NerdWallet's Smart Money Podcast - “Dynamic Pricing” Could Save You Money at the Drive-Through

Episode Date: March 6, 2024

Understand how you may actually be able to save money on fast food thanks to “dynamic pricing.” What’s the difference between surge pricing and dynamic pricing? How can you take advantage of supply and demand timing for certain products and services? Hosts Sean Pyles and Anna Helhoski tackle the buzz around Wendy’s controversial new pricing strategy, dissecting the confusion surrounding surge pricing and clarifying Wendy’s actual plan of implementing dynamic pricing starting in 2025. They discuss the potential impact this AI-driven pricing may have on consumers and how it could result in discounts based on factors like weather and demand, and its applications in other areas such as ticket sales, hotels, and airlines. In their conversation, the Nerds discuss: dynamic pricing, fast food costs, AI technology, surge pricing, consumer impact, pricing strategies, Wendy’s, rideshare services, supply and demand, menu changes, digital menu boards, AI-enabled technology, real-time data, pricing decisions, ticket sales, value offers, fluctuating prices, industry trends, and price shifts. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhosky. And this is our weekly Money News Roundup, where we break down the latest in the world of finance to help you be smarter with your money. Last week, the CEO of the fast food chain Wendy's announced in a call to investors

that it would begin to adopt a, quote, surge pricing strategy to set menu prices beginning in 2025. That's right. Those who use rideshare services like Uber and Lyft might recognize surge pricing as what happens at rush hour. You pay a lot more due to high demand. This sounds like your basic supply and demand strategy, but people aren't quite used to it when it comes to their burgers and fries.

Yeah, Sean, the announcement sparked quite a bit of a, ahem, frosty response by outraged consumers. But soon we found out that a lot of media outlets actually got it wrong. Wendy's wasn't going to apply surge pricing to its menu items. It would actually be implementing dynamic pricing. Today, Sean and I will dive into what Wendy's means by that. We'll also talk about where you might already see dynamic pricing, whether you realize it or not, and how AI fits into all of this. That's coming up right after the break. Listeners, Wendy's is refuting the claim that it was planning to implement surge pricing at all.

Ana, you had an email exchange with a representative from Wendy's. What did you learn? I did, Sean. I got a statement last week that explicitly stated that Wendy's never actually used the term surge pricing, and the company has no plans to implement that strategy at all. In a previous email, the company explained a little bit more about what it plans to do. They said that Wendy's will be utilizing tech, namely more frequent menu changes, to, quote, offer discounts and value offers to our customers, end quote. Wendy's says it plans to roll out digital menu boards in some U.S. restaurants. The plan here is to use AI-enabled technology to identify how to drive traffic by lowering prices or offering deals during slower hours of the day. The company also said the AI technology will

provide some selling suggestions based on factors like weather. The statement said, quote, an example of leveraging this technology could be a suggestion of a cool frosty on a warm summer day. The kind of thing that you want a robot to tell you that you need instead of just knowing it yourself. Okay. So instead of raising prices during periods of high demand, like Uber and Lyft do, Wendy's says it's actually going to be lowering prices to bring customers in during slower periods of time. So that digital menu board allows Wendy's to be more nimble with its prices and offer deals to customers to sell more burgers and Frosties. That's right, Sean.

But this concept of changing prices via a digital menu isn't exactly new. Why Wendy's wants to say it loudly is so people know deals are coming soon, well, at least starting in 2025 at certain locations. But dynamic pricing is certainly not new, and Wendy's isn't the first eatery to try it. The ever-changing digital menu is something you've probably already seen. Yeah, remember during the pandemic when restaurants started switching over to QR code menus for sanitary reasons? Well, restaurants also noticed they could change up the prices and menu items pretty easily too. After all, it's the click of a button, not a reprint. So there are practical and financial reasons that some restaurants have held on to the QR code menu model, even if we don't all love it.

