Just two words created an advertising nightmare for fast food giant Wendy’s: dynamic pricing.
In late February 2024, news broke that the network was considering charging different prices at different times of the day – a tactic usually associated with airlines and shipping companies. Like headlines like “Wendy’s will introduce Uber-style raises” flooded the news and #BoycottWendys trended on social media. Wendy’s rival Burger King was quick to capitalize on the news, slamming “No desire to grow” promotion.
This reaction put Wendy’s on the defensive.
Within days, Wendy’s said so it never intended to raise prices during periods of peak demand, instead intending to lower prices only when store traffic was slow. A monthly $1 burger deal was also announced and followers took up the offer quick connection to the pricing fiasco.
It looked like a classic PR disaster – and as professor of marketing, I couldn’t turn around. How did it all go wrong?
Divergent stakeholder interests, with a side of fries
I suspect that this burger fuss boiled down to a classic case of a collision between the interests of investors and the interests of consumers.
It seems this whole mess started on February 15, 2024, when Wendy’s published its fourth quarter results and held it teleconference with investors.
That day, Wendy’s announced a multimillion-dollar investment to introduce digital menu boards in all of its U.S. stores. According to a slide from the conference call, this investment would support “dynamic pricing and menu offerings.” Wendy’s CEO during the slide presentation he said“From 2025, we will begin testing more enhanced features such as dynamic pricing and offers at times of day, along with dynamic menu changes, AI-powered pricing and suggestive selling.”
While some say Wendy’s may have had no intention of raising prices at all, I’m skeptical. Of course, there’s nothing wrong with raising prices – companies would go out of business if they didn’t. The problem is how to account for the price increase. For example, Starbucks raised its prices three times in just four months from October 2021 to February 2022. The increases were blamed on inflation and were met with little opposition.
But no matter how you cut it, raising prices is a corporate action that benefits investors but not consumers. And while the whole thing has sparked outrage among restaurant diners, Wendy’s investors seem relatively indifferent. Wendy’s share price remained unchanged 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 academic research. Investors are typically driven by company profits. They are made happy by measures to increase income, such as price increases. That’s why companies often announce these increases long before they take effect – not for the sake of customers, but for investors.
Of course, higher prices seem different if you’re the one paying them. Consumers tend to believe that sellers are not fair when setting prices: they believe that sales prices are largely determined higher than fair pricesdownplay impact of inflation, they over-attribute the cause of price increases to the desire for profit and do not take into account the costs of the company. Their reaction is mutual economically rational and predictable.
It also makes sense that Burger King is trying to act like a typical rival – wanting to profit from Wendy’s backlash.
Unnecessary fighting for food
In my opinion, Wendy’s early announcement of dynamic pricing was a serious mistake. Recall that its CEO said that Wendy’s will introduce dynamic pricing “as early as 2025.” That means it announced the news at least nine months before customers needed to hear about it. I assume Wendy’s did this because they wanted to impress their shareholders and increase the stock price.
In fact, my cynic wonders whether this incident was “staged” – that is, Wendy’s was testing the waters to see if it could announce a price increase to impress shareholders and then not actually implement the changes.
Indeed, research has shown this companies often announce price increases several days or several months in advance and may withdraw some of these announcements if it realizes that a price increase may cause more damage than an increase in revenues.
Either way, announcing a decision nine months in advance seems premature. And I haven’t seen any evidence that Wendy planned for customers to hear this message along with investors.
My advice is that management should carefully communicate price increases so that consumers take the company’s point of view rather than consider the increase unfair. This may mean avoiding terms that trigger hostile reactions, or giving explanations for their decisions, such as increases in ingredient costs or employee salaries. Consumers who understand the reasons for price increases may be more favorable.
Interestingly, even after Wendy’s hesitation, there are apparently other restaurants considering the increase in menu prices during times of peak demand. I hope they learn from Wendy’s mistake and strategically determine price increases.
Otherwise, they shouldn’t be surprised when the players eat lunch.
