Revenue Management & Dynamic Pricing in Restaurants Ways to Maximize Revenue in Restaurants Maximizing Revenues in Restaurants Improving Efficiencies of Restaurants Examples of Dynamic Pricing in India

1. REVENUE
MANAGEMENT
AND DYNAMIC
PRICING
IN RESTAURANTS Presented by: (group 5)
Nitheesha (pgpj01040)
Rajat (pgpj01043)
Somnath (pgpj01049)

2. About restaurant business:
Owning a restaurant may seem like a glamorous business, and successful restaurateurs can achieve a
measure of fame and fortune. But it is not as easy as it seems like
Considerations before opening a restaurant
• Types
• Franchise
• New Restaurant
• Complexity
• Extensive market research
• Equipment to purchase
• Pricing
• Capacity
• Labor

3. Pricing and Duration positioning of Service industry
• Different industries are subject to different combinations of duration control and variable pricing
• Successful revenue-management applications are generally found in Quadrant-2 industries, because they can
manage both capacity and price.

4. Relatively Fixed Capacity
• Restaurant operators’ approaches to optimizing revenue primarily involve filling
the seats to capacity and turning tables as quickly as possible, but that effort can
be limited by the kitchen, by the menu design, or by staff members’ capabilities
• Seating capacity is generally fixed over the short-term, although restaurants have
some flexibility to crowd a table with an additional seat if necessary
• Adjusting kitchen capacity is more expensive so considered as relatively fixed
• Service capacity can be increased by adding staff or by reducing meal duration,
the limitations of the kitchen & dining room may make that change fruitless.
Thus, although restaurant operators can tweak their capacity, it is essentially
fixed.

5. Predictable demand
• Restaurant demand consists of guests
who make reservations and guests who
walk in. Both forms of demand can be
managed, but different strategies are
required.
• In sum, guests who make reservations
and those who walk in constitute an
inventory from which managers can
select the most profitable mix of
customers.
• To forecast this demand and manage
the revenue it generates, a restaurant
operator needs to compile information
on the percentage of reservations and
walk-ins, guests’ desired dining times,
and likely meal duration.
Time-variable demand
• Customer demand varies by the time of year,
by the week, by the day, and by the day part.
For restaurants, dinner demand may be higher
on weekends, during summer months, or at
particular times during the lunch or dinner
periods.
• Restaurant operators must be able to forecast
time-related demand so that they can make
effective pricing and table-allocation decisions
to manage the shoulder periods around high-
demand periods.
• A special factor for restaurant operators is that
they have to reckon with the length of time a
party stays once it is seated.
• If restaurant managers can accurately predict
meal duration, they can make better
reservation decisions and give better estimates
of waiting times for walkin guests.

6. Perishable inventory
• Restaurant inventory should be thought of as time—or, in this case, the time
during which a seat or table is available. If the seat or table is not occupied for a
period of time, that part of the restaurateur’s inventory perishes.
• Instead of counting table turns or revenue for a given day part, restaurant
operators should measure revenue per available seat hour (RevPASH).
• Many restaurants evaluate managers and servers based on average sales per
customer. This is equivalent to hotels’ measuring effectiveness by ADR without
paying attention to occupancy.

7. Appropriate cost and pricing structure.
• Like hotels, restaurants have a cost structure that features relatively high fixed
costs and fairly low variable costs, although it’s true that an item’s food-cost
percentage is usually higher than the cost of opening a hotel room compared to
the revenues from that room.
• Restaurants must generate sufficient revenue to cover variable costs and offset at
least some fixed costs.
• Nevertheless, restaurants’ relatively low variable costs allow for some pricing
flexibility and give operators the option of reducing prices during low-demand
times.

8. Yield Management in Restaurant Industry
• Yield Management
• Yield management is a variable pricing strategy, based on understanding, anticipating and
influencing consumer behavior in order to maximize revenue or profits from a fixed, time-limited
resource.
• Fluctuate prices in anticipation of consumer demand - charging more to consumers who are willing
to pay more, and charging less to price-sensitive consumers.
• Restaurants use reduced prices and use incentives to attract diners during off-peak time’s e.g.
• Happy hours during early evening.
• Specials on off-peak nights.
• Mondays have become burger night and Tuesdays are taco night, and Wednesdays are 1/2-price
wine night.
• An empty restaurant table is just like an empty airline seat, it is perishable inventory - the longer
they sit empty, the more revenue is lost.

