Surge pricing could be coming for your Wendy’s chili order.
The fast-food chain with a red-headed mascot is leaving some people red-faced after the news that it plans to test “dynamic pricing” starting as early as next year.
Skim through social media and it’s easy to find comments bashing the “Biggie Bag” provider, talking about watching “the price action of a hamburger,” or joking about being able to turn a profit on the resale of well-timed baconator purchases.
But the Wendy’s WEN, -0.49% announcement is also raising questions about what “surge pricing,” also called “dynamic pricing,” even is in the first place.
Answer: It’s a pricing model that shifts prices higher when consumer demand grows — and it’s already happening with your concert tickets, your ride-share trips, your airplane tickets and even your groceries.
The move to fast food, however, is a newer area for the pricing strategy. It comes at a time when food inflation is still a sore spot for many people — especially when it comes to fast-food prices.
Wendy’s broke the news on a recent earnings call.
“Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and daypart offerings, along with AI-enabled menu changes and suggestive selling,” Wendy’s Chief Executive Kirk Tanner told analysts on the call, according to an AlphaSense transcript.
“As we continue to show the benefit of this technology in our company-operated restaurants, franchisee interest in digital menu boards should increase, further supporting sales and profit growth across the system,” he said.
As the phrase suggests, dynamic pricing means prices shift instead of staying at one fixed point.
“It describes real-time pricing that reflects change in supply and demand,” said Kevin Williams, an economist at Yale University studying how companies make price decisions.
The cost hinges on an array of data points so that higher prices are there for higher demand or dwindling supply. You may have seen it in action when airfares surge as you’re trying to book a plane ticket right before Thanksgiving.
The pricing strategy can also adjust prices based on when someone starts shopping, like a fashionista willing to pay more for a new collection, versus a bargain-hunter, said Vivek Farias, a professor at the MIT Sloan School of Management who studies the science of dynamic pricing.
Overall, surge pricing can maximize economic efficiency, because in theory, it matches a product with the person who values it the most, he said.
But companies have to do it carefully, especially if their customers aren’t used to it. “Or else, when people see wild swings, it’s perceived as price gouging,” he said.
“Companies need to be careful when rolling out dynamic pricing, ‘Or else, when people see wild swings, it’s perceived as price gouging.’ ”
Airlines were pioneers of dynamic pricing; they started tweaking fares based on demand back in the 1980s, Farias noted. At the time, the strategy drew angry reactions from the public.
Now the pricing model has spread. “This happens in all sorts of goods and services markets,” Williams said. But the Wendy’s news might be hitting a new nerve.
“In other areas, we just kind of accepted it,” Williams said.
But that acceptance has come after uproar in some cases.
Bruce Springsteen fans raged in 2022 over concert tickets that were subject to dynamic pricing via Ticketmaster, surging as high as $ 5,000. And yet, Live Nation Entertainment Inc. LYV, +1.49%, Ticketmaster’s parent company, says it plans to do even more pricing based on demand after two big rebound years for concerts.
In a corporate earnings report last week, Live Nation’s CEO Michael Rapino said promoters and artists all want better pricing to fill venues instead of leaving more tickets to scalpers.
“There is nothing comparable to algorithmic surge pricing in concert ticketing,” a Live Nation spokesperson said. “The dynamic pricing in ticketing is a largely manual process of adjusting a small portion of the available inventory, typically the best seats in the house, to prices closer to the full market value revealed in resale markets. The vast majority of tickets are not dynamically priced.”
Will dynamic pricing work with food?
Actually, dynamic pricing is already part of the grocery shopping experience, according to Phil Lempert, editor of SupermarketGuru.com.
The coding on “shelf strips” — that labels beneath products on stores shelves — can let grocery companies spot which products are selling, which are not, and then adjust accordingly, he told MarketWatch. This can allow stores to increase the price of avocados ahead of Super Bowl Sunday, for example.
Dynamic pricing in grocery stores has “been talked about for years but it really hasn’t happened much until the technology allowed it to become instant,” he said.
Wendy’s says its new pricing strategies could help some customers bite into a bargain.
The company said its technology investments are going to make it easier to change its menus “to offer discounts and value offers to our customers through innovations such as digital menuboards, which will roll out in some U.S. restaurants.”
“Wendy’s has always been about providing high-quality food at a great value to our customers, and this recent investment will continue that by driving traffic and providing value during slower parts of the day,” the company said in a follow-up email to MarketWatch.
The AI-infused menu tweaks and selling suggestions that Wendy’s will test in 2025 will be “based on factors such as weather that we think will provide great value and an improved customer and crew experience.”
But it could be that some people don’t like the idea of scheduling the exact time of their fast-food run.
“This could cause all sort of weird things where you can kind of have customers being strategic. It’s a bit strange,” Farias said.
Who are the winners and losers with dynamic pricing?
“Usually when firms implement dynamic pricing, there are some winners and some losers,” Williams said. It’s a consequence he studied when it comes to airline tickets.
Dynamic pricing is a win for passengers with flexible schedules who pay long in advance, but a loss for business travelers with few choices and late-breaking travel obligations.
How about for someone searching for Wendy’s and its menu, including Dave’s Double and loaded nacho double cheeseburgers?
“I think the person who wins is the flexible, knowledgeable fast-food eater, because that person probably knows how price moves around,” Williams said.
On the other hand, “the person who is hurt is the person that is the inflexible lunchtime consumer who really wants to go to Wendy’s and faces a higher price.”