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Kimes rest.revenue mgt.1.26.04

  1. 1. CHR Reports CORNELLRestaurantRevenueManagement by Sheryl Kimes, Ph.D.The Center for Hospitality Research A T C O R N E L L U N I V E R S I T Y
  2. 2. Restaurant Revenue ManagementThank you to our generous corporate supporters! Partners and Sponsors AIG AIG Global Real Estate Investment Bartech Systems International Cendant Corporation Cornell Hotel Society Foundation MARSH The world’s #1 risk specialist™ Four Seasons Hotels and Resorts Kohinoor Marsh’s Hospitality Practice Nestlé Willowbend Golf Management Wyndham International Friends ARAMARK Lodging Hospitality Smith Travel Research DK Shifflet & Associates Hotel Asia Pacific National Hotel Executive The Hospitality Research Group Hotel China Magazine of PKF Consulting Global Hospitality Hotel Interactive, Inc. Resort+Recreation The Lodging Conference Resources, Inc. Hotel Resource TravelCLICK Hospitality World Lodging Magazine Shibata Publishing Co. Ltd. The Center for Hospitality Research CORNELL AT C O R N E L L 2 • Cornell Center for Hospitality Research U N I V E R S I T Y School of Hotel Administration Cornell University Ithaca, NY 14853
  3. 3. Restaurant Revenue Management Executive Summary Restaurant Revenue Management by Sheryl E. KimesTHE PRINCIPLES OF REVENUE MANAGEMENT CAN BE APPLIED TO RESTAURANTS, given that the restaurant’sunit of sale is the time it takes for a complete meal cycle, rather than just the meal itself. Moreover,restaurants have classic characteristics that invite revenue-management strategies (those characteristicsbeing relatively fixed capacity, perishable inventory, a demand inventory, time-variable demand,appropriate cost structure, and segmentable customers). When a restaurant’s operation is gauged bythe time-related measure called revenue per available seat-hour, or RevPASH, managers can analyzeoperations and menus to improve that statistic. Using RevPASH allows managers to capture more ofthe restaurant’s actual performance in their analysis than does average check or typical food- or labor-cost percentages. Restaurateurs have available two general sets of strategic levers to build RevPASH, which is thegoal of restaurant revenue management. Those key levers are duration management and demand-based pricing. Pricing approaches involve setting prices according to customers’ demand characteris-tics, such as whether they are willing to dine off peak or whether they are not as concerned aboutprice as they are about the dining experience. Pricing strategies must be approached carefully to avoidthe appearance that the restaurant seeks to gain at the expense of customers (which customers view asunfair). Typically, this means adjusting menus to offer discounts and specials that, while they offermore value to the customer, may well make as strong a contribution to revenue as other, higher-pricemenu items that cost more to serve. That is the province of menu engineering. Duration management helps restaurateurs gain control of the most erratic aspect of theiroperation, which is the length of time customers sit at a table (including the rate at which customerswill arrive to occupy that table). Among the tactics available for duration management are reducingthe uncertainty of arrival, reducing the uncertainty of duration, and reducing the time between meals.Whether the restaurant accepts reservations or serves customers as they arrive, its manager needs tohave a sense of when customers are most likely to appear. That is a matter of creating a forecastbased on the restaurant’s history and of carefully managing reservations (if the restaurant acceptsthem). Although a restaurateur cannot directly control the customer’s use of a table, careful processcontrol and analysis can make the restaurant’s operations (including menu design, kitchen operation,and service procedures) as effective as possible for moving the meal along, and perhaps indicating tothe customer when it is time to leave. As an example, Chevys Arrowhead, a Phoenix-area restaurant, used revenue-management leversto improve its revenue through process control. Seeking to augment revenue and also to improvecustomer service, the restaurant analyzed its operations and its customers’ characteristics. It foundthat its table mix (mostly 4-tops) was inappropriate for its customer base (mostly singletons andcouples). It also found that it could tighten up its post-meal procedures, particularly those involvingsettlement. The restaurant was reconfigured, servers were retrained, and certain key positions wereadded. The result was an increase in revenue (from higher occupancy) that paid for the increasedcapital costs in one year. The revenue improvement in this instance was to guests’ advantage, sincemenu prices were not changed as part of this revenue-management implementation. Cornell Center for Hospitality Research • 3
  4. 4. Restaurant Revenue Management CHR Reports: Restaurant Revenue Management is produced for the benefit of the hospitality industry by The Center for Hospitality Research at Cornell University Gary M. Thompson, Executive Director Glenn Withiam, Director of Publication Services Advisory Board Roger Cline, Chairman and CEO, Roundhill Hospitality Richard Cotter, EVP, Hotel and F&B Operations, Wynn Resorts Bjorn Hanson, Ph.D., Global Hospitality Industry Managing Part- ner, PricewaterhouseCoopers Jo-Anne Kruse, SVP, Human Resources, Cendant International Craig Lambert, President, Fieldstone Group Mark V. Lomanno, President, Smith Travel Research Gordon S. Potter, Ph.D., Associate Professor, Cornell University Janice L. Schnabel, Senior Vice President, Marsh’s Hospitality Practice David A. Sherf, SVP, Real Estate and Investment Analysis, Hilton Hotels Corporation Judy A. Siguaw, Ph.D., J. Thomas Clark Professor of Entrepreneurship and Personal Enterprise, Cornell University Barbara Talbott, EVP Marketing, Four Seasons Hotels and Resorts Elaine R. Wedral, President, Nestlé R&D Center and Nestlé PTC New Milford R. Mark Woodworth, Executive Managing Director, The Hospitality Research Group Peter Yesawich, Ph.D., President and CEO, Yesawich, Pepperdine, Brown & Russell Restaurant Revenue Management is CHR Reports, Vol. 4, No. 2 (February 2004) Single copy price US$50.00 Copyright © 2004 by Cornell University4 • Cornell Center for Hospitality Research
  5. 5. Restaurant Revenue Management Restaurant Revenue Management by Sheryl E. KimesR ESEARCH IN REVENUE MANAGEMENT has traditionally addressed the theoretical and practical strategic problems facing airlines and hotels, among other industries, but it has given little consideration to the restaurant industry. Therestaurant business is similar enough to hotel and airline operations that restaurantsshould be able to apply revenue-management-type practices in a strategic fashion, butthe applications have so far been mostly tactical. A broad theory of revenue manage-ment would permit restaurant operators to gain the benefits of strategic revenuemanagement that they currently lack. My objective in this report is to customers will be able to make their pur-develop a framework for such a theory and chases at the peak times that they discuss and demonstrate how that theory The application of revenue management hascan work in practice. After reviewing the been most effective when it is applied tonecessary conditions for revenue manage- operations that have the following character-ment, the strategic levers available for istics: relatively fixed capacity, perishablerevenue management, I will explain how inventory, a demand inventory, time-variablethose strategic levers, along with some demand, appropriate cost structure, andtactical tools, can be applied to restaurants. segmentable customers.2 As I explain next, these attributes are generally found in some Defining Revenue Management form or another in the restaurant industry.Revenue management is the application of Relatively fixed capacity A restaurant’s capacity.information systems and pricing strategies to capacity can be measured by number ofallocate the right capacity to the right cus- seats, kitchen size, menu items, or staffingtomer at the right place at the right time.1 In levels. Most restaurant operators’ ap-practice, revenue management has meant proaches to optimizing revenue primarilydetermining pricing according to predicted involve filling the seats to capacity anddemand levels so that price-sensitive custom- turning tables as quickly as possible, but thaters can achieve a favorable price by purchas- effort can be limited by the kitchen, theing at off-peak times, while price-insensitive menu design, or staff members’ capabilities. 2 1 B.A. Smith, J.F. Leimkuhler, and R.M. Darrow, “Yield S.E. Kimes, R.B. Chase, S. Choi, E.N. Ngonzi, and P.Y. Lee,Management at American Airlines,” Interfaces, Vol. 22, No. 1 “Restaurant Revenue Management,” Cornell Hotel and Restaurant(1992), pp. 8–31. Administration Quarterly, Vol. 39, No. 3 (June 1998), pp. 32–39. Cornell Center for Hospitality Research • 5
