Food tech startup Sauce is enabling restaurants to use dynamic pricing to drive up delivery costs.
Sauce is backed by venture capitalist Kevin Novak, who has created high prices for Uber.
The fast food chain said it was able to double its shipping profits by using Sauce at 49 stores.
Venture capitalist Kevin Novak, one of the original data scientists at Uber, invented premium pricing for the ridesharing giant.
Novak, founder and managing partner of Rackhouse Venture Capital, once again touts the benefits of supply and demand based pricing. Only this time it doesn’t encode. He is a seed investor in Sauce, a dynamic pricing startup that uses machine learning to adjust menu prices on delivery orders.
The time is right for the industry.
Raising menu prices to offset shipping costs and rising labor and supply chain costs is becoming standard practice at chains like Chipotle and McDonald’s. Money spent on eating out, including restaurants, rose 8.6% in October compared to last year, according to the Consumer Price Index. Chipotle said prices for delivery orders rose 13% in the third quarter from a year ago.
But “universal price increases are no longer the best strategy” to deal with rising costs, Colin Webb, co-founder and CEO of Sauce, told Insider.
Based in 2020, AI-powered Sauce software can offer different online menu prices for different times of the day based on real-time historical delivery and restaurant ordering patterns.
“In fact, we will be recommending strategies that both increase and decrease prices, and restaurants can choose their preferences or create their own strategies from scratch,” Webb told Insider.
In some cases, “we’ve seen restaurants raise prices by 40% during peak hours,” he said.
“We are trying to make sure that our margins are not severely eroded”
Webb said restaurants are putting more emphasis on dynamic pricing as they face inflationary pressures and a possible recession in 2023.
Sauce works with “hundreds” of restaurants and has “grown more than 700% this year,” the MIT alum said, declining to name a specific number of customers.
Fast food chain Piada Italian Street Food has been using Sauce since June. A case study published by Sauce this month found that the 49-store chain doubled its profit margins and improved its takeaway operations using a dynamic pricing model.
“For our part, we’re trying to make sure our margins don’t go down a lot due to third-party fees,” Jason Profitt, chief technology officer at Piada, said in a case study.
In a subsequent interview with Insider, Profitt said that Piada gave Sauce access to their order history. This allowed Sauce’s machine learning technology to “efficiently train its AI” to know when to raise prices and by how much.
Piada has set a cap on the Sauce markup of 10%.
“Ask-demand pricing allows us to keep this markup lower during periods of low volume and increase it during periods of higher volume,” Profitt said.
Piada said it also took advantage of Sauce’s ability to adjust prices differently for the same menu items in each store, where supply and demand differ in each market.
Piada couldn’t do that when it made “static” markups with its Olo online ordering platform, Profitt said.
When Piada increased shipping prices through Olo, Profitt said there was potential to “scare away our DoorDash guests” at lower volume stores.
Webb said Sauce’s technology has become more flexible this year based on feedback from restaurants. The startup’s technology is automated, but operators can also manually control prices recommended by Sauce.
“We have restaurants that change prices, and weekend prices are different from weekday prices,” Webb told Insider.
“It’s like paying to skip the line”
Andrew Charles, an analyst at Cowen, said in a Nov. 21 note that the restaurant industry has seen record increases in menu prices this year, but “there have been a few instances of consumer resistance to inflated industry prices.”
Webb said that so far, visitors have not complained about paying higher prices for the convenience of on-demand delivery during peak hours.
“It’s like paying to skip the line,” he said.
Based on customer surveys, Piada’s Profitt reported that visitors don’t mind either. In fact, he said, they “talked about a reasonable price” for third-party supplies.
Nowak, whose venture capital firm Rackhouse invested in Sauce last year, says price-cutting features are often overlooked when discussing dynamic pricing.
“I think that dynamic pricing seen with price increases is sort of a false correlation. A lot of times, you know, I think there is an opportunity for consumers to save money,” Novak said.
Sherry Kimes, professor emeritus at the Cornell School of Hospitality, backed Novak, saying dynamic pricing could give consumers “some control” over how they spend their money. For example, on-demand pricing in the aviation industry allows consumers to buy tickets on cheaper days of the week.
However, most consumers don’t like price spikes, she said.
“Research has shown that customers find it unfair to change prices based solely on demand,” Kimes wrote in a recent editorial for QSR magazine.
For restaurants, dynamic pricing is still worth a try.
“Don’t be afraid to experiment,” she wrote. “With digital menus, you just have to try it and see what happens.”
Read the original article on Business Insider