What’s the best way to deal with rising costs and increasingly price-aware customers?
Marcus Patel felt a mixture of pride and unease as he stood at the head of the conference table, waiting for his leadership team to gather. Two years ago he’d been recruited from Silicon Valley to lead an ambitious digital transformation at Burger & Bites.
Under his watch, the once-traditional fast-food chain had launched updatable menu screens in all restaurants and a sophisticated mobile app. But today, technology was not his primary concern. Instead, Marcus found himself grappling with something neither his training nor his experience had prepared him for: an unexpected and volatile inflation crisis. “Thanks, everyone,” Marcus began as the team quieted down. “Laura, let’s start with you. What are we looking at?” Laura Ramirez, the Burger & Bites CFO, displayed a slide of financial projections. “Input costs are accelerating far faster than we anticipated,” she reported. “Between the poultry and egg shortage from the bird flu crisis and the most recent tariffs, our margins are getting tight. Only a few of our inputs come from overseas—some of our beef is from Australia and our avocados are from Mexico—but they make up a big part of our ingredient costs. And our domestic suppliers are being squeezed on anything they get from abroad, so they’ve started to raise prices. In sum, the impact is larger than you might think. We’ve seen inflation in recent years, but nothing like this.” Marcus felt a knot in his stomach. Despite his success in bringing Burger & Bites into the digital age, he was already under pressure from several major shareholders to show clear paths to revenue growth and margin improvement, something that seemed even more difficult with this sudden increase in the company’s cost of goods. “Thank you, Laura,” he said, trying to project calm. “I’ve asked Grace to provide some suggestions for how we might respond.” Grace Zhang, the CMO, stepped in smoothly. “In my last role I worked at one of the Big Food giants, and we faced similar pressures. There are several strategies we can deploy quickly. First, we can raise prices across the board. Our new digital menus allow us to do that immediately.” She clicked through to the next slide. “A more subtle strategy is shrinkflation: reduce portion sizes to mitigate costs. Even making burger patties slightly thinner or offering five fewer fries per serving could help preserve margins. Along the same lines, we could use lower-cost ingredients instead of more-expensive ones—dried parsley instead of fresh in the coating for our Italian chicken, for example. Customers might notice, but if we do it correctly, the perception of value remains stable.” “Alternatively,” she continued, showing another slide, “we can renegotiate aggressively with suppliers. We have leverage—Burger & Bites is a significant customer for many of them.” Grace turned to face the team. “And the final option is overseas expansion. Increasing our international footprint in Asia and Europe—by, say, 40%—could hedge against U.S. market volatility and tariffs. That is obviously a longer-term play.” Marcus paused before saying anything. Grace commanded the room brilliantly, and he wanted to give her presentation a second to resonate. “So, does anyone have any thoughts?” he finally asked. “All these options have merit, but we’re missing the obvious solution,” said Jay Washington, the CTO, in his typical brusque tone. Marcus had brought in Jay to help oversee the digital transformation. Like his boss, Jay was an outsider from Silicon Valley; unlike Marcus, he was comfortable delivering direct criticism and openly attacking the entrenched beliefs in the Burger & Bites culture if he felt it was necessary. “We need dynamic pricing,” Jay said. “We invested in digital menu boards precisely because of the flexibility they provide. Sure, we can raise prices on everything and pull them back when it makes sense. But why not go further? Adjust prices in real time based on fluctuating input costs, demand patterns, and other factors. That would capture far more value.” Marcus raised a hand to pause Jay, his eyebrows knitted with concern. Jay had been advocating for dynamic pricing since the menu screen rollout. His department—going well outside its normal remit—had even calculated that it could increase profits by at least 15%. But despite the pressure from investors, Marcus had resisted, choosing to ensure a smooth, glitch-free implementation before attempting anything as bold as algorithm-driven pricing. Beyond that, Marcus remained deeply wary of consumer backlash. Early in his career, his office in San Francisco had been just blocks from Uber’s headquarters when the company’s infamous surge-pricing scandal erupted in 2012—prices had spiked in the New York City area as people tried to flee Hurricane Sandy. People had been angry about it for weeks, convincing Marcus that dynamic pricing could easily alienate core customers. “Thank you, Jay. We’ll consider that as an option.” Marcus took a deep breath, scanning the team. He was reassured by the professionalism and competence with which they were looking to address the inflation crisis. But he couldn’t shake a lingering anxiety. The coming weeks would be crucial, and decisions made now would shape Burger & Bites for