I'm ambivalent about it. Sometimes I'm fine with it. And there's a convenience factor to pulling out my phone and finding what I need. But at the same time, why do I have to pull out my phone to do everything anymore? Well, it's because we're living in 2024 and our rectangular screens control our lives, obviously. But I do totally get that. Sometimes it feels like companies are shoving technology into every product for the sake of a gimmick or so-called innovation, even if the changes aren't substantive or even wanted by consumers. Exactly. I feel like, did we need to reinvent this wheel? But that being said, there's certainly a benefit for businesses. Dynamic pricing is based on supply and demand. So you can, like Wendy said, lower prices at certain times to draw customers in with deals. It's the happy hour approach.

Businesses can also adjust prices depending on the cost of supplies, which, as we know, have been fluctuating throughout the last couple of years, first due to shortages and then inflation. But at some point, can it turn into price gouging? That's part of what has gotten Ticketmaster into hot water with the Department of Justice and Congress. Since 2011, Ticketmaster has utilized dynamic pricing to adjust prices for tickets based on demand. Well, as we all remember, it sent prices for Taylor Swift, Beyonce, Bruce Springsteen, and other concerts skyrocketing, which left consumers fuming, overpaying, or both. I'd like to note, Sean, that while Ticketmaster is primarily to blame for this,

artists have the option to turn off dynamic pricing for ticket sales, and many do not, like Taylor Swift, Bruce Springsteen, Coldplay, Harry Styles, and Paul McCartney. That is right. Some of your favorite pop artists are not immune to the draw of dynamic pricing. Imagine that. And many industries have never been immune to using this method to increase pricing or offer discounts depending on demand. Hotel bookings, airlines, electricity, gas, and toll roads have been using dynamic pricing for a long time, just usually by a different name. Airbnbs, ski areas, and both Disneyland and Disney World also tend to be higher during peak seasons when demand increases.

Tax software too. And those tend to be more seasonal, but there's also a whole subset of dynamic pricing called surge pricing. As we mentioned, that's what Wendy's was being accused of before it set the record straight. Surge pricing is based on real-time supply and demand, and it means that prices go up when there is high demand.

I think for me, the most visible examples are rideshare services like Uber and Lyft. There's nothing like trying to get home at midnight and seeing the cost of your ride jacked up to twice the normal cost. Ugh, I have spent far too much money on rides late at night just so I can get home as quickly and as safely as possible. Although there are fewer things that make me feel like more of a sucker as a consumer.

Yep. And as we said, dynamic pricing isn't new, but the impact on consumers varies by tolerance and likely what you're purchasing. So a dollar or two may be negligible for most consumers who aren't particularly price sensitive. But when you're talking about bigger ticket items, $100 more for that last minute flight might be more than you're willing to spend. I think no matter what your financial tolerance is, seeing prices seesaw from one day or week to the next can be really jarring, not to mention frustrating. So Ana, if it's safe to say that more companies and industries are using dynamic pricing, then the logical next question is why? Why now? Well, artificial intelligence is playing a big part in enabling businesses to roll out price shifts. Algorithms can plug in existing and real-time data to make pricing recommendations. That includes volume of buyers, as well as other

factors like the weather for a venue with a big outdoor space or for a sports bar if there's a big game on. And e-commerce and digital menus make it easy for those price changes to even happen automatically. So you might see price changes fluctuate quickly on Amazon, for example, which has been using algorithms and AI to make pricing decisions based on consumer interests for quite some time. That's right, Sean. For consumers, dynamic pricing can be a valuable way to save money when demand is lower for what they want. But by the same token, they may also pay more when demand is high. Yeah, the tech may be new, but good old-fashioned comparison shopping is still the best way for consumers to take advantage of dynamic pricing and avoid surges when possible.

I think so, Sean. That's it for this week's money news. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. Or send us a voice memo at podcast at nerd wallet.com. And remember to follow rate and review us wherever you're getting this podcast. Today's episode was produced by

Sean and myself and edited by Rick Vanderknife, Sarah Brink mixer audio. Here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.