  6. 6. Restaurant Revenue Management Seating capacity is generally fixed over tion requests. During high-demand periods, the short term, although restaurants have operators may choose to reject low-value some flexibility to crowd a table with an requests, for instance, while during low- additional seat if necessary, and the demand periods, managers may choose to restaurant’s cost of adding additional capac- accept such requests. ity in the forms of tables or seats (say, by While many restaurants take reserva- reconfiguring the dining room or seating tions, a majority of restaurants do not do so, diners in the lounge) is lower than that of preferring instead to manage a queue when many businesses that typically use revenue demand exceeds supply. Indeed, while management. Most restaurants have a fixed reservations help a restaurant sell and number of tables, but can vary the number control its inventory, they are not without of seats depending on the mix of party sizes. problems. As I discuss later, no-shows, late- In addition, some restaurants might increase shows, and short-shows are all problems in capacity during pleasant weather by using the restaurant industry, which is why some outdoor dining. restaurants choose to rely on walk-in busi- Perishable inventory One might think inventory. ness rather than take reservations. of a restaurant’s inventory as being its supply Time-variable demand Setting aside demand. of raw food, but most of that is not perish- carry-out activities as a separate business, able until it is removed from the freezer or is restaurant demand consists of guests who sitting on the receiving dock. Instead, a make reservations and guests who walk in. restaurant’s inventory is best thought of as Both forms of demand can be managed, time—or, in this case, the time during which albeit with different strategies. Strategic a seat or table is available. If a seat is not differences notwithstanding, guests who occupied for a period of time, that part of make reservations and those who walk in the restaurant’s inventory perishes. This is constitute an inventory from which managers the key to the strategic framework that I can select the most profitable mix of custom- present here, and it is the element that I ers. To do this, however, restaurant opera- believe has been missing in most approaches tors must forecast customer demand and to restaurant revenue management. Instead manage the revenue generated from that of counting table turns or revenue for a given demand. day part, restaurant operators should Restaurant demand has two compo- measure revenue per available seat hour nents: namely, the timing of the demand and (RevPASH). This measure captures the time the duration of that demand (that is, how factor involved in restaurant seating. long the meal lasts). As in most businesses, Demand inventory Demand can be inventory. customer demand varies by time of year, day inventoried either by taking reservations or of week, and time of day. For restaurants, by creating queues of waiting guests. Most dinner demand may be higher on weekends, industries that employ revenue management during summer months, or at particular use reservations (or advance sales) to create a times during the lunch or dinner periods. demand inventory. Reservations are valuable Restaurant operators must be able to because they give an operator the opportu- forecast time-related demand so that they nity to sell and control his or her inventory can make effective pricing and table-alloca- in advance of consumption (often with tion decisions. advance payment for that consumption). In A special factor for restaurant opera- addition, companies that take reservations tors is that they have to reckon with the have the option to accept or reject reserva- length of time a party stays once it is seated.6 • Cornell Center for Hospitality Research
  7. 7. Restaurant Revenue ManagementThis factor is analogous to a hotel’s having to of those measures captures sufficientforecast the number of guests who will stay information about a restaurant’s revenue-an additional (unscheduled) night, but the generating performance.hotel still is selling an integral room-night to Having a restaurant manager concen-the stayover guest and not dealing with the trate only on a high average check, foroften-unpredictable period that diners will instance, is equivalent to a hotel’s focusingstay at a table. If restaurant managers can solely on achieving a high average room rate.accurately predict meal duration, they can Just as ADR omits consideration of occu-make better reservation decisions and give pancy, a restaurant’s revenue performancebetter estimates of waiting times for walk-in cannot be evaluated without information onguests. seat occupancy. A high average check may Appropriate cost structure Like hotels, structure. even be an indication of detrimental prac-restaurants have a cost structure that features tices in times of strong demand if, forrelatively high fixed costs and fairly low example, customers are encouraged to lingervariable costs, although it’s true that a menu over their meal with coffee and dessert whileitem’s food-cost percentage is usually higher other parties wait for a table.than the variable-cost percentage associated Similarly, a manager’s achievingwith a hotel room. Like hotels, restaurants specified food-cost and labor-cost percent-must generate sufficient revenue from each ages is laudable, but that does not tell thesale to cover variable costs and offset at least entire story. In particular, the margin is not asome fixed costs. Nevertheless, restaurants’ measure of profitable use of a restaurant’srelatively low variable costs allow for some capacity. A restaurant manager can do apricing flexibility and give operators the good job of maintaining margins and still beoption of reducing prices during low- unprofitable, especially since an overempha-demand times. sis on margins can lead to a propensity to Segmentable customers Like hotels, customers. focus unduly on minimizing costs. Again,restaurants have some customers who are reducing cost is fine, but not when thatprice sensitive and others who are not. For causes reduced revenue due to disgruntledexample, certain customers (for instance, customers.students, families with small children, or The extent to which available seats arepeople on fixed incomes) may be willing to occupied is another commonly appliedchange their dining time in exchange for a measure of success, since a busy restaurant isdiscounted price. Conversely, other custom- generally a revenue-producing restaurant.ers are not at all price sensitive and are often Relying on seat occupancy as a measure ofwilling to pay a premium for a desirable table success suffers from problems similar toat a desirable time. Restaurant operators those of relying on hotel-room occupancy (inneed to be able to identify these two seg- the absence of consideration of ADR),ments and design and price services to because high use does not necessarily meandifferentiate them and meet their needs. high revenue. A restaurant can run at 90- percent of capacity and still not make money Measuring Success: if menu items are sold at too low a price, for The Case for RevPASH example, or, more generally, if checkRestaurant managers are typically evaluated averages are too such measures as the check average and 3 Much of this section comes from S.E. Kimes, “Implementingthe food- and-labor-cost percentage that the Restaurant Revenue Management: A Five-step Approach,” Cornell Hotel and Restaurant Administration Quarterly, Vol. 40, No. 3manager has been able to achieve. 3 Neither (1999), pp. 16–21. Cornell Center for Hospitality Research • 7