years to come. Diving Deeper Marcus settled into his chair, nodding to the two experts he’d invited to brief him on the promise and peril of dynamic pricing. Opposite him sat Elena Shaw, a seasoned consultant known for her extensive experience with alternative pricing models, and Dr. Amira Qureshi, a technology ethicist and marketing professor whose recent TED Talk had made Marcus eager for her perspective. “Dynamic pricing has proven incredibly effective across industries,” Elena began. “Airlines, hotels, ride-hailing services like Uber, even Disney theme parks all adjust their prices to meet demand. As a result, consumers have grown accustomed to price fluctuations, particularly during inflationary periods like the current one. It was a stroke of genius on your part, Marcus, to implement digital menus, which gives you options now.” Elena showed several optimistic projections of how much extra margin Burger & Bites could capture if it adjusted its pricing based on regional demographics, time of day, inventory levels, and even weather, for example by increasing the cost of frozen desserts on hot days and baked goods and coffee on cold ones. Marcus shifted his attention to Amira, sensing her reservations. “Dr. Qureshi, your thoughts?” Amira adjusted her glasses thoughtfully. “Marcus, while the potential benefits are appealing, dynamic pricing isn’t without significant risks. Frequently shifting the menu prices could unwittingly lead to discriminatory practices, with certain groups of people being inadvertently targeted for price changes by the algorithm. Even if it’s unintended, the implications are serious. And that’s not to mention the potential backlash from customers.” Marcus started to respond but was interrupted by Elena. “Price discrimination already subtly exists within the restaurant sector,” she said. “Consider the airport locations Burger & Bites has—prices there are routinely higher due to captive audiences and greater willingness to pay. We’re just considering the natural evolution of that, letting Burger & Bites match pricing with market dynamics.” “Respectfully, I think most consumers will balk at this kind of change,” Amira countered, “especially at a time when there’s so much anger over corporate profit-seeking. The backlash might even come from unexpected quarters. Say you introduce an algorithm that leads to higher pricing in affluent neighborhoods at certain times, for example. The right-wing media ecosystem could pick up on it as reverse discrimination. It could easily go viral.” “Couldn’t we just apologize and reverse course?” Marcus asked. “These things are very hard to undo,” Amira replied. “In 1999, Coca-Cola floated the idea of vending machines with thermometers that automatically raised the price of soda on hot days. It caused a scandal, the company quickly walked it back, and by the end of the year the CEO had resigned, with many media outlets reporting that the gaffe contributed to his departure. Or consider the outrage when the cost of Bruce Springsteen tickets surged on Ticketmaster a few years back due to huge demand. Public sensitivity to perceived unfairness is acute, immediate, and amplified by social media.” “What do you think, Elena?” Marcus asked. “I don’t deny that backlashes can happen,” she said. “But even in such instances, companies have recovered well. Coca-Cola is still doing just fine. Uber, airlines, and hotels are still successful. You don’t need to go all in immediately—you could pilot dynamic pricing discreetly, perhaps through app-based changes that you don’t announce while you fine-tune the system. Remember, younger consumers—Gen Zers and Millennials especially—are digital natives who are generally more accepting of this kind of flexibility.” Marcus considered the idea before turning again to Amira. “Would personalized, app-based dynamic pricing be a safer initial approach?” Her expression remained cautious. “Possibly, but it raises issues around transparency, equity, and consumer trust. If people suspect you’re using hidden individualized pricing, trust could erode rapidly. Customers value transparency and fairness; dynamic pricing, even done in secret, risks compromising those core values.” Marcus sighed. “Thank you both. You’ve given me a lot to consider.” Profit or Purpose? Marcus waited quietly at the front of the small, comfortably furnished conference room. Gathered around him were a handful of trusted franchise owners known as the Inner Grill, an informal advisory group he’d inherited from the previous Burger & Bites CEO. The group met twice a year, away from the larger, more formal franchise meetings. Marcus valued these discussions greatly; he considered franchise owners to be the heart and soul of Burger & Bites, as the company had long chosen franchisees with a passion for serving their neighborhoods and then given them wide leeway for community projects. As he surveyed their familiar, attentive faces, Marcus had a feeling this conversation might be the most consequential one of his tenure. He cleared his throat and kicked things off. “Good afternoon, everyone. It’s always an honor to gather with you all. As you know, we are facing major cost pressures. We’re considering various companywide responses, but there’s one I want to talk about in detail. I’m proud that our recent digital