The Economy of Desire

Is this the moment when restaurants finally adopt dynamic pricing? And if so, what does it say about us?

There is this bar in San Diego, California that used to game the price of its tequila shots. In 2016, the Blind Burro (we don’t name these places, folks, we just report them) placed a digital board that looked like something you might find on the floor of the stock exchange over the bar, with the prices of its numerous tequilas listed. When a bunch of guests ordered, say, a shot of Espolón Blanco, the price of that brand would creep up, while the José Cuervo left to languish would go down.

One bar’s goofy stunt is someone else’s ingenious economic solution. Dynamic pricing—also known as variable pricing or surge pricing (or “revenue management” if you’re into corporate euphemism and “price gouging” if you’re into the opposite)—refers to the practice of adjusting prices to consumer demand. It’s what The Blind Burro was doing with its tequila board, and it’s a method that other industries with fixed capacity have employed for a long time. Hotels and airlines have been doing it since the 1970s. Uber was basically founded on the idea. Even Disneyland charges more on weekends.

Restaurants have long resisted this trend. But in the wake of the pandemic, that resistance seems to be eroding. In part, that’s due to rising food costs and labor shortages that have restaurants scrambling for ways to increase revenue. In part, it’s because the shift to digital menus makes better prediction and tracking possible. And in part, it’s due to the rise of new start-ups founded on AI-driven promises to monetize everything from Saturday night bookings to that cozy corner booth.

 

[It’s] all going to be geofenced to your mobile device and priced based on demand and availability. It will seem odd that pricing was ever fixed.” – Nick Kokonas

 

Finland’s biggest pizza chain adopted dynamic pricing on delivery fees nationwide in 2021. A couple of weeks ago, Stonegate, the UK’s largest chain of pubs introduced it on pints. And in the last two years, the percentage of restaurants using it on Tock, the platform that pioneered pre-paid bookings, has grown to nearly 40%. The trend has become pronounced enough that Nick Kokonas, co-owner of The Alinea Group and Tock’s co-founder believes dynamic pricing is now inevitable. “[It’s] all going to be geofenced to your mobile device and priced based on demand and availability,” he says. “It will seem odd that pricing was ever fixed.”

If Kokonas is right, and we’re at a tipping point, the implications could be profound. Much of the debate around dynamic pricing has been framed around the question of whether diners will accept it or not, and therefore, whether it represents opportunity or risk for restaurants seeking to increase their revenue streams. But by fixating on will-they-or-won’t-they we miss the bigger questions that dynamic pricing raises; the questions about capitalism, about the meaning of hospitality, even about human nature itself.

 

The Varieties of Variable
When Tock launched in 2014, introducing deposits and pre-paid reservations whose price could change on demand, it prompted a wave of portentous headlines about the coming revolution in hospitality. Within a few years, the platform had signed up around 3000 restaurants, but only a small fraction of them implemented dynamic pricing. Matthew Tucker, Head of Tock (Kokonas stepped down in January), attributes the hesitation to the inhibiting effect of the industry’s low margins. “Because the volume of transactions is lower than in other industries,” he says, “their willingness to experiment is lower too.”

That hesitation has begun to fade in the face of today’s economic conditions. “You have to think about what you can do to combat labor shortages,” Tucker explains. “Food costs are going up. Food waste is a bigger issue. All of these things have allowed restaurateurs to think more strategically about their constraints, and how they can attack them.” Especially for restaurants where, as Tucker puts it, “the “power dynamic works in their favor,” varying a meal’s cost from $275 to $295, as Lazy Bear in San Francisco does, or from $345 to $395, like Blue Hill at Stone Barns in New York, just makes financial sense.

Journalist Kristen Hawley, who writes Expedite, a newsletter about restaurants and technology, describes Tock’s model as “brilliant for the kind of restaurant that sells out.” She sees the growth in dynamic pricing on pre-paid bookings as tied to the general bookings explosion. “Reservations are more popular and harder to get in a wider variety of restaurants than they’ve ever been. That goes for hot restaurants that sell out the second they list availability and for restaurants that recently switched from walk-ins only. There’s just so much demand for them.”

Yet perhaps the greatest evidence for rising acceptance of dynamic pricing comes at the other end of the spectrum. Capitalizing on how third-party delivery services like Wolt and DoorDash have already acclimated people to the idea of paying more for delivery of their pizza or chicken tikka if they order at a time when everyone else is jonesing for the same thing, startúps like Juicer and Sauce extend that ability directly to restaurants themselves, providing the option of altering menu prices based on demand. Juicer, for example, analyzes a client’s transaction history, then tests a variety of prices on high-performing items. “The data comes back and says, this particular salad sells very well on Thursdays between 5 and 8,” says co-founder and CEO Ashwin Kamlani. “We might find that you could be charging 6.5% more during a particular time window because there’s enough demand for it that the consumer doesn’t mind paying a little more.”