  8. 8. Restaurant Revenue Management desired time period (e.g., hour, day-part, day) by the number of seat-hours availableExhibit 1 during that interval. For example, assumeSample calculations of RevPASH that a 100-seat restaurant makes $3,000 on Fridays between 6:00 and 8:00 PM. Its Seat Average check RevPASH for those hours would be $15Restaurant occupancy (per person) RevPASH ($3,000/100 seats/2 hours). A 40% $18.00 $7.20 Managing Demand: Strategic Levers B 60% $12.00 $7.20 Restaurants appear to possess the conditions C 80% $9.00 $7.20 necessary for revenue management, but D 90% $8.00 $7.20 there is little evidence that most restaurants use a strategic approach for applyingNote: Mean dining times are assumed to be one hour in all cases. demand-management mechanisms. 4 A successful revenue-management strategy is predicated on effective control of customer demand. I have alluded to the two strategic Because it embraces capacity use and levers that restaurant managers have at hand check averages, revenue per available seat- to manage demand, and thus, revenue. hour (RevPASH) is a much better indicator Those are duration management and of the revenue-generating performance of a demand-based pricing. restaurant than are the commonly used Duration management As I men- management. measures that I just discussed. RevPASH tioned above, restaurant operators typically indicates the rate at which revenue is gener- face an unpredictable duration of customer ated and captures the trade-off between use, which inhibits their ability to manage average check and facility use. If occupancy revenue. To allow for better revenue- percentage increases even as the average management opportunities, restaurant check decreases, for instance, a restaurant managers must increase their control over can still achieve the same RevPASH. the length of time that customers occupy Conversely, if a restaurant can increase the their seats. To do this, restaurateurs can average check, it can maintain a similar refine the definition of duration, reduce the RevPASH with slightly lower seat occupancy. uncertainty of arrival, reduce the uncertainty Exhibit 1 gives an illustration of this of duration, or reduce the amount of time principle. The four hypothetical restaurants between customers’ meals (see Exhibit 2). in the exhibit all have the same RevPASH Redefining duration The length of duration. for the hour in question ($7.20), but each time that guests use a table is usually mea- achieves it in a different manner. Restaurant sured by the number of minutes or hours A has a seat occupancy of 40 percent and an that they actually occupy that table or by the average check of $18, while Restaurant D events relating to a meal (e.g., by the course has a seat occupancy of 90 percent but an or by the full meal). In either case, the average check of $8. Restaurants B and C restaurateur must know how long a typical also achieved a RevPASH of $7.20, but with guest will stay at a table in a given day part or varying seat occupancy and average-check meal. When duration is defined in terms of statistics. 4 S.E. Kimes and R.B. Chase, “The Strategic Levers of Yield The easiest way to calculate RevPASH Management,” Journal of Service Research, Vol. 1, No. 2 (1998), is to divide revenue (or profit) for the pp. 156–166; Kimes et al., op. cit. 8 • Cornell Center for Hospitality Research
  9. 9. Restaurant Revenue ManagementExhibit 2Methods of managing duration Uncertainty of arrival Uncertainty of duration Internal measures Internal measures Reservations policies Changes in the service delivery system Arrival management Labor scheduling Optimal table mix Menu design Communication systems External measures External measures Deposits Pre-bussing Guaranteed reservations Visual signals Reconfirmed reservations Coffee and dessert bar Check deliverya meal rather than as the time to complete a Instead, most restaurant operatorsmeal, the operator must be able to predict must keep track of the length of time thatmeal length so that selling a meal essentially guests occupy a table during given day parts.becomes selling a certain length of time. From these observations, the restaurateur On the surface, restaurants sell meals, could determine an average meal length,rather than explicitly selling time—although a while also noting the extent of variations infew restaurants actually do sell blocks of time meal length. That is, the restaurant operator(e.g., seating parties every two hours, with a needs to know the average length of a meal,reminder to leave when the time is up). In plus how close to the average most dinersreality, restaurant operators sell time in the come. Wide variation of meal lengthsform of meals of reasonably predictable (known as a high standard deviation) makeslength. This could be done directly, in forecasting more difficult and perhaps callstheory, by asking customers how long they for management efforts to make the durationwill need the table when they make a more consistent.reservation or request a table, but such anapproach would require a radical change in Uncertainty of Arrivalthinking for both restaurateurs and custom- Arrival uncertainty can be reduced throughers. Even though that approach would reservation and arrival-management policiesexplicitly change the definition of duration and by developing and implementing anfrom the meal itself to the time involved in optimal table mix. The key to reducingeating the meal, the tactic would put off most arrival uncertainty is to understand theguests—other than those who have a specific timing and volume of customer arrivals. Thisdate or appointment after the meal. information can be used to develop forecasts Cornell Center for Hospitality Research • 9
  10. 10. Restaurant Revenue Management that can assist with the establishment of good or of reaching someone who is not knowl- reservations and walk-in policies and with edgeable in how to take a reservation. developing an optimal table mix. Restaurants handle this problem in two ways: (1) dedicated reservation agents and (2) on- Reservation Policies line reservations. As I said earlier, restaurants that take Dedicated reservation agents not only reservations must contend with possible no- reduce the load on other staff members who shows, short-shows, or late-shows, while might respond to reservation calls, but also operators who do not take reservations must provide increased accessibility and consis- predict how many guests will arrive and tency. Obviously, retaining dedicated when they will do so. Given a choice, a no- reservation agents may be cost prohibitive reservation policy is probably preferable, but for small operations, but may be quite in many situations, particularly in fine-dining worthwhile for high-volume restaurants. On-line reservations provide complete accessibility, consistent service, and an Given the choice, a no-reservation policy enhanced reach at a minor cost—approxi- might be best, but that’s not always possible. mately $1 per person seated. While this cost may seem high to some operators, the cost is relatively low, given that the labor costs restaurants, customers expect to be able to associated with reservation agents can be make a reservation, so accepting reservations reduced and the restaurant can have in- is often a market necessity. creased exposure to a potentially larger Most reservations are made directly market. with the restaurant, although on-line reserva- Reservations are not without problems. tions are increasingly being made (e.g., The fact that a customer makes a reservation, If a restaurant does not ensure that the customer will honor takes reservations, its managers must decide that reservation. Even if the customer shows on the number of tables to allocate to each up, there is no assurance that the customer time slot and determine the desired interval will arrive on time or with the promised between reservations. The number and size number of customers. Because reservations of tables to allocate to each time slot de- are unpredictable, they must be managed— pends on the mix of walk-in and reservation either internally (with techniques not involv- business and on staffing levels. Little re- ing customers) or externally (involving search exists on the optimal number of customers). The primary internal approach tables to allocate to each time slot, but the is overbooking, while external methods focus should be on spreading demand include requiring deposits, guarantees, and throughout the meal period, and if possible, the reconfirmation of reservations. shifting demand to off-peak periods (see No-shows The primary internal No-shows. below for a more detailed discussion of approach to handling no-shows is demand shifting). The desired interval overbooking, a technique used by most between reservations will be dictated accord- capacity-constrained service industries. ing to the expected meal duration by party Restaurants have typically not used size. overbooking to offset no-shows, but have When customers call the restaurant for instead relied on walk-in business as a a reservation, they risk the possibility of buffer—although this strategy works only if calling during hours the restaurant is closed enough walk-ins arrive at the right time.10 • Cornell Center for Hospitality Research
