Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Use Dynamic Pricing to Maximize Revenue
Transcript
- Lucas: We've all seen a ride-share price spike on a rainy Friday night, or an airline ticket triple between Tuesday and Thursday. Dynamic pricing feels like it's everywhere except, historically, one big holdout: the franchise world. Luna: Right—because franchise agreements have traditionally been rigid on pricing. You can't have one McDonald's charging more for a Big Mac than another down the street. Lucas: Exactly. Franchisors want consistency, brand protection. But a lot of newer franchise contracts are loosening that. They're giving franchisees room to adjust prices within a band—say, plus or minus 10 percent from a recommended menu price. Luna: And that opens the door for dynamic pricing. So today we're asking: how are franchisees actually using it, and does it work? Luna: And what did they find? Lucas: Revenue per transaction went up 8.5 percent. But equally important, customer wait times dropped 12 percent, because the pricing smoothed out demand. They used a three-tier system: peak, standard, and off-peak. Luna: So a lunch rush burger might cost $7.50, a mid-afternoon burger $6.50, and a late-night burger $5.50—something like that? Lucas: Exactly. The off-peak discount pulled people into slower hours, the peak surcharge pushed some price-sensitive customers to come later. The net effect was flatter demand curves and higher total transactions. Luna: What about the tech? I imagine a franchisee can't just change a menu board by hand every hour. Lucas: No. They plugged a demand-forecasting platform into their existing point of sale system. The platform uses historical sales data plus local variables—weather, nearby events, school schedules—to predict traffic every 15 minutes. Then it automatically adjusts prices in the digital menu boards and the app. Luna: So the customer sees the current price when they order. It's transparent. Lucas: Right. The franchisee also gets a dashboard showing price elasticity in real time—how much demand changed with each price move. That helps them tune the bands. One store discovered that a 10 percent off-peak discount drove a 25 percent increase in orders, so they widened the band. Luna: But isn't there a risk of customer backlash? I remember a well-known pizza chain tried a 'busy hour surcharge' about two years ago and got hammered on social media. Lucas: That's the cautionary tale. That chain applied a blanket surcharge with no off-peak discount—so customers only saw prices go up, never down. It felt punitive. The burger chain in our example avoided that by framing it as a 'time-of-day savings' program, with the discount prominently displayed. Luna: So it's about psychology as much as math. Lucas: Totally. They also grandfathered loyalty program members: if you're a repeat customer, you always get the off-peak price, even during peak hours. That way the loyal base doesn't feel penalized. Luna: That's smart. So the dynamic pricing is really aimed at the occasional customer? Lucas: Exactly. The goal is to capture incremental demand without alienating your core. And it worked: the franchise reported that repeat visit frequency actually increased during the test, because loyal members felt they were getting a deal. Luna: Alright, so the operational upside is clear. But I want to get into the franchisor-franchisee tension. Royalty fees are usually a percentage of revenue. If a franchisee raises prices during peak, the franchisor gets a bigger cheque. Does that create a conflict? Lucas: It can. Some franchisees in the test worried that the franchisor would view dynamic pricing as a way to boost royalty revenue at their expense. But the franchise in this case actually reduced the royalty percentage during the test—from 6 percent to 5.5 percent—to align incentives. Luna: That's a meaningful concession. So the franchisor shared the risk. Lucas: Yes, and it made the franchisees more willing to participate. The other concern was brand consistency. If a customer goes to one location and pays $7.50 for a burger, then drives 10 miles and sees it for $6.00, that can feel off. Luna: How did they handle that? Lucas: They set pricing bands at the regional level, not the store level. All stores in the same metro area used the same schedule, so within a market the prices were consistent. The variation was between markets—urban vs. suburban, for example. Luna: That seems fair. And it still captures local demand differences. Lucas: Right. Now, the elephant in the room: fairness. Is it fair to charge someone more just because they happen to be hungry at noon? Luna: I think that's the ethical question a lot of franchisees wrestle with. Especially for essential food service in low-income areas. Lucas: Exactly. The franchise in our test addressed it by capping the peak surcharge at 15 percent and offering a 'community hour' from 2 to 4 PM where everything was 20 percent off. That way low-income customers could shift their buying time. Luna: So it's not just a revenue tool—it's also a demand-management tool that can actually serve customers better if done thoughtfully. Lucas: That's the argument. And the numbers back it up: employee scheduling became easier because traffic was more predictable, which lowered labor costs. The franchise saw a 6 percent reduction in labor as a percentage of sales. Luna: So the labor savings alone might justify the system, even before the revenue lift. Lucas: Absolutely. And that's the bigger picture: dynamic pricing isn't just about charging more. It's about aligning price with capacity. For a franchisee with fixed seating and staff, filling the slow hours is pure profit. Luna: That reminds me of something we talked about in episode 75 on subscription boxes—the idea of smoothing demand over time. Different tool, same principle. Lucas: Exactly. Now, if this kind of analysis is helping you think about your own franchise operations, it's worth mentioning that conversations like this are possible because of listeners who support the show. If you've gotten value from the podcast, you can buy us a coffee—literally—at buy me a coffee dot com slash fexingo. It keeps the show ad-free and lets us dig into these deep dives. Luna: Yeah, it really helps. We don't do sponsors, so listener support is what keeps us going. And we genuinely appreciate every contribution. Lucas: Alright, back to pricing. One more thing I found interesting: the test results showed that dynamic pricing actually improved customer satisfaction scores—by about 2 points on a 100-point scale. Because wait times dropped. Luna: So the trade-off is higher price for shorter wait—and some customers clearly valued that. Lucas: Right. It's a classic price discrimination outcome, but with a service benefit. The key is transparency. The franchise displayed the current price tier at the entrance and on the app, so no surprises. Luna: Alright, so what's the takeaway for a franchisee listening who's curious but cautious? Where should they start? Lucas: First, check your franchise agreement. See if there's a pricing band or a requirement for uniform pricing. If it's rigid, you may need to negotiate. Second, start small—maybe one store, off-peak discounts only. See how customers react. Luna: And make sure the technology integrates with your POS. That's probably the biggest hurdle. Lucas: Yes. The demand-forecasting platform we saw costs about $300 per month per location, which is easily covered by a 1 percent revenue lift. So the economics are there. Luna: It seems like dynamic pricing is one of those tools that was inevitable for franchises—it just took the right contract structures and customer acceptance. Lucas: Agreed. And as more franchise agreements include pricing flexibility, I think we'll see this become standard within five years. Luna: It's a fascinating shift from the old one-price-fits-all model. Lucas: It really is. And it's a reminder that even in a business model built on consistency, there's room for smart variation.