1. CHR Reports
CORNELL
Restaurant
Revenue
Management
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. Restaurant Revenue Management
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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. Restaurant Revenue Management
Executive Summary
Restaurant Revenue Management
by Sheryl E. Kimes
THE PRINCIPLES OF REVENUE MANAGEMENT CAN BE APPLIED TO RESTAURANTS, given that the restaurant’s
unit 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 characteristics
being relatively fixed capacity, perishable inventory, a demand inventory, time-variable demand,
appropriate cost structure, and segmentable customers). When a restaurant’s operation is gauged by
the time-related measure called revenue per available seat-hour, or RevPASH, managers can analyze
operations and menus to improve that statistic. Using RevPASH allows managers to capture more of
the 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 the
goal 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 about
price as they are about the dining experience. Pricing strategies must be approached carefully to avoid
the appearance that the restaurant seeks to gain at the expense of customers (which customers view as
unfair). Typically, this means adjusting menus to offer discounts and specials that, while they offer
more value to the customer, may well make as strong a contribution to revenue as other, higher-price
menu 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 their
operation, which is the length of time customers sit at a table (including the rate at which customers
will arrive to occupy that table). Among the tactics available for duration management are reducing
the 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 to
have a sense of when customers are most likely to appear. That is a matter of creating a forecast
based on the restaurant’s history and of carefully managing reservations (if the restaurant accepts
them). Although a restaurateur cannot directly control the customer’s use of a table, careful process
control 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 to
the customer when it is time to leave.
As an example, Chevys Arrowhead, a Phoenix-area restaurant, used revenue-management levers
to improve its revenue through process control. Seeking to augment revenue and also to improve
customer service, the restaurant analyzed its operations and its customers’ characteristics. It found
that its table mix (mostly 4-tops) was inappropriate for its customer base (mostly singletons and
couples). It also found that it could tighten up its post-meal procedures, particularly those involving
settlement. The restaurant was reconfigured, servers were retrained, and certain key positions were
added. The result was an increase in revenue (from higher occupancy) that paid for the increased
capital costs in one year. The revenue improvement in this instance was to guests’ advantage, since
menu prices were not changed as part of this revenue-management implementation.
Cornell Center for Hospitality Research • 3
5. Restaurant Revenue Management
Restaurant Revenue Management
by Sheryl E. Kimes
R
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. The
restaurant business is similar enough to hotel and airline operations that restaurants
should be able to apply revenue-management-type practices in a strategic fashion, but
the applications have so far been mostly tactical. A broad theory of revenue manage-
ment would permit restaurant operators to gain the benefits of strategic revenue
management 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 desire.
to discuss and demonstrate how that theory The application of revenue management has
can work in practice. After reviewing the been most effective when it is applied to
necessary conditions for revenue manage- operations that have the following character-
ment, the strategic levers available for istics: relatively fixed capacity, perishable
revenue management, I will explain how inventory, a demand inventory, time-variable
those strategic levers, along with some demand, appropriate cost structure, and
tactical 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 of
allocate the right capacity to the right cus- seats, kitchen size, menu items, or staffing
tomer at the right place at the right time.1 In levels. Most restaurant operators’ ap-
practice, revenue management has meant proaches to optimizing revenue primarily
determining pricing according to predicted involve filling the seats to capacity and
demand levels so that price-sensitive custom- turning tables as quickly as possible, but that
ers can achieve a favorable price by purchas- effort can be limited by the kitchen, the
ing 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. 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. Restaurant Revenue Management
This factor is analogous to a hotel’s having to of those measures captures sufficient
forecast 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, for
often-unpredictable period that diners will instance, is equivalent to a hotel’s focusing
stay 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 performance
better estimates of waiting times for walk-in cannot be evaluated without information on
guests. 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, for
relatively high fixed costs and fairly low example, customers are encouraged to linger
variable costs, although it’s true that a menu over their meal with coffee and dessert while
item’s food-cost percentage is usually higher other parties wait for a table.
