As I have written before, I have thought a lot about restaurant reservations — why firms offer them and how they change customer behavior. There is an interesting aspect of restaurant reservation: Customers value them but firms give them away (although look out for Next). Furthermore, it costs restaurants something to make them available. How much? Well, that’s discussed in yesterday’s New York Times (Table for 2? Get Ready to Wait in Line, Jun 9. Thanks to Larry Wein sending a link.):
The easy button for many restaurateurs is OpenTable.com, which allows diners to make reservations 24/7 online. “The average restaurant spends $1,500 to $2,000 a month on OpenTable,” said Mr. Brown, of Ed’s Chowder House, adding that restaurants like his pay a setup fee, monthly fees and a fee for every reservation.
In addition, a serious fine-dining experience requires reservationists “12 hours a day, seven days a week,” Mr. Brown said, “a minimum of three people making $30,000 apiece per year plus benefits.”
“Add to that yearly payments of $20,000 in OpenTable fees,” he said. “So by having no reservations, that restaurant saves $125,000 a year.”
So that all hits on the cost side. Reservations also lower the productivity of tables, so there is also a hit in revenue:
Furthermore, while no-reservations restaurants can reach as many as four table turns a night, two may be the maximum for restaurants that take reservations, Mr. Brown said. “So for them, often the only way to cope with increasing costs is to keep charging more money.” That, in turn, can price a restaurant out of its market.
That all fits into the main argument of the article: The soft economy has led to more NYC restaurants not taking reservations. There are several interesting points here. First, there is the question of what is the cart and what is the horse. Do firms forego reservations to lower costs and thus drive demand or do firms pick a lower price and then have sufficient demand that they don’t need reservations? Even if one ignores the overhead of hiring reservationists etc., it may not be worth taking reservations if they do not drive additional sales. A small room and competitive prices can take care of that. Sales are capped by the limited seating so even if reservations could boost demand, there is no way to capture those sales.
A second take on things is that reservations serve to segment the market. Customers that are time sensitive are scared off by long waits and go elsewhere. I, for example, really like Edzo’s in downtown Evanston but I won’t join a line that goes out the door. It is not clear, however, that we need reservations to solve this. To make the case for reservations, one has to argue that the time sensitive are also willing to pay more to cover the higher cost of providing the service. If that is the case, a restaurant not taking reservations could raise its prices, chase away the riffraff, and get more per customer. It would then have lower waits without the higher overhead. The question then is whether Edzo’s would make more charging me and my ilk an extra couple of bucks a burger as opposed to pricing low and having a line out the door.
Having said that, one reason why customers might prefer reservation is risk aversion. When going out to dinner interlocks with getting a babysitter or going to the theater, customer might be willing to pay to limit the uncertainty of when they will sit down. That is, if waiting costs are not simply linear, reservations may add value.
A final thing, can anyone take on OpenTable? Once upon a time there were several firms in the on-line reservation space. OpenTable has survived as the last man standing. There are moves afoot to challenge them. Specifically, Urbanspoon is trying to develop a reservation service (More Ways to Snag That Restaurant Table, May 20, Wall Street Journal). Urbanspoon has some scale and could thus attract a large number of users quickly. However, for restaurants its mostly about cost. Some are willing to try Urbanspoon’s offering simply because it is less pricey than OpenTable — particularly for reservations made through the restaurant’s own web site. I have to admit that I am a little uncertain that this will pay off. It seems too easy for OpenTable to respond. I can’t imagine that any new site would survive a price war with OpenTable given their scale and large number of users.