  11. 11. Restaurant Revenue Management The key to a successful overbooking Restaurants using credit-card guarantees havepolicy is to obtain accurate information on addressed this problem by charging guestsno-shows, cancellations, and walk-in guests who fail to honor their reservations a statedso that managers can set levels of fee (typically, $15 to $25 per guest).overbooking that maintain an acceptable Rather than require deposits or credit-level of customer service. A manager can use card guarantees, some restaurants use a lesssimple mathematical models to develop obtrusive, more service-oriented method ofappropriate overbooking policies by time of reducing no-shows. These operators callyear, day of week, and time of day. A good their customers during the day to reconfirmoverbooking policy balances the cost of their reservations for the evening to come.unused tables with the cost of inconvenienc- The call reminds the customer of theing or displacing a party—bearing in mind reservation and gives the customer thethat a guest denied a reserved table may not chance to cancel on the spot, if need be. Thebe especially forgiving. Along that line, calls also create a reasonably solid forecast ofrestaurants that use overbooking must the number of parties who intend to honordevelop good internal methods for selecting their reservation. For this approach to beand handling displaced guests. Operators in successful, the incremental personnel costother industries base their displacement associated with calling customers should bedecision on time of arrival (if customers are offset by the increased revenue associatedlate, their reservation is no longer honored), with a reduction in no-shows.frequency of use (regular customers are Late-shows Restaurants can manage Late-shows.never displaced), or perceived importance late-shows by establishing and communicat-(important, high-spending customers are ing maximum hold times for tables. Whennever displaced). the reservation is made, customers can be As I indicated above, requiring credit- informed that their table will be held for acard guarantees and deposits are external specified period after the time of theirapproaches to reservation management, as is reservation—at which time the table will becalling customers to reconfirm reservations. made available to any waiting party. Such aRestaurants have long required a deposit for policy, if clearly communicated, can helpspecial meals (e.g., Mother’s Day, New reduce late-shows and help protect theYear’s Eve), although the practice may meet restaurant from the resulting idle capacity. Awith customer resistance during low-demand restaurant with a RevPASH of $30 (or $0.50periods. Similarly, many fine-dining restau- per minute) would, for instance, lose $60rants in large cities have started to require a during busy periods (i.e., when customerscredit-card guarantee for reservations on are waiting) for a 4-top that is held 30busy nights. Hotels and airlines have used minutes for a late-arriving party.guaranteed reservations for many years and Short-shows Short-shows are more Short-shows.have been able thereby to reduce the difficult to handle, especially, say, when thenumber of no-shows. One problem with customer ordered only appetizers at dinnercredit-card guarantees in the restaurant time and then abruptly left. In that situation,industry, though, is that unlike hoteliers who after all, the customer honored the reserva-can require one night’s room rate to secure a tion, but merely left before making a “com-reservation, restaurateurs lack knowledge on plete” purchase. Theoretically, customersexactly how much the reserving party will could be charged a per-person fee for short-spend on dinner and so cannot charge the shows, but in practice, this policy wouldspecific price of the lost meal for no-shows. probably not be well accepted. Hotels face a Cornell Center for Hospitality Research • 11
  12. 12. Restaurant Revenue Management similar problem when customers stay for a ahead of time and scheduled an additional shorter time than they have reserved. Early server, but the party never showed up. departure fees have met with customer Meanwhile, the restaurant had turned away a resistance. Some hotels handle this problem number of potential guests. by forecasting the percentage of guests who Another approach to reservations is to leave early and overbooking accordingly. accept reservations only during off-peak periods. Customers placing a high priority Alternative Reservation Policies on reservations may choose to book at an Some restaurants do not expressly accept off-peak time and others may be willing to reservations, but do use call-ahead seating forgo a reservation and take their chances on that allows customers to put their names in securing a table upon arrival at their desired the queue, sometimes with an estimated time. Disney restaurants use a “priority” arrival time. Such a policy can be effective seating approach, in which guests can reserve for customers who know how to use it, but a table only during off-peak times and can then, upon arrival, be seated at the next available “right-size” table. Restaurants that do not accept reservations Without Reservation must be able to forecast and manage the Restaurants that do not accept reservations quantity and timing of their demand. and rely on walk-ins to fill their seats must be able to forecast the quantity (how many parties of various sizes) and timing (the time can be confusing and potentially frustrating of day) of walk-ins and must have well- to those who do not know about the tele- developed arrival-management policies. In phone policy. For example, if a party has addition, a table mix that reflects the compo- been waiting for a while and sees a later- sition of the party mix (for example, a fair arriving party being seated, those who are number of 2-tops in restaurants that have waiting may be unhappy and frustrated. Even many small parties) is essential. if the call-ahead seating policy is explained, Improved forecasting The POS forecasting. that may not always placate the dissatisfied system is the best source of information on guest. In addition, call-ahead seating can the quantity and timing of walk-ins, even distract the host or hostess from the neces- though it carries the built-in liability of sary functions of greeting and seating guests showing only when a check is opened and already at the restaurant. not when guests arrived or were seated. Some restaurants take reservations Nevertheless, POS information can be used only for large parties, which allows the to develop reasonable forecasts of arrival restaurant to prepare the table ahead of time patterns by time of day and party size. and reduce the wait for that party. Then Sophisticated forecasting methods are not again, if the restaurant does not require a necessary; even a simple average of the guarantee (either with a credit card or number of parties of two that arrived on deposit), it can end up with empty seats Fridays between 6:00 and 7:00 over the past when it could have been serving waiting three or four weeks is sufficient. This customers. One operator that I know of forecast can then be used to improve the accepted a reservation from a party of 20 for restaurant’s seating and greeting functions. a Friday night at 7:00 PM but did not require Improved arrival management The management. a guarantee. The manager set up the table host or hostess is essentially the restaurant’s12 • Cornell Center for Hospitality Research
  13. 13. Restaurant Revenue Managementrevenue manager. Frequently, though, wait), while others prefer to overestimaterestaurants place inexperienced employees wait time (so that customers are pleased thatin this position. Such an approach may keep they don’t have to wait as long), but alabor costs down, but it can impair revenue reasonably accurate wait time is essential tosince that particular employee may not be customer satisfaction. If the host or hostess ismatching parties to tables with revenue yield inexperienced, it is even more important toin mind. For example, if a host or hostess provide guidance on how to properly quoteregularly seats parties of one or two at 4-tops, wait times.the revenue effect during busy periods willbe substantial. Optimal Table Mix Along that line, policies for determin- An optimal table mix is one which providesing the order in which customers should be a set of tables that closely matches the mix ofseated must also be developed. Most party sizes. 5 For example, if 50 percent of allrestaurants use first-come, first-served parties are parties of one or two and theseating, in which the parties that arrived first restaurant has only 4-tops, the revenueare seated before later arrivals, but this can potential of the restaurant will be dimin-be a thorny matter. The policy could ished. One of the major advantages of abackfire, for instance, if the first party on the table mix that matches the customer mix iswait list is a party of two and the open table is that it takes much of the guesswork out ofa 6-top. As in the case of Disney, some which party to seat at which table. In addi-restaurants deal with this problem by tion, an optimal table mix will minimizeadapting the first-come, first-served rule to customers’ waiting time, but might requireone of first-come, first-served at the next staffing changes. If the optimal table mix has“right-size” table. Although such a policy more tables than the original mix (as isseems logical, it may diminish customer usually the case), the restaurant may need tosatisfaction. schedule more servers than previously. Also, Some restaurants assign a variety of the increased seat occupancy associated withside-work duties to hosts and hostesses, an optimal table mix may increase the loadincluding handling take-out orders and on the kitchen.answering the phone. Such an approach can A simple and effective way