financial investment in hardware and/or software. In addition to making it easier to change items and prices, digital menus offer the customer an experience enhanced by rich imagery and videos to help influence decisions and promote certain dishes and deals.
• Dynamic pricing software solutions: The right software can generate dynamic pricing recommendations by aggregating and analyzing POS data, historical data, market trends, and competitors’ pricing. AI and ML algorithms can also process the information to identify patterns, predict demand, and recommend optimal pricing strategies in real time.

Examples of Dynamic Pricing in Restaurants

The average American spends about $2,500 a year eating out, though tighter budgets have them seeking ways to save money, including using coupons (41%), taking advantage of special deals (34%), and ordering meals that result in leftovers (28%), according to a recent survey of 2,000 US adults. Dynamic pricing strategies could help patrons make the most of their money.

• Earlier this year, fast-food giant Wendy’s announced plans to introduce AI-enabled dynamic pricing and digital menu boards in 2025, though it quickly had to clarify that it did not intend to raise prices during peak times of day. “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,” the company stated. According to one industry observer, if dynamic pricing proves successful for Wendy’s, it could mark a “turning point” in the industry, with other chains following suit.
• Cali BBQ owner Shawn Walchef recently spoke to The Wall Street Journal about experimenting with dynamic pricing. By adjusting the online-ordering price of its pulled-pork sandwich during popular times and days, the California-based restaurant boosted monthly delivery sales by $1,500—a notable increase for a small business. “If somebody is willing to come in at a time where we’re not busy, why would I not want to incentivize them to come in earlier? It makes perfect sense,” Walchef explained in a separate podcast interview with “The Restaurant Growth Show.”

Manage Restaurant Pricing With NetSuite

Many restaurants have evolved beyond brick-and-mortar storefronts. With multiple points of sale, restaurant owners and operators need a single suite of applications to collect and analyze data that can help inform their menu-pricing decisions. NetSuite delivers a cloud-based solution for restaurants that features the functionality to handle ever-changing business needs related to sales, ingredients inventory, franchise management, personnel, accounting, and more. NetSuite’s software solution can track inventory in multiple locations and automatically calculate preferred stocking levels and reorder points, helping to decrease food waste or signify when to offer dynamic pricing options and on which dishes.

Restaurant’s goal with dynamic pricing aims is to generate more sales and profits during slow and busy times alike. But it’s also a strategy that requires restaurants to be transparent with their customers, to avoid backlash, and staff training so employees know how to communicate the way it works to diners. The right technology is key for dynamic pricing to be implemented effectively. It must allow for real-time adjustments, based on such factors as time of day or week and supply and demand, yet provide valuable data insights for ongoing optimization.

Dynamic Pricing for Restaurants FAQs

What is an example of dynamic pricing in restaurants?

Examples of restaurant dynamic pricing strategies include happy hours, discounted lunch menus, and early-bird dinner deals.

What is the best pricing strategy for a restaurant?

There is no “best” pricing strategy for a restaurant. Pricing is dependent on many factors, including how much food suppliers charge the restaurant, how much it costs to prepare a meal in terms of time and labor, as well business overhead and desired profit margin. Pricing strategies available to restaurants include value-based pricing, psychological pricing, and competitive pricing.

Do restaurants use surge pricing?

Restaurants have begun experimenting with surge pricing to try to maximize revenues and offset their increased costs. Surge pricing means raising prices at peak times or when demand grows.

What is an example of dynamic pricing?

Dynamic pricing has been common practice in other industries for years, with the travel industry at the forefront. Hotels, for example, charge more for weekend stays than for weeknights. Airlines charge more for tickets during popular travel or vacation times, such as spring break. Ride-sharing companies charge more during rush hours and rainy weather.