than the variable-cost percentage associated Similarly, a manager’s achieving
with 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 the
sale to cover variable costs and offset at least entire story. In particular, the margin is not a
some fixed costs. Nevertheless, restaurants’ measure of profitable use of a restaurant’s
relatively low variable costs allow for some capacity. A restaurant manager can do a
pricing flexibility and give operators the good job of maintaining margins and still be
option 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 that
price sensitive and others who are not. For causes reduced revenue due to disgruntled
example, certain customers (for instance, customers.
students, families with small children, or The extent to which available seats are
people on fixed incomes) may be willing to occupied is another commonly applied
change their dining time in exchange for a measure of success, since a busy restaurant is
discounted 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 of
willing to pay a premium for a desirable table success suffers from problems similar to
at a desirable time. Restaurant operators those of relying on hotel-room occupancy (in
need 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 mean
differentiate 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 check
Restaurant managers are typically evaluated averages are too low.
by such measures as the check average and 3
Much of this section comes from S.E. Kimes, “Implementing
the food- and-labor-cost percentage that the Restaurant Revenue Management: A Five-step Approach,” Cornell
Hotel and Restaurant Administration Quarterly, Vol. 40, No. 3
manager has been able to achieve. 3 Neither (1999), pp. 16–21.
Cornell Center for Hospitality Research • 7
8. Restaurant Revenue Management
desired time period (e.g., hour, day-part,
day) by the number of seat-hours available
Exhibit 1 during that interval. For example, assume
Sample 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 $15
Restaurant 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 applying
Note: 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. Restaurant Revenue Management
Exhibit 2
Methods 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 delivery
a meal rather than as the time to complete a Instead, most restaurant operators
meal, the operator must be able to predict must keep track of the length of time that
meal 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 in
few 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 diners
reality, restaurant operators sell time in the come. Wide variation of meal lengths
form of meals of reasonably predictable (known as a high standard deviation) makes
length. This could be done directly, in forecasting more difficult and perhaps calls
theory, by asking customers how long they for management efforts to make the duration
will need the table when they make a more consistent.
reservation or request a table, but such an
approach would require a radical change in Uncertainty of Arrival
thinking for both restaurateurs and custom- Arrival uncertainty can be reduced through
ers. Even though that approach would reservation and arrival-management policies
explicitly change the definition of duration and by developing and implementing an
from the meal itself to the time involved in optimal table mix. The key to reducing
eating the meal, the tactic would put off most arrival uncertainty is to understand the
guests—other than those who have a specific timing and volume of customer arrivals. This
date or appointment after the meal. information can be used to develop forecasts
Cornell Center for Hospitality Research • 9
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
opentable.com, iseatz.com). 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. Restaurant Revenue Management
The key to a successful overbooking Restaurants using credit-card guarantees have
policy is to obtain accurate information on addressed this problem by charging guests
no-shows, cancellations, and walk-in guests who fail to honor their reservations a stated
so 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 less
simple mathematical models to develop obtrusive, more service-oriented method of
appropriate overbooking policies by time of reducing no-shows. These operators call
year, day of week, and time of day. A good their customers during the day to reconfirm
overbooking 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 the
ing or displacing a party—bearing in mind reservation and gives the customer the
that a guest denied a reserved table may not chance to cancel on the spot, if need be. The
be especially forgiving. Along that line, calls also create a reasonably solid forecast of
restaurants that use overbooking must the number of parties who intend to honor
develop good internal methods for selecting their reservation. For this approach to be
