Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Are Using Dynamic Pricing to Boost Revenue
Transcript
- Lucas: Luna, I want to talk about something that's quietly reshaping franchise economics but isn't getting a ton of attention yet: dynamic pricing. Luna: You mean like Uber surge pricing, but for a sub sandwich or a haircut? Lucas: Exactly like that. And it's not hypothetical. I've been tracking a franchisee in Phoenix who operates fourteen Subway locations. Starting around January of this year, he began adjusting prices in real time based on demand. Lunch rush gets a small surge — maybe fifteen to twenty cents per footlong. Slow afternoons get a discount. Luna: And Subway corporate was okay with that? Lucas: That's the fascinating part. They didn't explicitly forbid it in the franchise agreement. The contract says franchisees set their own prices, subject to 'reasonable' constraints. So he tested it at one store first, saw a six percent revenue lift over three months, then rolled it out to all fourteen. Luna: Six percent lift on the top line — that's significant for a QSR margin. But what about the operational complexity? Do you need special software? Lucas: Yes, and that's part of why this is mostly multi-unit operators doing it. You need a digital menu board system that can update prices centrally — think a company like E la Carte or a custom integration with the POS. Fixed menu boards are dead for this strategy. The Phoenix franchisee uses a third-party platform called Juicer — not the smoothie brand, it's a pricing engine — that pulls in foot traffic data from Placer.ai and adjusts prices algorithmically. Luna: So it's not just 'we feel busy, let's raise prices.' It's data-driven. But I wonder about consumer blowback. People hate feeling ripped off. Lucas: Right, that's the risk. Wendy's got hammered in 2024 just for mentioning dynamic pricing in an earnings call — they weren't even doing it yet. But the trick is framing. The Phoenix franchisee positions the afternoon discounts as 'Happy Hour' specials, and the lunch surge is just a few cents. He told me he's had maybe two complaints total. Customers are used to it from Uber, Amazon, even movie theaters now. Luna: Still, there's a brand consistency issue. If one Subway is charging $7.49 for a footlong at noon and the one across town is $6.99, that creates confusion. Lucas: That's exactly the argument franchisors make. I spoke with a former franchise development VP who said brands worry it commoditizes the experience. But here's the counter: franchisees are already allowed to set prices, and in practice they don't all charge the same. Dynamic pricing just makes that variation intentional and data-backed. Luna: Are there any franchise systems that have explicitly banned it? Lucas: A few. McDonald's, for instance, requires franchisees to use suggested pricing within a narrow band. Most contracts have language about maintaining 'brand image' that could be interpreted broadly. But as more franchisees adopt this, we might see lawsuits over pricing freedom. It's a tension between the franchisor's desire for uniformity and the franchisee's desire to maximize profit per transaction. Luna: Let's talk about who benefits most. Is this only for high-volume urban stores, or could a suburban franchisee use it too? Lucas: It works best when you have predictable demand spikes. A suburban store might see a rush at dinner but not lunch. Dynamic pricing could offer an early bird discount to pull people in before the rush, then raise prices slightly during peak. One franchisee I know at a Great Clips in Atlanta uses it — prices go up fifty cents on Saturday mornings, down a dollar on Tuesday afternoons. He said it smoothed his labor costs because customers shifted to off-peak times. Luna: So it's not just revenue, it's demand shaping. That's smart. But what's the tech investment? Is it cost-prohibitive for a single-store owner? Lucas: Right now, yes. The software alone runs about two to three hundred dollars a month per location, plus the digital menu board upgrade which can be a few thousand upfront. That's why you're seeing this mostly from multi-unit operators who can amortize the cost. But I expect prices to drop. There are at least five startups now targeting franchise dynamic pricing specifically — they see the opportunity. Luna: Curious about the data side. Does the franchisee own the transaction data, or does the franchisor? If Subway corporate sees the pricing moves, could they use that data to adjust their own royalty or marketing fee structure? Lucas: That's a really sharp question. In most franchise systems, the franchisor owns the aggregated data from POS