of deter-work during slow times, since not many mining a restaurant’s optimal table mix iscustomers will be arriving at the restaurant, first to determine its party mix. Those databut it can be dangerous during busy periods. can be obtained through either the POSDuring busy periods, the host or hostess system or through observation. Once this isshould remain at the reception stand to done, the operator needs to determine theensure that all guests are greeted promptly appropriate table size for each party size.and seated or, if necessary, placed on thewait list. In addition, during busy periods, it 5 G. M. Thompson, “Optimizing Restaurant-table Configura- tions: Specifying Combinable Tables,” Cornell Hotel andmay be wise to have multiple hosts or Restaurant Administration Quarterly, Vol. 44, No. 1 (Februaryhostesses or use seaters to take guests to 2003), pp 53–60; G. M. Thompson, “Optimizing a Restaurant’stheir tables. Seating Capacity: Use Dedicated or Combinable Tables?,” Cornell Hotel and Restaurant Administration Quarterly, Vol. 43, No. 3. It’s important for the host or hostess to (June 2002), pp. 48–57; S.E. Kimes and G.M. Thompson,be able to give accurate wait-time estimates “Restaurant Revenue Management at Chevys: Determining the Best Table Mix,” Cornell University School of Hotel Administra-to arriving guests. Some restaurants prefer to tion working paper 04-23-03; and S.E. Kimes and G.M.underestimate wait time (in the hope that Thompson, “An Evaluation of Heuristic Methods for Determiningpotential guests won’t be scared off by a long the Best Table Mix in Full-Service Restaurants,” Cornell University School of Hotel Administration working paper 09-04-02. Cornell Center for Hospitality Research • 13
  14. 14. Restaurant Revenue Management This is merely logic: parties of one or two requests to accept, and restaurants with a should be seated at 2-tops, parties of three or large walk-in trade will be better able to four at 4-tops, and so forth. Because most provide accurate estimates of waiting time restaurants have relatively few truly large for guests in the queue. In addition, a parties, it’s probably best to just lump any reduction in meal duration during busy large parties into one category (e.g., 8+ periods can increase seat occupancy and people). table turnover and can lead to increased Research has shown that an improved revenue. table mix can increase revenue potential by As stated at the outset, one of the up to 35 percent without an increase in difficulties of implementing revenue manage- customers’ waiting time. In addition, the ment in restaurants is the fact that their combinability and layout of the table mix can explicit unit of sale is a meal (or an event) matter. For example, many operators believe rather than an amount of time, although one that having only 2-tops can lead to better could argue that the true measure of the results because the tables can be combined restaurant’s product is time. While the likely into any necessary configuration. A simula- length of a meal can be estimated, its actual tion study by Gary Thompson found, duration is not firmly set. Reduced dining however, that while combinable tables work times can have considerable revenue poten- well for small restaurants, large restaurants tial during high-demand periods.7 Consider do better with a variety of dedicated, non- a restaurant with 100 seats, a $20 average combinable tables.6 check, a one-hour average dining time, and a In addition, research has shown that busy period of four hours per day. During changing the table mix each night (as busy periods, defined as those when custom- needed) in a busy restaurant can increase ers are waiting for a table, a decrease in revenue by 1.2 percent. This has consider- dining time can increase the number of able promise for restaurants that are busy for customers served and the associated rev- all meal periods or are busy each night of the enue. Under the assumptions I just gave, the week. If the party-size mix varies by meal restaurant could theoretically serve 400 period or by night, it might be worthwhile to customers during its four-hour busy time develop and change the table mix on a (240 minutes/60 minutes * 100 seats), regular basis. Some restaurants might also assuming all 100 seats were occupied four want to consider changing the table mix for times for exactly one hour each time. That certain busy days such as Valentine’s Day or would result in revenue of $8,000 (400 Mother’s Day. customers * $20 average check). If the average dining time could be reduced to 50 Uncertainty of Duration minutes, the potential number of customers A restaurant operator who has dealt with the served would increase to 480 (240 minutes/ arrival-time issue must still be able to predict 50 minutes * 100 seats), and the potential meal length, because this controls the revenue would increase to $9,600, an number of tables available. With this increase of 20 percent. The question of how information, operators of reservations-based customers would react to such changes, restaurants can decide which reservation however, causes restaurant operators to approach time decreases with caution. 6 See: Gary M. Thompson, “Dedicated or Combinable? A If customers think that dinner takes too Simulation to Determine Optimal Restaurant Table Configura- long (because the service is lax), they may tion,” CHR Reports, Cornell University Center for Hospitality Research, 2003 ( 7 Kimes, op. cit.14 • Cornell Center for Hospitality Research
  15. 15. Restaurant Revenue Managementchoose not to return to a restaurant. Simi- rants have considerable latitude in adjustinglarly, if customers believe that dinner is too meal duration without upsetting customers.short, they may feel shortchanged or rushed As with arrival time, restaurant opera-and also may not return. The expected tors can exert control over meal duration.dining duration is affected by a number of Internal approaches in this case revolvevariables, including the type of restaurant, around setting up systems and training tothe reason for dining (e.g., special occasion, make the meal length shorter and moreentertainment, routine), and the characteris- consistent, while external approaches involvetics of the diners (e.g., nationality, age,income, frequency of dining out, andamount of free time). For example, consider Reducing meal duration offers great potentiala couple who decide to dine out for theiranniversary. They select what they perceive for increasing restaurant revenue, especiallyto be the nicest restaurant in town and during busy periods.expect to make an evening of the meal. Ifthey go to the restaurant and they are hustledthrough dinner in only an hour, they may encouraging guests to give up their table evenfeel shortchanged. if they are not really ready to leave and There’s no question that diners have a choose to linger elsewhere in the restaurant.specific idea of how long their meal should By reducing time variability, managerslast. In that regard, my associates and I will be better able to give accurate estimatesconducted a survey to find out how long of waiting time for those in the queue andcustomers think a dinner with friends at a determine whether and for what timecasual restaurant should take.8 On average, reservations should be accepted. A restaura-customers expected the meal to last for teur can manage duration by concentratingabout one hour. Interestingly, the expecta- on menu design, service-delivery design,tions varied by nationality: Asian respon- labor scheduling, and communication tools.dents gave the shortest expected dining time, Menu design Some restaurants have 57 minutes; North Americans’ expecta- redesigned or established their menutions averaged 59 minutes; and Europeans according to the preparation and consump-thought the meal should last about 77 tion time for each menu item. Menu itemsminutes. that exceed the established target for prepa- The same research team also asked ration or consumption are either recon-questions about the length of time consid- figured or eliminated from the menu. Like-ered to be short, too short, long, and too wise, menu items that cause customers tolong. The expected dining time of 60 linger can be eliminated if those items do notminutes was much higher than the time contribute to an increase in RevPASH.considered to be short (30 minutes) or too Improved service processes The key processes.short (23 minutes). The average time to improving service processes is to carefullyconsidered to be long was 82 minutes, while observe your current front-of-the-housethat considered to be too long was 93 procedures and target specific areas forminutes. This indicates that casual restau- improvement. The meal experience can be broken into three segments: pre-process, in- 8 S.E. Kimes, J. Wirtz, B.M. Noone, “How Long Should process, and post-process. The pre-processDinner Take? Measuring Expected Meal Duration for Restaurant segment includes the time from when theRevenue Management,” Journal of Revenue and PricingManagement, Vol. 1, No. 3 (2002), pp. 220–233. customer is seated until the first course is Cornell Center for Hospitality Research • 15
