Just two words created a public relations nightmare for fast food giant Wendy's. That's dynamic pricing.
In late February 2024, news broke that the chain was considering charging different fees for different times of day. This is a tactic typically used by airlines and ride-hailing companies. Headlines like “Wendy's Introduces Uber-Style Surge Pricing” filled the news, and #BoycottWendys trended on social media. Wendy's rival Burger King quickly capitalized on the news with a promotion called “No Urge to Soar.”
The backlash put Wendy's on the defensive.
Within days, Wendy's said it would not raise prices during periods of peak demand and would only lower prices when store traffic is slow. The company also announced a $1-a-month hamburger deal, which observers quickly linked to a pricing debacle.
It looked like a classic PR disaster, but as a marketing professor, I couldn't look away. How could this not work?
Stakeholder interests are wide-ranging, with fries on the side.
I think this hamburger scandal ended up being a classic case of a conflict between the interests of investors and the interests of consumers.
The whole mess appears to have started on February 15, 2024, when Wendy's released its fourth quarter results and held a conference call with investors.
That same day, Wendy's announced a multi-million dollar investment to roll out digital menu boards across all of its U.S. stores. The investment will support “dynamic pricing and menu offerings,” according to conference call slides. Presenting a slide, Wendy's chief executive officer said, “Starting as early as 2025, we will strengthen our dynamic pricing menu using AI, change our dynamic pricing menu, suggest sales, and provide dynamic pricing and time slots. “We will begin testing the features that were created.”
Some have argued that Wendy's never intended to raise prices, but I'm skeptical. Of course, there is nothing wrong with raising prices. If you raise prices, companies will go bankrupt. The problem is how to frame the price increase. For example, Starbucks raised its prices three times in just four months from October 2021 to February 2022, but did not face much backlash despite blaming the increases on inflation.
But no matter how you frame it, price increases are corporate actions that benefit investors but not consumers. And while restaurant people are outraged by the whole incident, Wendy's investors seem relatively unconcerned. Wendy's stock has been relatively stable since February 26, when the media picked up the story and calls for a boycott began.
This asymmetry makes sense and is well documented in academic research. On average, investors are motivated by the company's profits. Any move to increase profits, such as raising prices, pleases them. That's why companies often announce these increases well in advance of implementation, for the benefit of investors rather than customers.
Of course, a higher price feels different if you're paying it yourself. And consumers tend to believe that sellers are being unfair when setting prices. Consumers believe that selling prices are much higher than fair prices, underestimate the impact of inflation, over-attribute price increases to profit-seeking, and do not take businesses into account. . It costs money. Their backlash is economically rational and predictable.
It also makes sense that Burger King would try to act like a typical rival, trying to profit from the backlash Wendy's has received.
unnecessary food fights
In my opinion, Wendy's announcing dynamic pricing early was a grave mistake. Recall that the company's CEO said Wendy's would introduce dynamic pricing “as early as 2025.” That means they announced the news at least nine months before customers needed to know about it. I think Wendy's did this because they wanted to make a good impression on shareholders and increase the stock price.
In fact, the cynic in me wonders if this incident was “staged,” meaning that Wendy's can pre-announce price increases to impress shareholders and never actually implement the changes. I suspect that he was trying to find out.
In fact, research shows that companies often proactively announce price increases days to months in advance, and when they realize that price increases could cause more harm than revenue, they We may withdraw some of our announcements.
But in any case, announcing a decision nine months in advance seems premature. I also haven't seen any evidence that Wendy's, along with its investors, was planning on letting its customers hear this news.
My advice is that management should try to communicate price increases wisely so that consumers don't think they're unfair from the company's perspective. That might mean avoiding terms that provoke hostile reactions, or providing explanations for decisions, such as increasing food prices or employee salaries. Consumers who understand the reasons for price increases may be more tolerant.
Interestingly, even after Wendy's downturn, other restaurants are reportedly considering raising menu prices during high-demand times. I hope they learn from Wendy's mistake and structure their price increases strategically.
Otherwise, you shouldn't be surprised if your competitors are having lunch.
