This week, my attention was drawn to the misadventures suffered by the fast-food chain Wendy’s in the United States. The CEO of the group, Kirk Tanner, indeed proposed the idea of experimenting with “dynamic pricing” by next year. The mentioned objective was to use the price lever to regulate traffic in stores, especially to smooth out peak attendance times. The proposal encountered a barrage of criticism, to such an extent that the CEO had to promptly backtrack on his proposal – and instead propose a large promotional operation throughout the month of March to quell the “bad buzz”. I thought it interesting to revisit the principle of dynamic pricing which, unconsciously, already shapes some of our daily decisions.
Yet, the principle of “dynamic pricing“, which consists of adjusting the selling price based on real and predicted demand, is not at all new and is already widely accepted in a large number of industries. Thus, airplane or train tickets are generally cheaper when travelling at the very beginning or end of the day. A passenger who has booked his ticket well in advance generally benefits from a better rate than the one who waits until the last minute – the principle of “yield management”. In the hospitality and leisure sectors, rates increase during school holidays or major events, such as the Olympics. Uber uses information from its users, both passengers and drivers, to adjust prices in real time (the famous “surge pricing” mechanism sometimes criticized) and thus allow supply to meet demand. Amazon also adapts the price of each individual item based on demand and competition.
From an economic theory perspective, the proposal makes sense. By using variable prices, companies can get closer to the willingness to pay of each user. This mechanism, if well-calibrated, can allow the company to maximize its revenue and enable a greater number of users to access the goods or services in question. The benefit is particularly interesting when the company faces significant and predictable costs (operating an airplane, clearing a stock) and tries to maximize the revenue corresponding to the use of these costs.
For Wendy’s, the cold economic argument did not seem to withstand emotional considerations. As Laura Hood rightly writes for The Conversation, experiments in the field of catering have tended to encounter greater resistance because these areas are associated with almost “vital” human needs, for which price predictability is crucial – even though I think that a meal at a restaurant can, in the vast majority of cases, not be considered an essential expense, even in a fast-food like Wendy’s. If we followed this logic, we could almost expand the reflection to ethical considerations. Can we deprive a person of low income of a meal because they are hungry at the wrong time? How would we react if a supermarket chain decided to apply a similar policy?
Drawing on my own professional experience, I observe that the field of education also belongs, in the collective unconscious, to those “sanctified” sectors where dynamic pricing is not, in principle, “allowed”. If it exists, the individual adjustment of tariffs in private schools is limited, in most cases, to the parents’ income and whether or not there is an employer subsidy to cover the fees (if so, the rates are higher, because the employer is deemed to be less price-sensitive). However, nothing theoretically prevents certain establishments, particularly in post-compulsory education, from seeking to diversify their student recruitment pool by offering affordable rates at the beginning of the enrollment campaign and then increasing them later.
Returning to Wendy’s, the negative reaction may have been amplified by the vocabulary used. By presenting only the “surge pricing” aspect of the approach, Tanner presented the initiative as a loser in all cases for consumers. However, if well applied, dynamic pricing can also be beneficial to them, with lower prices outside peak hours. This lack of precision in language probably contributed to the idea being dismissed even more quickly.
In a digitalized world where access to data is facilitated and interactions between customers and companies are more direct and rapid than ever, the realm of possibilities related to the application of dynamic pricing has never been theoretically as vast. However, this does not mean that companies must push open every door that presents itself. The case of Wendy’s reminds us aptly: our cultural heritage and psychological predispositions must continue to be taken into account. Algorithms here will continue to collide with the reality of our humanity.