9. • The time is very important in restaurant industry because of the following
reasons
• Perishable Inventory. Empty tables mean lost revenue.
• Low Incremental Costs. Food & drink costs a restaurant about 25%, so there is wiggle room
to cut the price & still make a profit.
• Prices Matter. Competition is fierce and increasingly perceptive diners are sensitive to
changes in price.
• On-Demand Matters. Consumers make decisions fast. Mobile technology allows diners to
assess prices on the move.
• Platform Technology Exists. Price changes are best communicated en masse via a
marketplace. Calculating the "right price" is best achieved via a marketplace. Marketplaces
work best on platforms.
• However, the challenge is creating the real “pull” needed to inspire a guest - i.e. a
well-communicated and intelligently calculated incentive.

10. Yield Management Comparison

11. Measurement Parameter
“Restaurant revenue management can be defined as selling the right seat to the right customer at the right price and for the
right duration.”
The determination of “right” entails achieving both the most revenue possible for the restaurant and also delivering the
greatest value or utility to the customer.
For example:
Hotels measure revenue per
available room-night (RevPAR),
airlines measure revenue per
avail able seat-mile (RPSM)
airlines measure revenue per
available seat hour (RevPASH)

12. RevPASH
It combines information from the average check and seat use (or occupancy) to provide a measure of the flow
of revenue through the system and to indicate how effectively a restaurant is using its productive capacity.
Restaurant Capacity
use
Average
Check(RS)
RevPash (RS
per seat hour)
A 40% 1800 720
B 60% 1200 720
C 80% 900 720
D 90% 800 720
Reliance on seat occupancy as a measure of success might
not be correct as in all the above cases it gives same
RevPash
RevPASH is closely related to the number of turns and the length of the
meal, or service cycle.
100-seat restaurant with its four-hour dinner, say that its average service
cycle is 60 minutes. In that case, the restaurant can potentially handle
400 customers per night. If the average check is $15, its maximum nightly
revenue is $6,000, and its potential RevPASH is $15.
If the meal time can be reduced to 59 minutes, the restaurant can handle
an additional 6.8 customers. If the average check remains at $15, its
potential nightly revenue increases to $6,102 and its potential RevPASH
increases to $15.26 (a 1.7-percent increase).

13. Modelling of Restaurant revenue management
• Ck = no. of tables of size k available
• Dt,k= the expected number of size k parties arriving at time, t,
• Sk,s= the expected duration of phase s for a size k party,
• Sk= ∑(s=1 to SP) Sk,s the expected total service duration of a size k party,
• S’ k,s= ∑(n=s to SP) Sk,n , the expected remaining service duration for a size k party entering phase s,
• Rk= the revenue expected from a party of size k,
• CostQt,k= the cost of postponing service to a party of size k that arrived at time t and is currently in queue,
and
• CostXt,k= the cost of postponing service to a party of size k that is expected to arrive at time t.
To achieve the “right” trade-off between revenue, waiting time, and fairness.
• Max = the maximum number of periods that a party will wait,
• M = a user-defined parameter that controls the trade-off between revenue and waiting time (the higher M,
the higher the importance of the waiting time and
• = a user-defined parameter that controls the trade off between revenue and allowing flexibility in
allocating a size k party to a table of size k’>= k;

14. Variables defining state:
Now: = the current time (in periods),
Qt,k= the number of size k parties that arrived at time t currently waiting in queue,
Ns
t,k= the number of size k parties in service phase s seated at a size k table.
Decision Variables
qt,t’,k,k’= the number of parties of size k, who arrived at time t and are currently in the queue, that should be
seated at a size k’ table at time t’
qdenyt,k = the number of parties of size k, who arrived at time t and are currently in the queue, that are not
currently allocated a seat
xt,t’,k,k’ = the number of parties of size k, out of Dt,k, that should be seated at a size k’ table at time t’ ,
xdenyt,k = the number of parties of size k, out of Dt,k, that are not currently allocated a seat (i.e., not seated
within Max periods),
zq
t,k = the auxiliary variables that allow us to model fairness in the seating decisions,
and
zx
k = the auxiliary variables that allow fairness in the seating decisions

15. Objective function :
The objective is the maximization of expected future revenue while controlling waiting time:
Constraints:
The constraints in the above model are mainly demand, seating capacity, fairness and integrity constraints

16. Revenue management at Prego Italian
restaurant

17. Introduction:
• After the busy lunch hours on a weekday afternoon, John, Prego's
restaurant manager, was looking at the half empty restaurant, feeling
that it was in total contrast to the lunch and dinner hours, especially
during the weekends, when they had to turn away customers. If seats
were occupied during the off-peak hours, more revenue could be
generated. During the peak periods, when customer demand
exceeded the supply of tables and diners were unwilling to wait for
long, Prego was losing revenue and perhaps even future business.
John thought that there should be better strategies in which the
revenue could be increased