  16. 16. Restaurant Revenue Management delivered; the in-process segment starts when payment process, the check return, and the first course is delivered and concludes guests’ departure. Generally, once guests when the check is requested; and the post- request the check, they are ready to leave the process segment includes the time from the restaurant. Anything that the restaurant can when check is requested until the customer do to speed the check-processing time will departs. enhance guest satisfaction and reduce dining The largest opportunities for improve- duration (again, without unduly rushing the ment generally come during the pre-process guest). and post-process stages. Luckily, these are Staffing Redesigning the menu and Staffing. also the parts of the meal that most guests procedures, in conjunction with improved prefer to move along, and so the operator forecasts of customer arrivals, should does not have to worry too much about improve labor scheduling, which is a key guests’ feeling rushed in those segments. As element in controlling meal duration. I’ve mentioned, care must be taken when Restaurateurs’ common desire to minimize trying to speed up the in-process segment. labor costs may backfire if reduced staffing The pre-process segment consists of leads to slower table turnovers and longer seating the guest, greeting the guest, taking meal times. The increased revenue resulting the drink order, delivering drinks, taking the from faster table changeovers made possible food order, and delivering the first course. by extra bussers or servers may more than compensate for the increased labor costs. Implementing a revenue-management strategy would help a restaurant operatorThe greatest chances for tightening the dining determine appropriate staffing levels.process are before and after the meal—which Communications Some restaurants Communications. have improved communication systems most guests also would like to move along. among employees and have increased control by tracking the connection between food preparation and food delivery. By Problem areas in this segment generally setting up appropriate communication include delays in greeting the guest, delays in mechanisms, kitchens can notify servers that delivering the drinks, and delays in taking a course is ready for pick up and servers can the food order. If an operator can figure out notify bussers that a table is ready to be ways to reduce delays of that kind, meal cleared, thereby speeding the meal service duration will drop and customer satisfaction (usually to the guests’ delight) and making it will most likely improve. possible to improve RevPASH. To assist The concerns regarding the in-process with employee communication, some segment are primarily to keep focus and restaurants have used information technol- maintain the pace. The operator must ogy such as headsets and table-management ensure that food is delivered in a timely systems. fashion, that the timing of the courses is appropriate, and that the guest does not feel External Approaches rushed. Pre-bussing can and should occur, Part of duration management involves but guests should not feel as if they are being finding ways to signal to guests that it is time pushed out the door. for them to relinquish their table. Customers The post-process segment consists of who unexpectedly linger after their meal may the check request, the check delivery, the interfere with seating the next party. A16 • Cornell Center for Hospitality Research
  17. 17. Restaurant Revenue Managementrestaurant can use both implicit and explicit waiting and a 4-top has not been bussed andsignaling devices to remind guests that the sits vacant for five minutes, it costs thatmeal is over. Many restaurants use subtle restaurant $20. When viewed this way, theimplicit approaches such as bussing the cost of an additional busser to promote atable, dropping off the check, or offering quick turn seems minor. (Bear in mind,valet service. In a few restaurants, customers however, that the $20 in question is revenue,are asked to specify how long they plan to and not necessarily contribution, a fact thatstay, but that is rare. Instead, the restaurant should be considered in looking at the valuemanager must rely on timing the courses and of the busser.)other implicit signals to remind the customer Managers can do a number of things tothat the meal has ended. ensure that changeover time is minimized. Explicit approaches risk customer ire. First, they should insist that bussers andA manager obviously cannot directly ask servers work as teams and do a good job ofcustomers to leave, but the restaurant could pre-bussing the table. The fewer items left onattempt other, less offensive methods of the table when the guests depart, the easierturning the table. Some restaurants in the and faster it will be to clear and reset thetheater district of New York City, for table. In addition, as I indicated, pre-bussing,instance, place an hourglass on each party’s if not overly aggressive, can send a reason-table. When the sand in the hourglass is ably subtle signal to customers that it is timegone, patrons have a visual cue to finish to relinquish the table.dinner and leave so that they will not be late Clear communication among bussers,to the theater (and, not incidentally, release servers, and hosts helps bussers and serversthe table). know when a table is ready to be cleared and reset, and those employees should, in turn, Reducing Changeover Time notify the host so that he or she can find theReducing the amount of time between next party to be seated at that table. Somecustomers (changeover time) increases restaurants use technology such as table-capacity and revenue. This tactic will not management systems to facilitate thisoffend a departing customer and should communication process, but as long as aplease the customers who are waiting to be clear line of communication is established,seated. As an example, reducing changeover technology is not always necessary.time has become a common strategy in the Management should also analyze andairline industry. Southwest Airlines and streamline the process of clearing andRyanAir both boast 20-minute aircraft resetting tables to minimize changeover time.turnarounds and have thereby been able to Again, it helps to think of an idle table asincrease plane use. Cabin employees at potential revenue. Anything that can be doneSouthwest, for one, actually enlist passen- to shrink this time, whether it is having pre-gers’ assistance in clearing the cabin by rolled flatware and napkins, easily accessibleasking them to hand over discarded newspa- tablecloths, or well-placed glassware, canpers and other trash that usually would be help the restaurant increase revenue.left in the seatback pouch. A quick-turn When customers are waiting at busystrategy suits the restaurant industry. The restaurants, one of the major stumblingmanager of a fine-dining restaurant in Las blocks to reducing the changeover time isVegas with a RevPASH of $60 knows, for locating the next party to be seated. Someinstance, that each seat in his restaurant restaurants use technology (such as loud-generates $1/minute. If customers are speakers or hand-held signaling devices) to Cornell Center for Hospitality Research • 17
  18. 18. Restaurant Revenue Management quickly notify guests, but this technology is many restaurants seem to do so by offering not appropriate for all restaurants, since variable prices, usually based on the time of customers don’t always respond well to such day (e.g., the early bird special) or the day of approaches. If hosts know which tables will the week (e.g., the Friday fish fry). Such be available and know where to find the next variable pricing, however, cannot necessarily party, they can find the party ahead of time be said to constitute revenue management in and have the customers ready to be seated as the absence of a customer-focused strategy. soon as the table comes up. Otherwise, if The three chief methods for setting prices hosts wait for notification that a table is are cost based, demand based, and competi- ready, it may take some time to find the tively based. Revenue management typically party, some time for the party to settle or involves demand-based pricing, but some transfer its account in the bar (if that’s where companies practicing revenue management the customers are waiting), and some time to use other types of pricing strategies, as well. walk the party to the table. Again, it helps in Cost-based pricing Restaurants have pricing. this context to think of an idle table as traditionally used cost-based pricing, in potential revenue being squandered. It may which the cost of the menu item’s ingredi- be worthwhile to hire an additional seater to ents is first calculated and then