 

“Restaurants–oh my god do we suck at making profits. If we’re getting crushed by 9% food inflation, we can’t just stick to the old ways where we only have one revenue source.” – Frazer Nagy

 

At Gasoline Grill in Copenhagen, owner Klaus Wittrup began implementing his own form of dynamic pricing for online orders during the pandemic. The burger restaurant’s app allows customers to specify a pickup time at several of its locations, but Wittrup didn’t want everyone to use it– the line stretching outside from walk-ins was too good a form of advertising to give up. Plus, he wanted to be fair to those who chose to wait. “It’s really not cool if someone just walks in front of you;” he says. “If you’re going to bypass the line, it should cost you something.” So now, a customer who orders online and wants to pick up her cheeseburger at, say, 18.00 on a Friday night will pay 15 kroner (about $3 or 2.5 euros) extra.

Dynamic pricing is also reaching mid-range restaurants. At Arzabal, the well-regarded tapas bar in Madrid, co-owner Ivan Morales conceived of dynamic pricing as a solution to the wild fluctuations his restaurants experienced in both guest numbers. “It was driving me crazy,” he says. “If I don’t buy at the same price every day or week, how come I sell that way?” Taking advantage of the pandemic-era shift to digital menus, Arzabal worked with local tech company DynamEats to create software that adjusts prices of individual menu items according to real-time demand.

And then there’s Tablz, a Canada-based start-up whose variable pricing focuses not on the food, but on the table where it’s consumed. Born of founder Frazer Nagy’s experience as a manager at a Toronto fine dining place where one table in front of the fireplace was especially prized by guests, it allows restaurants to designate a percentage of their seating as ‘premium’–and charge variable fees to book it. “Some people like the window, some people like the booths, some people like the chef’s table,” Nagy says. “And they’re absolutely willing to pay 20 or 30 bucks to get that experience.”

Under Tablz’s model, not all seating carries a fee so guests can still book without paying extra, and the company only takes its 30% cut on the tables designated as premium. The 20 or so restaurant groups that have signed on so far are drawn by the prospect of earning on a product that has no cost of goods for them. “Restaurants–oh my god do we suck at making profits,* Nagy says. “If we’re getting crushed by 9% food inflation, we can’t just stick to the old ways where we only have one revenue source. This is low-hanging fruit.”

 

The Varieties of Reason
You gotta admit, there’s a logic to it. For many restaurants that have embraced dynamic in one form or another, revenues have indeed gone up. One of Tablz’s clients, Cafe la Trova in Miami, brings in an extra $120,000 a year in premium seating fees. At Kotipizza, that Finnish pizza chain, profits increased 6%. For Alinea group restaurants, Kokonas estimates variable pricing has brought in “tens of millions” in profits. That increase, he adds, “is not solely about the actual higher price on a busy Saturday. It’s also about getting that booking at 9:15 PM on a Tuesday night in February in Chicago. That’s where the greatest difference arises.”

That’s another key benefit: By encouraging cost-conscious guests to choose less popular times, dynamic pricing can bring new revenue to nights that were previously dead. And by spreading out the clientele, it can also diminish pressure on the kitchen and dining room, thereby improving guest experience. “The idea is not to make 15 kronor extra, that’s not why we’re doing it,” says Wittrup of Gasoline Grill’s pickup fee. “We’re doing it to try to push people out of peak hours. We have fixed capacity and at those times, we can’t just turn up the volume.” Similarly, Arzabal also uses price changes to deter guests from ordering more labor-intensive dishes at times of highest volume. “It takes stress off the kitchen, but it also makes things nicer for the guests,” says Morales.

 

“A good rule of thumb is that we shouldn’t impose a set of rules that will create moral outrage, even if that moral outrage seems stupid to economists.” – Richard Thaler

 

And depending on how it’s applied, dynamic pricing ensures that at least some guests –namely those willing to pay for it– get exactly what they want, whether in the form of a peak hour booking or that cozy corner booth. “The data shows that picking your table is the single most demanded guest service,” Nagy says. “How has that simple act of helping someone get the experience they want eluded our industry?”

Of course, dynamic pricing also means that at least some diners get less of what they want, which is a night out at the lowest possible cost. Although Kokonas says guests don´t even notice the variation (“it’s sort of like ‘the invisible hand.’ he says) others believe dynamic pricing risks alienating their clientele. Drew Nieporent, the restaurateur behind iconic New York restaurants like Tribeca Grill and Nobu, believes diners are too price-conscious these days to tolerate new increases. “I say this as someone with 40 years in the restaurant business: I just don’t think the restaurant public is going to go for it.”

Research on the subject is contradictory. In the US, a 2023 National Restaurant Association report found that 79% of adults have a “favorable” view of variable pricing. A survey conducted by business software platform Capterra, however, determined that 52% consider it “price gouging” and 42% said it would reduce the frequency with which they dine out.

 

The Varieties of Hospitality
But let’s not let a little statistical conundrum keep us from philosophizing. In all likelihood, dynamic pricing will continue to gain ground, which means that restaurants are going to have to think not merely about whether they should adopt it or not, but about what it all means. And here, other industries are no guide. Because for all the ways in which restaurants may be similar to other fixed-capacity businesses that have embraced dynamic pricing, some profound differences remain.

