Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Dynamic Pricing Is Quietly Taking Over Everything
Transcript
- Lucas: So a couple months ago, Wendy's announced they were testing dynamic pricing — surge pricing, basically — and the internet basically exploded. People were furious. The phrase 'surge pricing for cheeseburgers' became a meme overnight. Luna: Yeah, I remember that. Wendy's walked it back pretty fast. They said it was just gonna be digital menu boards that could change prices throughout the day, but the damage was done. Lucas: Exactly. And it's a fascinating case study because dynamic pricing itself isn't new. Uber's been doing it for over a decade. Airlines, hotels, they've been doing yield management since the 1970s. But when a fast-food chain tries it, the reaction is totally different. Luna: Why do you think that is? Is it just that people don't expect it from a burger joint, or is there something deeper about how dynamic pricing feels unfair? Lucas: I think it's both. But I also think Wendy's made a specific mistake that tells us a lot about when dynamic pricing works and when it backfires. And that's what I want to drill into today — the line between dynamic pricing that customers accept and dynamic pricing that feels like a gouge. Lucas: And honestly, if this conversation moves your thinking forward in some small way, that's great. If it's worth a coffee to you, you know where to find us — buy me a coffee dot com slash fexingo. That kind of listener support is what keeps this show ad-free and focused. Luna: Yeah, it makes a real difference. Just a small gesture lets us keep doing deep dives like this without any sponsor pressure. So if you're into it, that's the link. Lucas: Alright. So back to Wendy's. What they proposed was digital menu boards that could adjust prices based on demand — more expensive at lunch rush, cheaper at 2 PM. In theory, that's just basic supply and demand. But the public reaction was visceral. Luna: Right. And I think part of it is that Wendy's is a commodity. People have a reference price for a cheeseburger — it's supposed to cost around five bucks. If you're paying $8 at noon and $4 at three, you feel like you're being punished for eating at a normal time. Lucas: That's exactly the psychological friction. With Uber, you can choose to wait. With an airline, you book ahead. But with fast food, the transaction is supposed to be simple and uniform. Dynamic pricing breaks that implicit contract. Lucas: Compare that to Disney. Disney's been doing dynamic pricing for park tickets since 2016. A one-day ticket to Magic Kingdom can cost anywhere from $109 to $189 depending on the day. And people mostly accept it. Luna: Because they see it as a premium experience. You're not buying a commodity — you're buying a vacation. And Disney frames it as a way to spread out crowds. Lucas: Exactly. The framing matters enormously. Disney calls it 'demand-based pricing' and talks about improving guest experience. Wendy's just said 'digital menu boards' and people filled in the blanks. Same mechanism, totally different reception. Luna: So what about Ticketmaster? They got hammered for dynamic pricing during the Taylor Swift presale in 2022. Prices for floor seats went over $20,000. That felt like a gouge. Lucas: That's a good example of dynamic pricing going too far. Ticketmaster uses what's called 'platinum pricing' — it's essentially market-based: when demand spikes, prices rise in real time. But the problem is the lack of transparency. Fans didn't know the face value was dynamic until checkout. Lucas: And there's a key difference. With airlines, consumers have learned to expect prices to vary. You check three different days and see three different fares. But with concert tickets, fans still expect a fixed face value. The industry trained them for decades that a ticket costs what it says on the stub. Luna: So the expectation is set by the category. Airlines trained us. Hotels trained us. Uber trained us. But fast food and concerts hadn't. That seems like a pattern. Lucas: That's the core insight. Dynamic pricing works when the consumer has been primed to accept variability. If you spring it on them in a category that's historically fixed, you get backlash. Luna: What about the opposite side — do any companies use dynamic pricing in a way that actually builds loyalty? Lucas: Yeah, I think there are a couple of smart examples. One is how some sports teams do variable pricing for tickets. The San Francisco Giants, for instance, charge more for weekend games against the Dodgers and less for a Tuesday night game against the Marlins. Fans understand that — it feels logical. Lucas: Another one is how some SaaS companies use usage-based pricing. Snowflake charges by the amount of data you process. If you use less, you pay less. That's dynamic pricing that feels fair because it's tied directly to value. Luna: But that's not really surge pricing. That's just metering. The emotional charge is different. Lucas: Right, and that's an important distinction. Dynamic pricing covers a spectrum. On one end, you have pure algorithmic surge pricing — prices rise when demand peaks. On the other, you have tiered pricing based on attributes that the customer can plan around. The former feels punitive. The latter feels like a choice. Luna: So Wendy's mistake wasn't just that they used dynamic pricing — it's that they used the wrong kind for the category. They should have gone with a tiered approach, like a lunch menu with fixed higher prices and a discount window in the afternoon. Lucas: Exactly. McDonald's actually does this in some markets with their 'McPick 2' promotions at certain hours. It's not algorithmic — it's just a scheduled discount. But it achieves a similar goal without the backlash. Lucas: Now, let me bring in one more case that I think is really instructive: surge pricing at stadium concessions. During the pandemic, some venues started using dynamic pricing for hot dogs and beer. And guess what? It actually worked. Luna: Wait, really? I feel like that would cause a riot. Lucas: You'd think so. But a team called the Atlanta Braves tested it at Truist Park. They used a system where concession prices would rise during high-demand moments — like between innings — and drop during lulls. And the key was that the price was shown on digital screens clearly. Fans could see the price and decide whether to buy now or wait. Luna: So it gave them agency. That's the opposite of the Ticketmaster surprise. Lucas: Exactly. When customers can see the price and make a choice — buy now at a premium or wait for a lower price — it feels like a market, not a trap. And attendance actually increased because fans felt they had more control over their spending. Luna: That's counterintuitive. You'd think higher prices would drive people away. But if you give them the option to buy cheap later, maybe they're more willing to stomach the peak price. Lucas: That's the behavioral economics angle. It's called the 'decoy effect' in a way — the presence of a cheaper option makes the expensive one feel like a choice rather than a forced extraction. The Braves essentially created a voluntary surge pricing system. Lucas: So the lesson from all this is that dynamic pricing isn't inherently bad. The reaction depends on three things: category expectations, transparency, and perceived fairness. If you violate all three — like Wendy's almost did — you get a PR disaster. If you nail all three — like the Braves — you get a competitive advantage. Luna: Where do you see dynamic pricing going next? I think it's going to spread to more physical retail categories. Maybe even grocery stores eventually. Lucas: I think you're right. Amazon's been experimenting with dynamic pricing in its physical stores for years. And we're already seeing it in gas stations — prices change multiple times a day based on competitor pricing and demand. The question is whether consumers will ever fully accept it, or whether there's a ceiling on tolerance. Luna: I think the ceiling is about control. If I feel like I'm being played by an algorithm, I'll hate it. If I feel like I'm getting a deal because I was smart about timing, I'll love it. Lucas: That's a perfect summary. Dynamic pricing that rewards the customer's behavior — that feels like a win. Dynamic pricing that punishes the customer's necessity — that feels like a shakedown. The smartest companies will figure out how to stay on the rewarding side of that line.