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Dynamic Pricing: Should the Time Determine the Price of Your Meal?

Oct 19, 2013 • 614 Views

A 12:00 lunch at the Goldman Sachs cafeteria will cost you more than a 1:30 meal.

The problem was the long lines. Standing in line for even just 10 minutes a day means 50 minutes a week, 200 minutes a month…you get it. The opportunity cost is huge for the firm, not to mention the aggravation for the individual of waiting and waiting when you know you have so much to do.

Goldman’s solution was an incentive pricing system that dispersed the lunch hour crowds. Eat before 11:30 or after 1:30 and you get a 25% discount. In addition, you save money and your boss sees you care about cost control.

True whenever prices are controlled by “command” rather than the market’s supply and demand, there is usually an unexpected consequence because of a perverse incentive. At Goldman, people who arrived at the cafeteria at 1:20 created an inefficiency by demonstrating the “cliff effect.” Before buying lunch, they wasted 10 minutes to take advantage of the 1:30 discount.

Perhaps instead the pricing should be dynamic. At the top rated Chicago restaurant Alinea and its sister, Next Restaurant, what you pay depends on the day. At Alinea, there is an 20% difference for the tasting menu, anywhere from $210 to $265. As you would expect, Saturday night is most pricey.

At a place like Alinea, no matter what the time, they might be fully booked. However, at more normal places, I wonder if the dynamic pricing model has some potential. Through the incentive of lower prices, empty eateries might attract some diners during off days and even off hours. They might even make some rejected Saturday nighters pleased with a less desirable evening.

Should your favorite restaurant use a dynamic pricing model?

A note: Taking still another experimental pricing step, Alinea is now selling dinner tickets. Yes–no cancelable reservations available. Like a concert, you pay ahead of time. From the restaurant’s perspective, there is no such thing as a no-show. You buy a non-refundable ticket. Alinea chef Grant Achatz says his narrow profit margins necessitated the approach. Now he knows his cash flow for every seating.

Sources and resources: For more about the Goldman cafeteria, you can go to this Washington Post article or CNBC‘s description and then move to mouth watering stories about Alinea that not only discuss pricing but also their 20+ course meal. In an econlife post, we did wonder whether people experienced diminishing marginal utility eating 21 or so courses at Alinea.

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