Surge Pricing Burgers and the Importance of Reading the Whole Post

Wendy, Wendy what went wrong? – Brian Wilson and Mike Love

Some weeks back a news story made the rounds that Wendy’s CEO had announced in a call with investors that the company was planning to institute ‘surge pricing’ in its restaurants. You can read a somewhat outraged story about it in the NY Post here, if you missed it. Surge pricing in this case would mean that what you pay for items on their menu would vary with the time of day, as does the amount of business at Wendy’s – busy times would see higher prices. The technology to do this is the installation of menu boards at the drive-thrus on which prices could be changed electronically whenever desired. Presumably the same would be true for the in-store menu boards, also.

Anyway, this generated a mostly predictable amount of outrage from mostly predictable quarters, but I am writing about this not because of the pricing itself, or the outrage, but rather about what happened next. On February 28 the Globe ran an Associated Press article with the headline “Wendy’s says it has no plans to raise prices at busiest times at its restaurants”. Similarly, CNN’s website (a place I rarely go) ran an article on Feb 28 titled “Wendy’s says it won’t use surge pricing’.

To its credit, CNN also provided a link to the blog post in which Wendy’s supposedly backtracked from its CEO’s original statement to investors about this. You can read that post here also, if you like.

However, what convinced me this was worth writing about myself, was an Opinion article that appeared in my print edition of The Globe and was headed up thusly:

Surge pricing for burgers? Wendy’s was wise to reject it

Woonghee Tim Huh and Steven Shechter

Special to The Globe and Mail – Feb 29, 2024

Woonghee Tim Huh is professor and chair of the operations and logistics division at the UBC Sauder School of Business and the Canada Research Chair in operations excellence and business analytics.

Steven Shechter is a professor in the operations and logistics division at the UBC Sauder School of Business and the WJ VanDusen Professor of business administration.

****

You can read the online version of this Globe article here. In it, the UBC guys explain, sort-of, why it was wise of Wendy’s to back off from their original surge pricing plan.

No doubt Bus School profs have superior insight into firm pricing than do I, but it seems to me that it behooves all of us to read what the firm in question has to say about what they are doing before analysing what they are doing. Professors Huh and Shechter do quote from Wendy’s ‘backtracking’ blog post, in the paragraph below, quoted directly from the Profs’ G&M article:

So, on Wednesday, Wendy’s said its dynamic pricing plan would not raise prices during busy times. The plan, the company said, would only “allow us to change the menu offerings at different times of day and offer discounts and value offers.”

Point one: learn to use ellipsis if you only quote part of a sentence. Here is the full sentence from the actual Wendy’s blog from which the good Professors’ partial quote is taken:

“Digital menuboards 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.”

Point two: everything that is important about the actual sentence posted by Wendy’s is the underlined part of it at the end which the Professors left out of their own quote. Had they included it, they might have felt compelled to explain how ‘raising prices during peak times’ differs from ‘offering discounts during slower times of day’, and that would be a truly difficult task, because there is no difference.

Back when I taught price discrimination strategies in my Managerial Econ class, I would start with something familiar to everyone – Seniors pricing. You know, you walk into the movie theatre and find something that looks like this:

Admission: $15.00

Seniors (55+): $12.00

(Sidebar: I would ask my students why so many businesses offer lower prices to seniors, and get lots of responses about corporate altruism and Seniors being on fixed incomes. It was fun then to show them that this pricing increased profits for the firms, no altruism needed.)

But I digress.

My point is that one does not see this sign in a theatre:

Admission: $12.00

Under 55: $15.00

There is no bloody difference in the price anyone pays for a theatre ticket with the two different signs, but the second one just seems so mean, while the first one seems nice.

Well, it’s the same with Wendy’s pricing: offering discounts at slow times seems nice, adding a premium when it’s busy, well that’s just mean, and Wendy’s would never do that. They said so, after all.

Minor point: If Wendy’s actually had, in some alternate universe, backtracked from surge pricing, I can’t say there is anything in the Sauder School authored Globe article that convinced me that backtracking would have been wise, the headline notwithstanding. However, since Wendy’s did not backtrack, that point seems not worth pursuing.

Not so minor point: Since it is clear from their own blog post that Wendy’s is going to install these quick-price-change menu boards, the following scenario becomes possible. The drive-thrus already have cameras focused on the cars in the queue, so it would be easy to build a data base of licence plate numbers at each store, or even across stores, so the store could determine, for example, how regular a customer they were serving. If Wendy’s corporate strategists have kept up with what goes on at insurance companies, they could then program their menu boards to show higher prices to frequent drive-thru-diners.

I used to teach students about that sort of ‘disloyalty pricing’, too, because insurance companies do employ it – they call it ‘price optimization’, and last I read, some US States were trying to ban it.

Shattering illusions, that was always my mission.

Coda: Before this post went to press, the WSJ published another article on surge pricing and other restaurant strategies. A quote from that article:

While some consumers tend to resent surge pricing, as Wendy’s discovered last month, they like happy-hour discounts and other deals at slow times, industry consultants said.

Whatever would the world do without industry consultants?