18. Background
• Prego is an upscale, trendy, and popular Italian restaurant in Singapore.
• It was rated one of Singapore's Best Restaurants in 2002 by the Singapore
Tatler
• Prego is located right at the heart of Singapore within the Raffles City
complex. Part of the complex are Singapore's largest hotel
• The restaurant industry in Singapore is fiercely competitive
• Singaporeans eat out frequently. Nearly two-thirds (62.9%) eat at hawker
centers (groups of local food purveyors) at least once a week, while 56.9%
patronize neighborhood coffee shops and 10.5% go to restaurants at least
once a week

19. Restaurant Layout

20. Guest Arrival Pattern
Day of Week Arrival Times Dinner Revenue
18.00 18.30 19.00 19.30 20.00 20.30 21.00 21.30 Dinner Revenue
Monday 3 59 88 37 36 24 10 7
Tuesday 15 51 53 51 42 31 36 14 $11,470.39
Wednesday 14 90 73 42 39 73 25 19 $14,658.84
Thursday 24 59 61 53 42 17 8 15 $11,493.06
Friday 10 39 56 75 27 27 46 25 $10,501.53
Saturday 15 117 14 70 51 32 32 14 $13,543.46
Sunday 31 58 53 15 36 19 17 8 $8,052.16
Monday 0 17 56 58 24 24 0 0 $6,462.71
Tuesday 5 48 36 56 76 27 3 12 $13,085.65
Wednesday 25 92 70 51 29 31 25 3 $12,328.54
Thursday 3 44 63 41 37 32 32 3 $11,121.85
Friday 22 76 44 100 53 15 24 7 $12,702.21
Saturday 39 93 90 93 59 42 31 8 $14,398.04
Sunday 14 95 31 53 27 36 0 20 $10,230.51
Day of week
18.00 18.30 19.00 19.30 20.00 20.30 21.00 21.30
Dinner Revenue
$10,301.32
• approximately 15 to 30 customers could not be accommodated immediately for dinners from Tuesdays to
Saturdays.
• approximately 33% did not wait and left for other restaurants.
• Diners with reservations were rarely turned away, as all reservations were accepted and honored.

21. Course Timing
Courses timed included
(1) arrival to seating/drinks, (2) seating/drinks to food order, (3) food order to appetizer, (4) appetizer to entrée,(5)entrée to dessert/coffee, (6) dessert/coffee to
check request, (7) check request to check clearance, (8) check clearance to leaving table, and (9) arrival to departure. During busy periods, the restaurant will take
an average of nine minutes (with a standard deviation of 6 minutes) after guest departure before each table is being bussed.
Arrival Times
Day of Week 12.00 Duration (STD) 12.30 Duration (STD) 13.00 Duration (STD) 13.30 Duration (STD)
Monday 1:14 (0:29) 1:01 (0:20) 0:51 (0:17) 0:22 (0:05)
Tuesday 1:23 (0:21) 1:19 (0:28) 1:15 (0:26) 0:49 (0:07)
Wednesday 1:12 (0:41) 1:05 (0:22) 0:53 (0:12) 0:30 (0:05)
Thursday 1:28 (0:30) 1:13 (0:44) 0:49 (0:15) 0:20 (0:05)
Friday 1:10 (0:34) 1:17 (0:23) 0:50 (0:19) 1:20 (0:11)
Saturday 1:04 (0:25) 1:19 (0:22) 0:50 (0:07) 1:22 (0:22)
Sunday 1:09 (0:18) 1:25 (0:34) 1:17 (0:19) 1:19 (0:27)
Arrival Times
18.00 Duration 18.30 Duration 19.00 Duration 19.30 Duration 20.00 Duration 20.30 Du
Day of Week (STD) (STD) (STD) (STD) (STD) (STD
Monday – 1:22 (0:24) 1:13 (0:38) 1:08 (0:27) 1:11 (0:19) 0:46 (0
Tuesday 1:58 (0:25) 1:09 (0:23) 1:10 (0:31) 1:27 (0:40) 1:34 (0:33) 1:14 (0
Wednesday 1:23 (0:38) 1:15 (0:39) 1:13 (0:34) 1:08 (0:40) 1:21 (0:24) 1:09 (0
Thursday 1:20 (0:08) 1:11 (0:33) 1:12 (0:43) 1:32 (0:41) 1:18 (0:37) 1:16 (0
Friday 1:20 (0:27) 0:48 (0:29) 1:23 (0:31) 1:22 (0:43) 1:11 (0:40) 1:02 (1
Saturday 1:20 (0:25) 1:20 (0:42) 1:10 (0:27) 1:07 (0:44) 1:25 (0:24) 1:18 (0
Sunday 0:55 (0:22) 0:50 (0:30) 1:23 (0:45) 1:17 (0:28) 1:10 (0:30) 1:20 (0
Day of Week
Wednesday Thursday Friday Saturday
Course Timing Duration (STD) Duration (STD) Duration (STD) Duration (STD)
Arrival to Seating/drinks 0.03 (0.01) 0.04 (0.02) 0.03 (0.02) 0.03 (0.01)
Seating/drinks to Food Order 0.05 (0.02) 0.04 (0.01) 0.04 (0.02) 0.04 (0.03)
Food Order to Appetizer 0.09 (0.02) 0.10 (0.04) 0.11 (0.03) 0.09 (0.03)
Appetizer to Entrée 0.15 (0.05) 0.14 (0.08) 0.16 (0.04) 0.14 (0.04)
Entrée to Dessert/coffee 0.30 (0.10) 0.31 (0.08) 0.28 (0.05) 0.32 (0.07)
Dessert/coffee to Check Request 0.14 (0.04) 0.31 (0.08) 0.18 (0.08) 0.16 (0.03)
Check Request to Check Clearance 0.03 (0.02) 0.03 (0.02) 0.03 (0.01) 0.04 (0.02)
Check Clearance to Departure 0.02 (0.01) 0.03 (0.02) 0.04 (0.03) 0.03 (0.01)
Arrival to Departure 1.21 (0.124) 1.24 (0.129) 0.04 (0.03) 1.25 (0.090)
Lunch Dinner