and handling displaced guests. Operators in successful, the incremental personnel cost
other industries base their displacement associated with calling customers should be
decision on time of arrival (if customers are offset by the increased revenue associated
late, 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. When
never displaced). the reservation is made, customers can be
As I indicated above, requiring credit- informed that their table will be held for a
card guarantees and deposits are external specified period after the time of their
approaches to reservation management, as is reservation—at which time the table will be
calling customers to reconfirm reservations. made available to any waiting party. Such a
Restaurants have long required a deposit for policy, if clearly communicated, can help
special meals (e.g., Mother’s Day, New reduce late-shows and help protect the
Year’s Eve), although the practice may meet restaurant from the resulting idle capacity. A
with customer resistance during low-demand restaurant with a RevPASH of $30 (or $0.50
periods. Similarly, many fine-dining restau- per minute) would, for instance, lose $60
rants in large cities have started to require a during busy periods (i.e., when customers
credit-card guarantee for reservations on are waiting) for a 4-top that is held 30
busy 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 the
number of no-shows. One problem with customer ordered only appetizers at dinner
credit-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, customers
exactly 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 would
specific price of the lost meal for no-shows. probably not be well accepted. Hotels face a
Cornell Center for Hospitality Research • 11
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’s
12 • Cornell Center for Hospitality Research
13. Restaurant Revenue Management
revenue manager. Frequently, though, wait), while others prefer to overestimate
restaurants place inexperienced employees wait time (so that customers are pleased that
in this position. Such an approach may keep they don’t have to wait as long), but a
labor costs down, but it can impair revenue reasonably accurate wait time is essential to
since that particular employee may not be customer satisfaction. If the host or hostess is
matching parties to tables with revenue yield inexperienced, it is even more important to
in mind. For example, if a host or hostess provide guidance on how to properly quote
regularly seats parties of one or two at 4-tops, wait times.
the revenue effect during busy periods will
be substantial. Optimal Table Mix
Along that line, policies for determin- An optimal table mix is one which provides
ing the order in which customers should be a set of tables that closely matches the mix of
seated must also be developed. Most party sizes. 5 For example, if 50 percent of all
restaurants use first-come, first-served parties are parties of one or two and the
seating, in which the parties that arrived first restaurant has only 4-tops, the revenue
are 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 a
backfire, for instance, if the first party on the table mix that matches the customer mix is
wait list is a party of two and the open table is that it takes much of the guesswork out of
a 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 minimize
adapting the first-come, first-served rule to customers’ waiting time, but might require
one 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 is
seems logical, it may diminish customer usually the case), the restaurant may need to
satisfaction. schedule more servers than previously. Also,
Some restaurants assign a variety of the increased seat occupancy associated with
side-work duties to hosts and hostesses, an optimal table mix may increase the load
including 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 is
customers will be arriving at the restaurant, first to determine its party mix. Those data
but it can be dangerous during busy periods. can be obtained through either the POS
During busy periods, the host or hostess system or through observation. Once this is
should remain at the reception stand to done, the operator needs to determine the
ensure that all guests are greeted promptly appropriate table size for each party size.
and seated or, if necessary, placed on the
wait list. In addition, during busy periods, it 5
G. M. Thompson, “Optimizing Restaurant-table Configura-
tions: Specifying Combinable Tables,” Cornell Hotel and
may be wise to have multiple hosts or Restaurant Administration Quarterly, Vol. 44, No. 1 (February
hostesses or use seaters to take guests to 2003), pp 53–60; G. M. Thompson, “Optimizing a Restaurant’s
their 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 Determining
potential 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. 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 (www.chr.cornell.edu). 7
Kimes, op. cit.
