Revenue management in restaurants

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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 highest revenue possible for the restaurant and also delivering the greatest value to the customer. Without that balance, revenue management type practices will in the long term alienate those customers who feel that the restaurant has taken advantage of them. Revenue management, or yield management, is commonly practiced in the hotel and airline industries. Companies implementing revenue management report increases in revenue of 2 5% over the results of prior procedures.

Restaurant operators have two main strategic levers that they can use to manage revenue: price and meal duration. Price is a fairly obvious target for manipulation, and many operators already offer price related promotions to augment or shift peak period demand (e.g., early bird specials, special menu promotions, happy hours for low demand periods, and minimum cover charges or higher priced menu items during peak periods). More sophisticated manipulations of price include day part pricing, day of week pricing, and price premiums or discounts for different types of party size, tables, and customers.

Managing meal duration is a bit more complicated. One of the difficulties of implementing revenue management in restaurants is that their explicit unit of sale is a meal (or event) rather than an amount of time although one could argue that the true measure of the restaurant’s product is time. While one can estimate a likely mean length for that meal, the actual duration is not set. By comparison, implementing revenue management is much easier for the hotel, airline, cruise line, and car rental businesses, because they sell their services for an explicitly contracted amount of time. Restaurants rarely sell tables for a fixed amount of time, and most restaurants seem reluctant to broach this topic with customers. Moreover, North American restaurateurs cannot even rely on the practice of charging for the cover, which is common in many European countries.

One of the stumbling blocks to successful implementation of restaurant revenue management is the struggle that restaurant operators face in developing internal methods of managing meal duration. In the context of managing meal duration, one should not think only of reducing diners’ average meal length. Quite often the factor interfering with revenue management is the variability in meal lengths, and not just their duration. These issues can be addressed by, for example, streamlining the service delivery process, changing reservation policies, redesigning menus, pacing service processes, and making those processes more efficient. Although customer dining time can be reduced, the issue of how customers will react to the reduction must be addressed.

Reduced dining times can have considerable revenue potential during high demand periods. Consider a restaurant with 100 seats, a $20 average check, a one hour average dining time, and a busy period of 4 h per day. During busy periods, defined as those when customers are waiting for a table, a decrease in dining time can increase the number of customers served and the associated revenue. Under current conditions, the restaurant could theoretically serve 400 customers (240 min/60 min) * 100 seats) and obtain revenue of $8000 (400 customers) * $20 average check). If the average dining time could be reduced to 50 min, the potential number of customers served would increase to 480 (240 min/50 min ) * 100 seats) and the potential revenue would increase to $9600, an increase of 20%. Even small improvements beyond that reduction of, say, 2 min would produce appreciable savings.

References

Kimes, S. (1989). The basics of yield management. The Cornell Hotel and Restaurant Administration Quarterly, 30(4), 15.

Susskind, A. M., Reynolds, D., & Tsuchiya, E. (2004). An evaluation of guests’ preferred incentives to shift time variable demand in restaurants. The Cornell Hotel and Restaurant Administration Quarterly, 45(1), 68 84.

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