Revenue management and fine dining

So what’s a good setting for applying revenue management? That’s always a fun discussion to have in class. The answers usually revolve around having some variation in demand (so the service isn’t always in high or low demand) as well as having a limited shelf life (so if we don’t sell it today we can’t sell it tomorrow) and relatively low variable costs (so there is significant room to adjust prices). Air travel, of course, fits this model and airlines have long been big users of revenue management techniques.

Restaurants, however, have rarely used much in the way of revenue management outside of, perhaps, early bird specials and prix fixe offerings. This despite the fact that restaurants have some fairly steep fixed costs and so should welcome a way to add more diners on what would otherwise be a slow night. According to the New York Times, that is now starting to change (When It Comes to Reservations, Time Is Money, Sep 5).

Mr. Mantica’s problem is one that all restaurants puzzle over. Costs (the staff, the food, the flowers, electricity) are pretty much the same whether there is a single diner or a full house.

While airlines and hotels have figured out how to vary prices to fill flights and rooms, restaurants’ methods have largely remained in the icebox age. Now, some restaurants are borrowing a tactic from other hospitality businesses and charging different prices for meals at different times.

The restaurants’ premise is that a dinner at 8 p.m. on Saturday should simply cost more than one at 5:30 on a Monday. “Restaurants are catching up,” said Sheryl E. Kimes, professor of operations management at Cornell’s school of hotel administration. They are betting that consumers, used to paying extra for holiday-weekend flights, V.I.P. seats at the theater or umbrellas on the street after the first raindrop hits, will also pay more for their Friday-night dinners out.

So how can firms do this without offending customers?

The first thing to note is that restaurants fundamentally differ from other parts of the travel and hospitality industry. While it’s theoretically possible to spend more on spa treatments and other amenities than one’s room at a hotel, for most travelers the room rate is the biggest part of the bill. (OK, so casinos would be different.) Similarly, one’s airfare  generally exceeds baggage fees and buying a beer on the plane. Thus a hotel or airline can focus on a basic rate that is set up front and can depend  on when the customer contacts the firm. Restaurants don’t typically have that luxury. What you pay depends on what you order after arrival. Unless you always get the lasagna at your favorite Italian place, you may not know what you will buy until the server comes.

So what can a restaurant do? As the article tells it, the focus is on offering discounts (over imposing premia) to either draw more walk ins or to shift reservation requests. In line with the former is Leloca, which allows restaurants to post offerings that consumers can download to their smart phones. Customers then have 45 minutes to present their downloaded deal code at the restaurant.

An alternative service is Savored, which creates value by drawing more reservations during off-peak times.

Savored, used by more than 1,000 restaurants, asks diners to make reservations online. (It is working on integration into OpenTable, the reservations system used by about 44 percent of reservation-taking North American restaurants.) It offers discounts for the less popular times, usually 15 or 30 percent off a bill. It is applied to the check before it reaches the table, so there are no coupons.

Savored studies a restaurant’s traffic pattern, and those of comparable places, to suggest when to offer discounts: Saturday nights at the Capital Grille, a steakhouse in the Wall Street area, are slow because it attracts a workweek crowd, so all Saturday-night slots are offered at a discount. But at Fatty Crab in the West Village, the only discounted Saturday-night slot is at 11 p.m.

Either of these schemes would plausibly work. Which is better would depend on whether you expect there to be more people in the market for a spur of the moments deal or there to be a lot of people who plan ahead but can be shifted from dining at 7:30 to dining at 6:00. Which is more likely would really depend on the market and maybe even the day of the week.

Both of these systems seem relatively blunt in comparison to what airlines do. Offering a flat discount regardless of whether it is a party of one or four and independent of whether one buys a three-course meal and wine or just an entrée has to be leaving money on the table. I would guess that these offerings may become more sophisticated over time. Restaurants now have systems that allow them to track diners over time (see this article also from today’s Times).  Presumably, all else being equal, restaurants would like to be able to draw in big spenders.

A final point. As we have posted on before, Next here in Chicago sells tickets in lieu of giving out reservations. That allows them to vary prices by time and day of week while totally redoing the cash flow model for the restaurant. That clearly is a more appealing system than offering the occasional discount to early diners.