The Rise of Dynamic Pricing: What Businesses Can Learn from NYC Congestion Pricing

Dynamic pricing allows businesses to adjust prices based on demand, timing, and other variables. This strategy is gaining traction across various industries. From transportation apps to restaurants, dynamic pricing is becoming a key tool for optimizing revenue and managing fluctuating demand.  

Businesses across industries are already exploring dynamic pricing, with technologies that adjust prices based on the day, time, costs, and demand for the product. Some examples of industries that have implemented dynamic pricing technology include:  

• Utilities: Electricity is more expensive during the winter when it is in higher demand. The highest cost helps discourage use to ensure electricity is available to meet urgent needs. 

• Entertainment: Ticketing systems used for concerts, movie theaters, and sports teams adjust pricing based on demand for the event. 

• Fast Food: Wendy’s recently announced the implementation of digital menu boards that adjust prices in real-time, considering demand and costs. The company’s desire to implement surge pricing, like Uber and Lyft, has been met with criticism and intrigue.  

• Fine Dining: Some higher-end restaurants charge a premium for reservations during the busiest times of day, reflecting increased demand.   

Businesses are challenged to implement dynamic pricing cost-effectively and ethically.   

Dynamic Pricing Case Study: NYC Congestion Pricing  

New York City recently implemented congestion pricing, a toll of $9+ to drive into Manhattan south of 60th Street. The program is intended to discourage people from driving into Manhattan and instead enjoy the public transit system. For those who must drive into Manhattan and choose to pay the toll, the tolls collected will help fund transit improvements.   

This model illustrates the concept of dynamic pricing—charging different prices based on demand, timing, or other variables. This pricing strategy has become increasingly common across various industries, from transportation apps like Uber and Lyft to restaurants experimenting with surge pricing during busier times of day. Is it fair to charge more for a product when demand is higher and charge less when demand is lower? While this approach can optimize revenue, it raises questions about fairness and cost-benefit.  

Lessons from NYC Congestion Pricing 

NYC’s congestion pricing is a case study in behavioral economics. A cost attached to driving into Manhattan is intended to reduce traffic congestion, which was previously nightmarish, and to fund improvements to the robust public transit system. In this case, the extra cost may be necessary since the city's size cannot grow any larger to meet the traffic caused by the increased population. Commuters are unhappy, but the tradeoffs of transit infrastructure developments and reduced traffic may be worth the inconvenience to commuters impacted by the increase. While the first-of-its-kind NYC congestion pricing experiment is too new to assess, businesses can draw valuable lessons from congestion pricing, particularly in industries that manage quickly fluctuating demand.   

Approaches to Dynamic Pricing 

Pricing strategy is one of the most important decisions a business can make. Price too high, and you lose out on customers. Price too low, and you’ll have too many. The goal for business is to increase sales volume without sacrificing quality. To achieve this, businesses employ various pricing tactics. One of the most common pricing strategies in the restaurant industry is bundling, which entails selling multiple menu items as a discounted “combo” menu item. This allows the customer to get more value for their spending and enables the restaurant to increase volume on items that may not have had the same traction individually. Another approach to pricing is cost-plus pricing, in which a business sets prices based on the costs to create an item plus a desired profit margin.  

Jean Hagan, Partner at EisnerAmper, shares her insights on dynamic pricing within restaurants: “The restaurant business has established a form of pricing that considers demand and cost for many years now, which we refer to as weighted potential pricing. Good operators will look at menu items regularly, considering the cost and percentage of sales in the item category to ensure pricing fits the food cost goal”. Transitioning from a periodic review of pricing to dynamic pricing comes with technology, marketing, and operational challenges. Despite the potential challenges, this approach to pricing is already being used in various industries.  

What to Know Before Implementing Dynamic Pricing 

While the benefits of dynamic pricing are clear – optimized revenue that matches demand – its implementation requires careful consideration of the potential costs and hurdles, including:  

• Technology and People: Businesses need reliable technology, such as AI-driven analytics and dynamic pricing software, to monitor demand and adjust prices in real-time. These technologies require upfront investments, ongoing maintenance, and skilled professionals to manage them. The skillsets needed to manage these systems are in high demand, creating a competitive recruiting environment.  

• Processes: Operations may need to be restructured to accommodate dynamic pricing, such as real-time updates to digital menus or ticketing systems.  

• Financial Implications: Businesses need to analyze whether the potential revenue increase from dynamic pricing outweighs implementation costs. Financial planning and forecasting must account for variable pricing scenarios. Technologies that update prices must have access to live demand and cost information.  

• Customer Perception: Maintaining customer trust is critical. Businesses must strike a balance between maximizing revenue and ensuring customers are receiving fair value. Increased cost demands increased value, which can take the form of speedier service, more menu options, faster service time, more convenience, faster delivery, more menu options, improved quality, or other improvements. Clearly communicating the increased value to the customer will improve trust. 

Conclusion 

Dynamic pricing is more than a trend; it is a strategy that is undoubtedly here to stay, with applications growing across industries. From NYC’s congestion tolls to digital menu boards at fast food restaurants to online ticketing systems that consider demand and the type of device you purchase, businesses are finding new ways to adapt to fluctuating demand without increasing production capacity.  

Successful implementation requires more than just ideas; it demands thoughtful consideration of strategy, technology, and people. Partner with a trusted business advisor with experience in your industry to ensure you are well-prepared for the changes brought about by dynamic pricing. Businesses that can implement dynamic pricing as a sustainable tool for growth and innovation will be at the forefront of their industries in the coming years.  

Have questions about implementing dynamic pricing in your business? Reach out to EisnerAmper using the form below to get advice tailored to you.