Feb 29, 2024 - Business

Why fast-food fans flipped out over Wendy's pricing

Illustration of a pattern of speech bubbles with one on a spatula about to be flipped.

Illustration: Aïda Amer/Axios

Fast-food fans were aghast when news broke this week that burger chain Wendy's would be testing out surge pricing — a mostly reviled strategy of raising prices during busy times made famous by Uber.

Why it matters: It's getting easier to use technology to monkey around with prices, but that doesn't mean customers will like it.

State of play: In an earnings call earlier this month, Wendy's CEO Kirk Tanner said the company was planning on testing "dynamic pricing." That's a commonly used practice of changing prices more frequently using algorithms, machine learning and AI.

  • His remarks went unnoticed at first but then were picked up Monday by a few big news outlets. They used the term "surge pricing." The backlash was quick.
  • Late on Tuesday, the company put out a statement clarifying that it didn't plan to raise prices during busy hours — but would use digital menus to change offerings during the day and offer discounts during slower times.
  • That of course means that prices would be higher at high-demand times, but typically consumers don't view that as price-gouging — happy hours and early bird specials are seen as good deals.

The big picture: People are accustomed to dynamic pricing in certain areas. Flights are more expensive on Dec. 23 than on the 25th. An Outer Banks beach house costs more to rent in July than in February.

  • These kinds of price adjustments are more common than folks might realize, and they're growing in popularity as more companies pop up to help retailers try it out.
  • Dozens of restaurants have quietly been implementing surge pricing, including barbecue chain Tony Roma's, the New York Post reports. As more menus move to tablets, the process has gotten easier to implement.
  • Retailers like Kohl's, Best Buy and grocery chains have used digital price tags that make it easy to change prices.

Follow the money: If done right, there are nice profits here. "Technology has enabled firms to deepen their relationships with customers and, in parallel, become more efficient and proficient in extracting money from them," write the authors of a Harvard Business Review piece on the pitfalls of dynamic pricing.

  • Restaurants have the "opportunity to increase item prices by 10% to 20% during the lunch rush," write the authors of a blog post at a company that runs this kind of tech for restaurants.

The bottom line: Wendy's didn't handle this well, says Vicki Morwitz, a professor at Columbia Business School. It seems they didn't think sufficiently about how consumers would react or about the best way to use dynamic pricing.

  • That's crucial. There has to be a human overseeing the rollout and watching the algorithm, she says.
  • Changing prices a lot can be "unsettling," the HBR professors write. Just look at how vexing the recent period of inflation has been.
  • Charging customers based on demand might make sense from an economist's perspective, but not from a customer's, says Alexander Chernev, a professor at Kellogg School of Management at Northwestern University.
  • Sometimes, a new technology gets businesses excited and they don't think through the human piece. "Everybody's using AI, so we should use AI."
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