transformation—especially the menu screens and app upgrades—has positioned Burger & Bites to better serve our increasingly tech-savvy customers. And now, with that new technology in place, we face a pivotal decision: Should Burger & Bites implement dynamic pricing?” Araceli Martinez stood to speak first. A franchisee based in Texas, Araceli owned 15 restaurants across three states. She was known widely for her deep community involvement, including scholarship programs for area students and regular meal donations to local shelters. Her voice was firm and filled with conviction. “Marcus, innovation is important, and I fully respect that. However, the legacy of Burger & Bites is rooted in fairness and reliability. Customers across all income levels visit our restaurants, but it’s our lower-income patrons who feel price fluctuations most acutely. This change would affect them the most. Unexpected price hikes could significantly damage the customer loyalty we’ve worked so hard to build.” Devonte Harrison rose next, animated and passionate. A young entrepreneur who had rapidly amassed eight restaurants across Ohio, he was known for ensuring they had high-speed Wi-Fi and charging stations, making them popular hangouts for younger customers. “Marcus, Araceli has valid points, and I think we all share some concerns. But I also think dynamic pricing is the future of our business. Our competitors are already heading in this direction. It’s become the norm in other sectors. Customers will adapt, adjusting their dining habits to times and places that fit their budgets.” John Donohue, a respected figure among the franchisees, stood slowly. His father had been one of the original Burger & Bites owners in Iowa, and he now ran 12 highly profitable locations, renowned for their unwavering support of rural farmers and schools. “If dynamic pricing is inevitable, perhaps we could at least implement price caps to prevent excessive surges. Or, better yet, why not simply raise prices slightly across the board and use dynamic pricing exclusively for promotions and discounts? That way, we reassure customers they won’t face surge pricing.” Marcus exhaled, visibly conflicted. “John, that’s an appealing idea, and certainly worth exploring further. But with the intense pressures we’re facing to boost margins, I’m hesitant to publicly commit to a hard price cap. The reality is, we don’t fully know the revenue we might be leaving on the table—and the market and our investors won’t easily let us forget it.” The room fell silent. Marcus looked around at all the franchisees—deeply committed yet divided on how to proceed. “Let me summarize where we’re at before we break for lunch,” Marcus said. “We have the technology, we’ve seen dynamic pricing work elsewhere, and the financial upside is clear. But the customer trust that Burger & Bites has painstakingly built on fairness, consistency, and community connection is priceless, intangible, and perhaps more fragile than we realize.” Many of the franchisees murmured in appreciation of the sentiment. “So, I guess the question is, What do we do?” His words hung in the air for a long moment. “I would sure pay a lot of money to know the answer,” Marcus concluded, chuckling. The group laughed warmly, grateful for the moment of authenticity. They filed out of the conference room and headed outside, where company shuttles waited to take them to a local Burger & Bites, an Inner Grill tradition. But as Marcus walked to the door, he realized he had lost his appetite. The decision he faced was not just about profits or technology—it was about the identity and integrity of his company. The Experts Respond: Should Burger & Bites move forward with dynamic pricing? Jori Bolton Philip Daus is a partner and the head of the Houston office of Simon-Kucher, a global pricing and growth consultancy. Dynamic pricing is not the right tool for Burger & Bites to use to respond to rising costs, but other tactics might help. While customers have grown accustomed to dynamic pricing for some goods and services, they don’t like to see it in quick-service restaurants . In our recent study of more than 500 frequent QSR patrons, 71% said they viewed the practice negatively. Whether people have walked into a restaurant or sat in a drive-through line, they don’t want to be forced to pay higher-than-expected prices. That’s especially true during periods when the algorithm has determined that demand is high: when everyone is hungry, service probably slower, food less consistent, and tempers short. What’s more, during slow periods, dynamic pricing won’t boost demand, because few people know prices are lower. Customers may end up ordering a larger lunch, but the benefit is small. Marcus could also struggle to push through dynamic pricing with franchisees, since their economic goals typically differ from those of the parent company. While they want to optimize unit-level profit, the chain is chasing market-share growth, traffic, and scale to attract more franchisees and negotiate better supply terms. Fortunately, there are several lower-risk ways to protect margins without undermining loyalty. People ordering through third-party delivery apps already expect fees and some price swings, so Marcus can roll out dynamic pricing through that channel. A well-timed cut could steer users to