Those differences explain why Talldungen, an inn in the Swedish countryside, uses dynamic pricing on its hotel rooms, but not in its dining room. Rates rise for rooms on the weekends when, according to co-owner Emma Höök, demand is at least double the availability. But although the inn’s restaurant is also packed on Saturday nights, Höök has never considered instituting dynamic pricing on its menus. “Partly it’s because I’ve never heard of anyone doing that in Sweden,” she says. “But also I just don’t like the way it sounds. It’s not really logical, but it just feels ungenerous.”

Did someone say logical? Restaurants have always been as much about emotion as reason, and their customers aren’t solely buying something concrete like a plate of food. They’re also paying for the ineffable, for hospitality, which is to say for the whole timeless experience, including at least the appearance of generosity. And there’s something about raising and lowering prices based on demand that can feel like the opposite of generous.

That´s not to say that diners can’t get used to paying for something for which they previously weren’t charged (witness the no-longer ¨free” bread basket). But it does mean that any disruption, even if understandable, gets into risky emotional territory. As Richard Thaler, an economist at the University of Chicago who won a Nobel prize for his work on dynamic pricing puts it, “A good rule of thumb is that we shouldn’t impose a set of rules that will create moral outrage, even if that moral outrage seems stupid to economists.”

It’s also worth considering where the practice will lead. Capitalism, after all, loves a slippery slope, and if you need proof of that, look no further than Ryanair, the discount airliner that, once it had gotten its customers habituated to paying extra for things that were once charge-free, like choosing a seat and bringing hand luggage on board, began adding fees for other “perks,” like printing boarding passes at the airport, and even floating, for a few outraged months, the idea of charging to using the plane’s bathrooms. That latter never came to pass, because it provoked the moral outrage that Thaler describes. But it’s telling that other pricing “innovations” that were once controversial when Ryanair introduced them have now become customary throughout the airline industry.

 

“The best booking or the best table to the person with the most money? It just feels icky.” – Kristen Hawley

 

Are we ready for economy and business class in dining? It’s not hard to imagine a future dining room where one set of guests is paying the minimum necessary to get the bare bones of food and drink, and another, willing to spend more, is being graced with linen napkins, seating far from the toilets, and all the amuse they can fit in their bouche. Because like those proliferating loyalty clubs that give out bookings to well-heeled clients who pay annual fees or own expensive credit cards, dynamic pricing raises questions about elitism and democracy in hospitality.

Restaurants, of course, have never been accessible to absolutely everyone, and there have always been diners who attain better experiences because they slip the maitre d’ some bills or are known to splash out on expensive bottles. Nevertheless, we tend to see restaurants as public spaces, and the sentiment that everyone in them should be treated equally continues to dominate. “The best booking or the best table to the person with the most money?” says Expedite’s Hawley. “It just feels icky.”

Bertrand Grébaut goes further than ‘icky.’ As the chef-owner of Septime, he runs one of the hardest-to-book restaurants in Paris but is firmly opposed to dynamic pricing. “The values we defend are totally opposed to this principle of speculation,” he says. “Since the beginning, we’ve tried to create places that are accessible, by defending principles that aren’t elitist, which is why we’re always looking for the right [set] price.”

In recent years there’s been a call for letting a bit more reality into the dining room. As restaurants try to reform the way they do business, whether from an environmental standpoint (produce grown by small organic farms costs more than that from industrial farms working at scale) or from a human one (paying stagiaires and reducing staff hours costs more than not doing those things), the notion that diners need to pay the true costs of food has gained traction. What is striking about this current crop of dynamic platforms is that they don´t address those issues: the variations they allow are based not on fluctuations in commodity costs or labor supply but simply on what is desirable. And what is desirable, apparently, is not good environmental stewardship or equitable workplaces but the right table at the right restaurant at the right time.

“I feel like in general, consumers are not very morally driven,” says Juicer’s Kamlani. “Ultimately, their decision is going to be based on why they think it’s worth it to spend this money for the product or experience that they’ve been receiving. I just don’t think it’s realistic that consumers are going to say, ‘Oh, well, I’m going to now spend more than I was before because you’re saying this food is coming from a farm.’”

But they will, according to dynamic pricing proponents, spend more for convenience, or to look cool, or to get something a lot of other people want. If that’s just human nature, then there’s a pragmatic argument to be made for keeping restaurants financially afloat by having people pay for the things they will pay for, rather than for the things we wish they would pay for. But is that really where we want to land?

Because in the debate between financial viability and upholding the traditional values of hospitality, there is, as Grébaut points out, another option.

Like pretty much every other restaurant in the world, Septime has confronted rising food costs and a tighter labor market this year. So as the owner of a place that values paying staff overtime and compensating producers fairly, and one that aims to achieve both financial balance and what he calls a “virtuous economy,” Grébaut did the only thing he could think of.

“We raised prices.” 

Illustration: Jakob Tolstrup

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