multiplied by handle this process. some constant (usually about 3) so that the restaurant can maintain a certain food-cost Pricing percentage (usually about 30 percent). While The key to any successful revenue-manage- it is certainly important to track costs, a cost- ment strategy is to offer multiple prices to a based pricing approach can lead to sub- variety of market segments, as appropriate. optimal results, particularly in situations in For example, movie theaters often offer which customers are willing to pay more lower prices to seniors and children at than the cost-based price. In addition, it may certain times of the day or on certain days of be worthwhile in some situations to offer a the week. Similarly, the airline industry lower price in an attempt to stimulate offers a wide variety of prices on the same demand (of course, assuming that all costs route depending on the time, method, and would still be covered). itinerary for the booking. That means, for Demand-based pricing Demand-based pricing. example, that economy passengers flying pricing is based on the notion of responding from Los Angeles to Singapore may pay to guests’ demand characteristics, in particu- nothing (by using frequent-flyer miles) to lar their response (or lack thereof) to over $1,500 for the same seat. changes in prices. As an example, a resort in To apply this multiple-price approach Malaysia catered to three major market to the restaurant industry, managers must segments: Europeans, Japanese, and groups answer two questions: what prices should be from other parts of Asia. The segments charged, and who should pay which price? varied in price sensitivity: the Europeans and The answers to those two questions are Japanese were not price sensitive, while the affected by the answer to a third question— Asian groups were extremely price sensitive. how will customers react to variable prices? This hotel operated three restaurants: a buffet restaurant, a sit-down Asian-style Setting the Price restaurant, and a sit-down steak and seafood Revenue management is often associated restaurant. The average check per person with manipulating prices according to was about $12 in the buffet restaurant, $15 in demand characteristics. On the surface, the Asian restaurant, and $30 in the steak18 • Cornell Center for Hospitality Research
  19. 19. Restaurant Revenue Managementand seafood restaurant. The price-sensitive menu engineering, the contribution marginAsian groups preferred to eat in the buffet (selling price less the cost) and the numberrestaurant, and the non-price-sensitive of units sold of each menu item are calcu-Europeans preferred the sit-down Asian lated and plotted on a graph. The menurestaurant, in which they could get “safe” items are then divided into the following fourlocal food. Upon careful reflection on the categories: (1) Stars: above-average contribu-price sensitivity of the resort’s different tion margin and above-average volume;markets, the manager decided to increase (2) Cash cows: below-average contributionthe prices at the Asian restaurant by 30 margin and above-average volume;percent. The decision was well taken, as (3) Question marks: above-average contribu-there was no decrease in that restaurant’s tion margin and below-average volume; andvolume, so revenue and profit increased by (4) Dogs: below-average contribution margin30 percent. and below-average volume. Stars and cash One version of demand-based pricing cows are good candidates for potential priceis charging a relatively high price during high- increases since they both have high demand,demand times and a lower price during low-demand times. As an example of thatapproach, a restaurant in Singapore experi- The key to any successful revenue-managementenced extremely high demand on weekendsand much lower demand during the week. strategy is to offer multiple prices to a variety ofThe managers decided to develop a special market segments, as appropriate.weekend menu that featured prices that were25-percent higher than during the week.Once again, the restaurant suffered no while question marks may be possible itemschange in volume, so weekend revenue and for price decreases.profit increased by 25 percent. Restaurants that use menu engineering Both examples illustrate uses of generally review their results each monthdemand-based pricing. The hotel in Malay- and make necessary price adjustments. Ofsia used information on the price insensitiv- course, this necessitates the printing of newity of its European customers to change menus, but that cost is generally minimal andprices in the restaurant considered most should be more than covered by the associ-attractive by those guests, and the ated revenue increase.Singaporean restaurant realized that it was Competitive pricing Some restaurants pricing. 9underpricing its high-demand periods. set their prices according to competitors’ Menu engineering supports another prices. For example, if they offer a grilledform of demand-based pricing.10 With fish, they make sure that their price is similar 9 A cautionary note: Increasing prices, as in the cases cited to that of their competitors. If their grilledhere, must be handled carefully. At no time should a restaurant (or fish is slightly better or if the atmosphere ofany other hospitality operation) be seen as price gouging or takingunfair advantage of customers by raising prices in times of stressful their restaurant is more upscale, they mayor emergency situations. charge a slight premium over the competi- 10 For a discussion of menu engineering, see: Lee M. Kreul,“Magic Numbers: Psychological Aspects of Menu Pricing,” Cornell tion. On the other hand, if their grilled fish isHotel and Restaurant Administration Quarterly, Vol. 23, No. 2 not quite as good or if the restaurant is less(August 1982), pp. 70–75; David K. Hayes and Lynn Huffman, upscale, they might offer a slightly lower“Menu Analysis: A Better Way,” Cornell Hotel and RestaurantAdministration Quarterly, Vol. 25, No. 4 (February 1985), pp. 64– price. Competitive pricing, which is preva-70; and David V. Pavesic, “Prime Numbers: Finding Your Menu’s lent in the hotel and airline industries, can beStrengths,” Cornell Hotel and Restaurant Administration Quarterly,Vol. 26, No. 3 (November 1985), pp. 70–77. successful, but companies that use competi- Cornell Center for Hospitality Research • 19
  20. 20. Restaurant Revenue Management tive pricing seem to assume that their level for a given time. As a rule, restaurants competitors have set their prices correctly. If offer the same menu prices regardless of the this assumption is untrue, the use of com- customer’s demand characteristics. Perhaps petitive pricing could be dangerous. the question for restaurateurs is whether they Need for experimentation Successful experimentation. could implement some kind of pricing price increases are often associated with differential for busy times (e.g., Saturday experimentation. The cost of printing a new nights) and slack times. Early bird specials menu is relatively low, and a new menu with are a step in this direction, as are special new prices can easily be tested. If customer prices for affinity groups and frequent-diner reaction is negative, the new menu can be clubs. The next step is to create an overall withdrawn, and if customer reaction is demand-management program based in part neutral or positive, the menu can be contin- on demand-based pricing. ued. Offering nightly specials allows a Unfair? Restaurant operators are often restaurant to experiment with different prices reluctant to use demand-based pricing and menu items in a non-threatening way. because of the potential customer backlash stemming from perceptions of unfair Who Pays Which Price? conduct. If increased prices cannot be In differential-pricing systems, the question justified in some way (say, by menu items of which customers pay which price is that obviously have high production values usually addressed through the use of rate or by offering other desirable conditions), fences.11 Hotels and airlines use rate fences customers may view demand-based-pricing to offer discounts on inventory that might policies as unfair. The issue of fairness has otherwise not be sold at all to customers who been studied extensively in a variety of might otherwise not purchase that inven- industries. In general, it has been found that tory—while at the same time preventing fair behavior on the part of operators is customers who were going to buy anyway instrumental to the maximization of their from taking advantage of a discount that they long-term profits. did not actively seek. For example, the Consumers may perceive demand- familiar airline or hotel rate fences include based pricing as being unfair for at least two requiring customers to make their reserva- reasons. First, they may view charging high tion in advance, prepay for their reservation, prices during high-demand times as exceed- or stay over a Saturday night. The fences can