How often should you be changing your menu prices?
Discover the benefits and considerations of constantly changing menu prices, and find the perfect balance to match your market
What Is The Point of Changing Prices
The vast majority of prices we see today are not representative of the actual supply and demand of the underlying market. We gravitate towards using standard rounding increments (i.e. 5$ or 10$), and then keep those prices fixed after setting them. We do these things to try to make life easier and accounting “simple”, although I would argue that anyone who says accounting is simple has obviously never done the task. The result of this widely adopted norm is that we have extremely inefficient markets that do not reflect the ever-changing aspect of real life, and thus on the sides of both consumers and suppliers, we tend to lose a lot, in terms of both money and happiness.
To each consumer in a market, the value of an item is unique to their own demand, their desire to own that specific item. To each supplier, the value of an item is unique to the time and cost that was spent to serve that item. One day “boba popsicles” might be featured in a viral video, causing demand to skyrocket. Another day, there could be a disaster such as the Suez Canal shipping fiasco, causing supply to suddenly tighten. In each of these cases, society expects prices to stay the same for the sake of simplicity and pricing loyalty, but as a result both sides end up feeling unsatisfied when compared to a dynamically priced world.
In the case of the popsicles, the supplier may feel like the popsicles are priced unfairly, too low compared to demand, and be less willing to stock up on them. This leaves the consumers unhappy as well since they are unable to find the popsicles they desire.
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In the case of the Suez Canal fiasco, suppliers’ costs suddenly shoot up as they either have to find the materials from another source or wait for the shipment to arrive, in which case the consumers are also unhappy due to the delay. Orders will be canceled and suppliers will incur great losses while consumers will not receive the item that they wanted.
Benefits of Changing Prices
In an ideal world, every market would be perfectly efficient and prices would move to capture each and every person’s supply and demand curves. A close example would be the stock market, which isn’t perfectly efficient (if it was, trading firms wouldn’t exist!), but it is much more so than our traditional markets for goods and services. In the stock market, we buy and sell when we are satisfied with the price of the stock, and the price is able to move with each persons’ ask and bid, their supply and demand. As a result the pricing market is more reflective of the actual state of the world, and for those that studied economics, both the producer and consumer surplus is increased.
Considerations for Constantly Changing Prices
Now if things were so simple as just making a stock market for every type of goods and services transaction, the answer to our pricing problem should be simple right? Well ideally yes, but we have to consider that humans are not perfectly rational. Even me personally, someone who works at a company dedicated to dynamic pricing, doesn’t want to see a world where everything I buy is constantly changing in price. I can’t even buy a pair of shoes now without being price gouged for an arm and a leg. There would always be the sense of “can this be cheaper” or “can I get more for this in the future”, on both the consumer and supplier side. Finding a balance is where we come in, we want to find a way to price in a way that more accurately reflects the true state of the market, yet also gives people a sense of security and discourages anybody that would want to abuse the system.
Now this is a world that I want to live in.