22. Revenue per Available Seat Hour
• the highest RevPASH being achieved between 12.30 and 1.30 p.m., and between 7.00 p.m. and 9.00 p.m.
• The afternoon period between 2.30 p.m. and 5.30 p.m. showed very little activity.
$14.0
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23. Strategy to maximize profit :Managing Demand
A successful revenue-management strategy is predicated on effective control of
customer demand.
Strategic Levers
• Duration management and
• Demand-based Pricing

24. Reducing Uncertainty of arrival
• Restaurant managers have always struggled with not knowing whether or how
many guests will show up.
• Restaurateurs have long taken reservations to gain a forecast of arrivals, but that
does not eliminate uncertainty of arrival and sometimes the restaurant faces the
prospect of unused seat-hours.
• The primary external approach is to shift the liability for arrival to the customer
by doing such things as asking for deposits

25. Reducing Uncertainty of Duration
• A restaurant operator who has dealt with the arrival-time issue must still be
able to forecast meal length accurately, because this variable is the one that
controls the number of tables available.
• A restaurateur can work toward consistency of duration through menu design,
process design, labor scheduling, and communication tools.
• The increased revenue resulting from faster table changeovers made possible
by extra bussers or servers may more than compensate for the increased
personnel costs.
Reducing changeover time
• Reducing the amount of time between customers (changeover time), increases
capacity and revenue. This tactic will not offend a departing customer and
should please the customers who are waiting to be seated.

26. Duration management
To allow for better revenue-management opportunities, restaurant managers must
increase control over the length of time customers are occupying their seats
Redefining duration
The length of time that guests use a table is usually measured either by the number
of or
• Hours that they actually occupy that table or
• Events relating to a meal
Most restaurant operators will have to keep track of the length of time that guests
occupy a table during given day parts. From those observations the restaurateur
could determine an average meal length, while also noting any variation in meal
length.
That is, the restaurant operator needs to know the average length of a meal, plus
how close to the average most diners come. Wide variation of meal lengths

27. Price Management
• When price is used as a tool of revenue management, managers must think beyond
happy hours and two for- one specials and develop methods for offering differential
prices that make sense for the demand level at a given time.
• Issue is weather could restaurants implement some kind of pricing differential for busy
times (e.g., Saturday night) and slack times.
• Early bird specials are a step in this direction, as are special prices for affinity
groups and frequent diner clubs.
• The next step is to create an overall demand-management program based in part
on time sensitive pricing.

28. Fences
• Restaurant operators might take into account the following attributes in
developing price fences
• Physical attributes include table location, party size, menu type, and amenities or
• Intangible rate fences include group membership or affiliation, time of day or week,
meal duration, presence or timing of the reservation (e.g., whether the party is a
walk-in), and whether the reservation is guaranteed.
• The purpose of intangible rate fences is to shift demand from busy times to slow
periods, to reward regular and reliable customers, and to schedule the highest-
margin business at the busiest times.
• As long as the variable costs of the meal are covered, managers should consider
offering discounts and other benefits for dining during off-peak times.

29. other examples:
Starting with all prices starting at retail prices, the prices of your favourite drink rise in direct proportion to
its consumption over a period of time at the bar. Every increasing peg/pint/shot/glass ordered by a patron
increases its value margin, to be brought down once again if time is on your side (if orders for the same
drink decrease over a period of time).