Late Stage Capitalism - Baconator “Surge Pricing”
Wendy’s, the popular fast food chain, has made some headlines recently and drawing the ire of the internet after it was reported that the company plans to test “surge pricing” at its restaurants in 2025.
The term “surge pricing” first made it into our collective psyche thanks to Uber, who famously adopted the strategy in 2011. Customers that used the new ride-sharing app on New Years Eve that year were shocked to see that they were charged as much as five times what they would have normally paid for the same ride under normal circumstances. Uber executives defended the practice at the time, saying that the higher prices would attract more Uber drivers back on the road, adding more supply of available cars to customers. In fact, Uber stated that the practice would only be used during certain holidays. Not a year or two passed by, and the company made it a regular practice that continues to this day.
Uber may have coined the term surge pricing but they did not invent the concept, better known as “peak pricing.” Most of us have encountered peak pricing when we plan a trip, purchasing airline tickets and booking a hotel room. It is hard to ignore the fact that the cost of an airline seat during the December holiday season, specifically for any flights scheduled for the week before Christmas through New Years Day, are priced multiple times higher than they are after the holidays. The price change is based on increased consumer demand relative to the existing supply of available aircraft to transport them.
Are you angry, yet?
Now imagine pulling up to the drive-thru window at your local Wendy’s at prime dinner time and your Baconator costs 5x the price because of higher demand for the product. This is what the news reports suggested would soon be part of the Wendy’s customer experience.
Wendy’s devotees now had to contemplate their experience devolving to one like buying airline tickets during the holidays! I’d be mad, too.
Here is where the nuance comes in.
The reports of the surge pricing strategy adoption cited comments from Kirk Tanner, President & CEO of Wendy’s during the Company’s most recent earnings call. However, if you listened to or read the transcript of the call you would understand what he actually said:
“We expect our digital menu boards will drive immediate benefits to order accuracy, improve crew experience and sales growth from upselling and consistent merchandising execution. Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and day-part offerings along with AI-enabled menu changes and suggestive selling.”
The term “surge pricing” was never mentioned.
Surge pricing is just one example of various dynamic pricing strategies employed by companies to optimize the economic outcomes (i.e., profit margins) of their businesses by using variable pricing on specific products or services they sell, in real-time, depending on market dynamics.
There are several different types of dynamic pricing strategies that can be deployed, each with their own driving variables, specific advantages and disadvantages associated with them. The most common purposes for using these strategies is to maximize profits, take advantage of trends, and manage inventory. All very important to businesses and their shareholders.
These strategies are usually technology-driven to automate the process using competitive analysis, market trends, inventory data, and customer traffic, purchasing history and behavior data.
A few weeks after the report was published that triggered public backlash, Wendy’s issued a statement on their website to address the issue:
“We said these menu boards would give us more flexibility to change the display of featured items. This was misconstrued in some media reports as an intent to raise prices when demand is highest at our restaurants. We have no plans to do that and would not raise prices when our customers are visiting us most. Any features we may test in the future would be designed to benefit our customers and restaurant crew members. Digital menu boards could allow us to change the menu offerings at different times of day and offer discounts and value offers to our customers more easily, particularly in the slower times of day.”
Wendy’s VP Heidi Schauer even sent an email to NPR to clarify the CEO’s remarks: “To clarify, Wendy's will not implement surge pricing, which is the practice of raising prices when demand is highest. We didn’t use that phrase, nor do we plan to implement that practice.”
The point we are trying to make is that this is another instance where nuance is important to understand before making a snap judgement after reading a headline.
Whether or not you choose to believe that Wendy’s had no intention to incorporate “surge pricing” is up to you. On one hand, the concept of surge pricing for a cheeseburger does not sound like it would be good for customer loyalty. On the other hand, as technology becomes more widely available to drive greater efficiencies, more and more industries will be looking to implement some type of dynamic pricing strategy.
Consumers should probably be prepared to see more of this practice.