Omar H. Fares, Lecturer in the Ted Rogers School of Retail Management, Toronto Metropolitan University; The Conversation

This article was originally published on The Conversation, an independent and nonprofit source of news, analysis and commentary from academic experts. Disclosure information is available on the original site.

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The recent controversy over Wendy’s pricing strategies is a perfect example of how online word-of-mouth can distort marketing communications and create confusion for consumers.

Wendy’s new president and CEO Kirk Tanner announced plans to test dynamic pricing and AI-enabled features by 2025 on Feb. 15 during an earnings call. He said: “Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and day-part offerings.”

Many interpreted this to mean Wendy’s would be introducing surge pricing — a term often associated with the dynamic pricing models used by companies like Uber, where prices increase during periods of high demand.

The issue likely stemmed from confusion over terminology. Although surge pricing and dynamic pricing are often used interchangeably, they have slightly different definitions. Dynamic pricing refers to any pricing model that allows prices to fluctuate, while surge pricing refers to prices that are adjusted upward.

Several news outlets ran stories suggesting Wendy’s would raise prices during busy periods, prompting widespread backlash and criticism online. 

Wendy’s executives have since clarified that its dynamic pricing model would not increase prices for customers, saying in a news release the CEOs comments were “misconstrued.” Wendy’s said that while price adjustments could happen in both directions, the upper limit would remain the current price.

Although Wendy’s won’t be exploring dynamic pricing until 2025 at the earliest, this type of pricing strategy is nothing new for many industries.

Dynamic pricing is nothing new

One aspect of the Wendy’s dynamic pricing controversy that warrants further examination is the nature of the product being sold. Traditionally, dynamic pricing has been associated with high-value goods and services, such as airline and concert tickets and ridesharing services, where consumers are accustomed to fluctuating prices. 

In contrast, fast food is generally perceived as a low-cost, everyday convenience with an expectation of stable pricing. Introducing dynamic pricing into the fast food industry represents a significant departure from these established norms.

Of the industries that already use dynamic pricing, ride-sharing apps are perhaps one of the most well-known. Uber, for example, uses surge pricing during peak times, meaning prices increase during periods of high demand when there aren’t enough drivers available for every customers.

The travel and hospitality industries have long used dynamic pricing models as well. Airlines adjust ticket prices based on a variety of factors, including time until departure, the day of the week and demand for specific routes. The hospitality industry similarly adjusts room rates based on demand, seasonality and local events. 

Ticket prices for concerts, sporting events and other live performances often vary based on factors like demand, seat location and timing as well. In this context, dynamic pricing allows event organizers to match prices to perceived market value.

Benefits of dynamic pricing

When implemented effectively, dynamic pricing can offer a number of benefits to both businesses and consumers. One advantage it offers is an enhanced customer experience. Dynamic pricing can provide value to consumers by offering lower prices during off-peak times or for less popular products and services. 

This can make certain goods and services more accessible to budget-conscious customers and encourage them to make purchases they might otherwise forgo. Additionally, dynamic pricing can help businesses respond to market changes and customer preferences more quickly, leading to a more personalized and satisfying shopping experience.

Dynamic pricing can also help with inventory management. For industries dealing with perishable goods or limited inventory, dynamic pricing can help manage supply and demand more efficiently. 

By adjusting prices based on demand, businesses can encourage sales when inventory is high or demand is low, reducing the risk of unsold inventory. This can be particularly beneficial for events or services with fixed capacities, like concerts or flights, where unsold seats represent lost revenue.

Lastly, dynamic pricing can help businesses maximize revenue and profitability. It allows businesses to adjust prices in real-time based on demand, competition and other market factors.

Challenges of dynamic pricing

While dynamic pricing offers a number of benefits, it also comes with its own set of challenges. One of the biggest risks associated with dynamic pricing is the potential negative impact on customer perception and trust. If customers feel that prices are unfair or unpredictable, they may lose trust in the brand. 

This was evident in the Wendy’s situation, where the misunderstanding around surge pricing led to a backlash. Transparency and clear communication are crucial to maintaining customer trust when implementing dynamic pricing strategies.

Another concern is the way dynamic pricing can be perceived as a form of price discrimination, where different customers are charged different prices for the same product or service based on factors like demand, time of purchase or even personal data. Businesses need to ensure their dynamic pricing models are fair and do not inadvertently discriminate against any customers.

Implementing a dynamic pricing strategy can be complex and requires sophisticated technology and data analysis capabilities. Businesses need to invest in the right tools and systems to effectively manage and analyze large volumes of data in real-time. 

Additionally, businesses need to ensure their pricing algorithms are accurate and responsive to market conditions. Failure to do so can result in pricing errors, lost revenue and damage to the brand’s reputation.

Lessons for businesses

As technology continues to advance, dynamic pricing models are expected to become more common across sectors like retail, energy and transportation. While these pricing models offer the potential for increased profitability, businesses need to approach them with an honest and genuine consumer-first approach.

The recent pricing controversy at Wendy’s underscores the importance of precise language and transparent communication for companies looking to adopt dynamic pricing. It serves as a reminder that businesses need to avoid misunderstandings and negative reactions from customers.

As dynamic pricing gains popularity, companies must carefully choose their words and clearly articulate their pricing strategies to prevent misunderstandings and maintain customer trust. Failure to do so could result in losing control over how consumers and the public interpret their pricing strategies, which could significantly impact their reputation and overall success.

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Omar H. Fares does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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This article is republished from The Conversation under a Creative Commons license. Disclosure information is available on the original site. Read the original article: https://theconversation.com/wendys-wont-be-introducing-surge-pricing-but-its-nothing-new-to-many-industries-224910

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