ing their reference price, or their reference comprise almost any set of rules as long as price may already have been shifted down they somehow make sense to the customer. because of low prices charged during low- While early bird specials and the like demand periods. In either event, the “new,” constitute rudimentary rate fences, managers higher regular prices may be perceived as must think beyond happy hours and two-for- less fair than before. Second, the restaurant one specials, which do not really discrimi- may not be seen as providing more value for nate the price-sensitive customers from their the higher price. I will first discuss the effect free-spending friends. Instead, restaurateurs that demand-based pricing can have on must develop stratagems for offering differ- consumer reference prices, followed by an ential prices that make sense for the demand examination of the potential effect on the 11 perceived fairness of demand-based pricing. R.B. Hanks, R.P. Noland, and R.G. Cross, “Discounting in the Hotel Industry, A New Approach,” Cornell Hotel and Reference prices I have used the terms prices. Restaurant Administration Quarterly, Vol. 33, No. 3 (June 1992), “reference transaction” and “reference pp. 40–45; and R.J. Dolan and H. Simon, Power Pricing (New York: The Free Press, 1996). price,” which are often used when discussing20 • Cornell Center for Hospitality Research
  21. 21. Restaurant Revenue Managementfairness.12 A reference transaction is how The two overarching categories of ratecustomers think a transaction should be fences are physical and non-physical.conducted, and a reference price is how Physical rate fences for a hotel might includemuch customers think a service (or product) room location, furnishings, and the presenceshould cost. Reference prices can come of amenities or a view. Non-physical ratefrom the price last paid (especially at your fences include time of consumption, transac-restaurant), the price most frequently paid, tion characteristics, buyer characteristics, andand what other customers say they paid for controlled availability. In a restaurantsimilar offerings, as well as from market context, physical rate fences include tableprices and posted prices. For example, location (e.g., a better table commands acustomers may know that they generally pay higher price), view (e.g., tables with a scenicabout $25 for dinner at a particular restau- view cost more), and amenities (e.g., tables inrant, and so their reference price for dinner a private room with fresh-cut flowers costat that restaurant is $25. more). Non-physical rate fences might To assess a transaction’s fairness, include time (e.g., a weekend dinner mightcustomers often rely on reference prices in cost more, or meals consumed before 6:00relation to what they are paying for the PM might cost less), transaction characteristicscurrent transaction. For consumers to (e.g., customers who make a reservation overperceive the price increases inherent in a month ahead of time might pay less), buyerdemand-based pricing as being fair, guests’reference prices would have to shift in linewith the restaurant’s variable-pricing sched- The question of which customers payule. This may be difficult for operators toachieve for two reasons. First, as I just which price is usually addressed throughindicated, the low price used during low- the use of rate fences.demand periods may become the customer’sreference price and may make futurepurchases at the regular or peak rate seem characteristics (e.g., frequent customersunfair. Second, consumers may believe that might pay less or get free-of-charge extras),the restaurant is charging them higher prices and controlled availability (e.g., customersto reap higher profits without having in- with coupons will pay less).creased the customer’s value. Research on rate fences My colleagues fences. Rate fences. Rate fences are designed and I studied the perceived fairness of fiveto allow customers to segment themselves potential rate fences for restaurants—specifi-based on their willingness to pay, their cally, several time-based fences (i.e., differen-behavior, and their needs.13 One chief tial pricing for lunch and dinner, weekdayspurpose of a rate fence is to create customer and weekends, and specific times of the day),segments and justify why different people one physical fence (i.e., table location), andpay different prices. To be perceived as fair, one controlled-availability fence (i.e., twofences need to be logical, transparent, up- meals for the price of one).14 We alsofront, and fixed, so that they cannot be 14 S.E. Kimes and J. Wirtz, “Perceived Fairness of Demand-circumvented. Based Pricing for Restaurants,” Cornell Hotel and Restaurant Administration Quarterly, Vol. 43, No. 1 (2002), pp. 31–38; S.E. 12 Kimes and J. Wirtz. “Has Revenue Management Become D. Kahneman, J.L. Knetsch, and R.H. Thaler, “Fairness Acceptable? Findings from an International Study on theand the Assumption of Economics,” Journal of Business, Vol. 59 Perceiving Fairness of Rate Fences,” Journal of Service Research.(October 1986), pp. S285–S300. Vol. 7, No. 2 (2003), pp. 125–135. 13 Hanks et al., op cit.; Kahneman et al., op cit. Cornell Center for Hospitality Research • 21
  22. 22. Restaurant Revenue Management investigated how customers react to the way ing demand-based pricing using fences, price differences are presented. Specifically, restaurant operators must make sure that the we wanted to know whether a fence framed rate fences are easy to explain and adminis- as a price decrease would be evaluated more ter, and that customers can understand the favorably than the same fence presented as a reasoning behind them. This will make it price increase. Research has shown that easier for front-line employees to pacify presentations that emphasize customer gains unhappy or confused customers. Moreover, are preferable to economically equivalent employees must understand that demand- frames that emphasize customer losses. based pricing is a win–win situation. It needs In that regard, consider a restaurant to be emphasized that variable pricing allows with a static menu that decides to establish patrons to choose prices that suit their two sets of menu prices. The restaurant can needs, and, by having tight fences, a restau- present the price differences in two ways: it rant can ensure that patrons who see high can either present the lunch prices as being value in a good view, a desirable table, or 20-percent lower than the dinner prices eating dinner during peak times are much (framed as a gain from the diner’s perspec- more likely to get the dining experience they tive), or it can present the dinner prices as seek. Accordingly, increased profitability via being 20-percent higher than the lunch demand-based pricing does not have to prices (framed as a loss). The situations are come at the expense of customer satisfaction economically equivalent, but research has and loyalty. shown that customers will view the “re- duced” prices more favorably, and that the Developing a restaurant should frame the price difference Revenue-management Program accordingly. When developing a revenue-management Results We found that restaurant Results. program, a restaurant operator must first patrons consider demand-based pricing in understand current conditions and perfor- the form of coupons (i.e., two for the price mance.15 Following this, the operator must of one), time-of-day pricing, and lunch- evaluate the possible drivers of that perfor- versus-dinner pricing to be fair. Variable mance. This understanding will help manag- weekday-versus-weekend pricing was per- ers determine how to improve RevPASH ceived as neutral to slightly unfair. Table- statistics. Finally, the manager must monitor location pricing was seen as somewhat the effects of changes on revenue perfor- unfair, with potential negative consumer mance. I describe each of these steps below. reaction to that practice. With regard to (1) Establish the baseline. Most manag- framing demand-based pricing as discounts ers know their average check and their labor- or surcharges, we found that demand-based and food-cost percentages, but few can pricing presented as discounts made the accurately gauge their restaurants’ seat differential prices seem fairer in the consum- occupancy or RevPASH. To develop a ers’ eyes, and therefore less likely to have a revenue-management program, operators negative effect on consumers’ perceptions must collect detailed information on arrival, and reactions. seat occupancy, and RevPASH patterns; Our findings provide restaurant party-size mix; meal times; and customer operators with some useful guidelines, but preferences. This information can be those findings do not guarantee that all collected from a variety of sources, including guests will willingly accept demand-based- pricing practices. Therefore, when develop- 15 Much of this section comes from: Kimes, op. cit.22 • Cornell Center for Hospitality Research