Burger & Bites before they scroll elsewhere. Next, Marcus can try to squeeze more value from the company’s own app-targeted promotions. For example, use customers’ purchase histories and geolocations to push special offers that feel like a perk. Burger & Bites can pass on some of the increased cost from international suppliers to consumers through clever marketing: maybe a special “Australian grass-fed beef” burger or “fresh avocado” topping. Another option is to map every menu item to the job it performs. Marcus could keep “traffic drivers”—hamburgers and fries—at the same price but apply modest increases to specialty dishes and “veto items,” such as salads, which exist so the health-conscious friend doesn’t veto the group’s visit. Or, use well-designed bundles that add a drink or a side for a small premium. Customers will see the extra value, which makes it easier to quietly increase the average take from orders. Prices can also flex from store to store. A downtown location that feeds office workers or well-off residents can potentially charge more than a rural drive-through. Big chains often leave money on the table by sticking to one national price, rather than using data to truly understand customers’ willingness to pay. Eventually, Burger & Bites could introduce new higher-margin items people will value; think a chicken sandwich with a unique spice mix but cheaper thigh meat. Inflation is then a reason to innovate. Marcus should try new approaches with the channels he already controls—app-driven offers, store-specific prices, and new products—before he hands the till over to an algorithm. Jori Bolton Dave Burwick is the CEO of Spindrift Beverage Company. Marcus isn’t ready to make the decision about dynamic pricing. He needs to more carefully consider how it might impact the company’s value proposition, brand equity, and trust with customers. First, though, credit where it’s due: In a high-pressure situation, he resisted the temptation to fall back on his training and skills as a “tech wizard.” Expectedly, that’s how Jay, the CTO, has responded, by pushing a technological solution without working backward from consumer needs. By contrast, Marcus, as CEO, pulled in a diverse circle of advisers—finance, marketing, tech, franchisees, and outside specialists—and fostered an open, psychologically safe debate. That willingness to listen and filter different viewpoints, rather than dictate, is the mark of a leader on the right path. Now he should sit down with his CMO and ask a blunt question: Why do people trust Burger & Bites? If the answer is quality, consistency, community connection, and no-surprises value, that lens must frame every move. Surge pricing that feels like a tax on loyalty would violate the very promise that draws customers through the door. Then Marcus should try different ways to absorb the cost increases before passing them on to the consumer. At Spindrift, tariffs have hit our imported fruit costs. We went straight to suppliers and negotiated with them to split the pain. The scripting goes something like this: “We’re both in a bind. Tariffs are pushing costs up, and if we pass the full hit to customers, demand will dip and nobody wins.” Marcus can remind the avocado and beef importers that they’ve built a long, successful partnership and that he has a plan to grow Burger & Bites. He can share exactly how his digital menu investment will eventually pay off for them—if consumer prices stay predictable. Few suppliers want to bet against a brand that’s expanding in a flat category. Once supplier talks are underway, Marcus should hunt for internal savings by potentially trimming overhead, scrutinizing freight and packaging, or delaying nonessential capital expenditure. Marketing is off-limits; you can’t cut demand and expect margin to rise. As a last resort, layoffs may be necessary. If there is still a gap, Burger & Bites could raise menu prices across the board, but only after the category leader—likely McDonald’s—goes first. In general, big players move first on price increases since they have the market power to do so; that’s why Walmart has recently talked about tariff-related changes. Burger & Bites can let larger competitors absorb most of the social media heat, then institute a modest 2%–4% bump, keeping its “fair player” image intact. After exploring all of these options, if Marcus still wants to consider dynamic pricing, he can start by experimenting in safe “sandlots,” such as groups of stores or regions. Could Burger & Bites use promotions and discounts to drive traffic that will counter the sales it will lose due to price increases? Could it use the digital menus to increase sales at off-peak hours through lower prices? The goal should be to refill quiet periods and recapture any visits lost to inflation, not to squeeze extra dollars out of customers. Marcus might even enhance brand trust by being fair and transparent with consumers, which in turn will make his franchisees and shareholders happy—a win for all. HBR’s fictionalized case studies present problems faced by leaders in real companies and offer solutions from experts. This one is based on the HBS case study “Dynamic Pricing at Wendy’s: Where’s the Beef?” , by Elie Ofek, Alicia Dadlani, and Martha Hostetter.
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