systems. So they can see pricing changes. The Phoenix franchisee told me his Subway business consultant asked about the price fluctuations after a few weeks. He explained it was dynamic pricing. They haven't pushed back, but he's aware it could become a negotiation point at renewal. Luna: So there's this underlying power dynamic. The franchisee is innovating with pricing, but the franchisor has the data and the contract. It feels like a cold war. Lucas: Exactly. And the franchisor might decide they want a cut of the revenue lift, or they might decide they want to roll out their own dynamic pricing system and charge franchisees for it. That's the risk for early adopters. Luna: Have any franchise brands embraced it officially? Like, built a tool and offered it to franchisees? Lucas: A few smaller chains in the fast-casual space. One I'm watching is a brand called 'Saladworks' — they tested a franchisor-provided dynamic pricing tool in five stores last year and saw a four percent revenue increase. They're now rolling it out to fifty stores. Their CEO told me they see it as a competitive advantage against bigger brands that move slower. Luna: That makes sense. A nimble franchise system can use pricing as a weapon. But I keep coming back to the customer. How do you communicate that prices are changing? Do you post signs? Lucas: The best approach is transparency. The Phoenix Subway has a small digital sign at the counter that says 'Lunch Rush Pricing in Effect' and another for 'Happy Hour Discount.' Customers see the price before they order. The key is to avoid surprises at the register. Also, the changes are small enough that most people don't even notice unless they're paying attention. Luna: Still, there's a psychological ceiling. At what point does a price increase feel unfair? Is there research on that? Lucas: There's a paper from Cornell's hospitality school that looked at QSR dynamic pricing. They found that customers accept up to about a ten percent increase during peak times if it's explained as 'demand-based pricing.' Beyond that, you get pushback. So the sweet spot is five to eight percent. For a $8 footlong, that's maybe 40 to 64 cents. That's well within tolerance. Luna: And the discounts? Do you see franchisees using that to build loyalty, or is it purely tactical? Lucas: Both. The Phoenix guy uses the afternoon discount to attract nearby office workers who might otherwise go to a cheaper option. He also ties it to his loyalty app — if you scan your app during discount hours, you get an extra stamp. So it's a customer acquisition play too. Luna: Alright, so what's the bottom line for a franchisee listening right now? Should they look into it? Lucas: If you're a multi-unit operator with digital menu boards and a decent data set, yes. Start with one store, run a pilot for three months, compare against a control store. Track not just revenue but also customer satisfaction scores. If the numbers hold up, expand. But also read your franchise agreement carefully. Look for clauses about pricing, brand standards, and data ownership. Have a conversation with your franchisor before you flip the switch. Luna: And if the franchisor says no? Lucas: Then you have a decision to make. But you might also join a franchisee association and push for a pilot program. The data is on your side. And if enough franchisees want it, the brand may have to listen. Luna: It's interesting — we talk a lot about franchisees innovating on operations, marketing, even supply chain. But pricing is that last frontier because it touches the customer directly and the brand directly. Lucas: It's also the lever with the fastest payoff. You change a price, you see the effect immediately. No lag, no inventory changes. That's why I think this trend will accelerate. By the end of 2027, I wouldn't be surprised if a quarter of QSR franchisees are using some form of dynamic pricing. Luna: That's a bold prediction. And if it happens, it will change how franchise contracts are written. Speaking of moving the conversation forward — if you're finding these episodes valuable, especially the deep dives on franchise economics, it's worth knowing that listener support is what keeps this show ad-free and independent. People who care about the content can contribute at buy me a coffee dot com slash fexingo. No pressure, just a way to keep the conversations going. Lucas: Absolutely. And on that note, next week we're going to look at how franchisees are using dynamic pricing not just for revenue, but to manage labor scheduling. Because if you can predict demand based on pricing, you can staff more efficiently. That's a whole other layer. Thanks for listening.