14 • Cornell Center for Hospitality Research
15. Restaurant Revenue Management
choose not to return to a restaurant. Simi- rants have considerable latitude in adjusting
larly, 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 revolve
variables, including the type of restaurant, around setting up systems and training to
the reason for dining (e.g., special occasion, make the meal length shorter and more
entertainment, routine), and the characteris- consistent, while external approaches involve
tics of the diners (e.g., nationality, age,
income, frequency of dining out, and
amount of free time). For example, consider Reducing meal duration offers great potential
a couple who decide to dine out for their
anniversary. They select what they perceive
for increasing restaurant revenue, especially
to be the nicest restaurant in town and during busy periods.
expect to make an evening of the meal. If
they go to the restaurant and they are hustled
through dinner in only an hour, they may encouraging guests to give up their table even
feel 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, managers
last. In that regard, my associates and I will be better able to give accurate estimates
conducted a survey to find out how long of waiting time for those in the queue and
customers think a dinner with friends at a determine whether and for what time
casual restaurant should take.8 On average, reservations should be accepted. A restaura-
customers expected the meal to last for teur can manage duration by concentrating
about 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
design.
at 57 minutes; North Americans’ expecta- redesigned or established their menu
tions 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 items
minutes. 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 to
long. The expected dining time of 60 linger can be eliminated if those items do not
minutes 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 carefully
considered to be long was 82 minutes, while observe your current front-of-the-house
that considered to be too long was 93 procedures and target specific areas for
minutes. 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-process
Dinner Take? Measuring Expected Meal Duration for Restaurant segment includes the time from when the
Revenue Management,” Journal of Revenue and Pricing
Management, Vol. 1, No. 3 (2002), pp. 220–233.
customer is seated until the first course is
Cornell Center for Hospitality Research • 15
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 operator
The 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. A
16 • Cornell Center for Hospitality Research
17. Restaurant Revenue Management
restaurant can use both implicit and explicit waiting and a 4-top has not been bussed and
signaling devices to remind guests that the sits vacant for five minutes, it costs that
meal is over. Many restaurants use subtle restaurant $20. When viewed this way, the
implicit approaches such as bussing the cost of an additional busser to promote a
table, 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 that
stay, but that is rare. Instead, the restaurant should be considered in looking at the value
manager must rely on timing the courses and of the busser.)
other implicit signals to remind the customer Managers can do a number of things to
that the meal has ended. ensure that changeover time is minimized.
Explicit approaches risk customer ire. First, they should insist that bussers and
A manager obviously cannot directly ask servers work as teams and do a good job of
customers to leave, but the restaurant could pre-bussing the table. The fewer items left on
attempt other, less offensive methods of the table when the guests depart, the easier
turning the table. Some restaurants in the and faster it will be to clear and reset the
theater 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 time
gone, 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 servers
the 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 the
Reducing the amount of time between next party to be seated at that table. Some
customers (changeover time) increases restaurants use technology such as table-
capacity and revenue. This tactic will not management systems to facilitate this
offend a departing customer and should communication process, but as long as a
please 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 and
airline industry. Southwest Airlines and streamline the process of clearing and
RyanAir 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 as
increase plane use. Cabin employees at potential revenue. Anything that can be done
Southwest, 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 accessible
asking them to hand over discarded newspa- tablecloths, or well-placed glassware, can
pers 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 busy
strategy suits the restaurant industry. The restaurants, one of the major stumbling
manager of a fine-dining restaurant in Las blocks to reducing the changeover time is
Vegas with a RevPASH of $60 knows, for locating the next party to be seated. Some
instance, 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. 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 steak
18 • Cornell Center for Hospitality Research
19. Restaurant Revenue Management
and seafood restaurant. The price-sensitive menu engineering, the contribution margin
Asian groups preferred to eat in the buffet (selling price less the cost) and the number
restaurant, 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 menu
restaurant, in which they could get “safe” items are then divided into the following four
local 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 contribution
the 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; and
volume, so revenue and profit increased by (4) Dogs: below-average contribution margin
30 percent. and below-average volume. Stars and cash
One version of demand-based pricing cows are good candidates for potential price
is 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 that
approach, a restaurant in Singapore experi- The key to any successful revenue-management
enced extremely high demand on weekends
and much lower demand during the week. strategy is to offer multiple prices to a variety of
The managers decided to develop a special market segments, as appropriate.
weekend menu that featured prices that were
25-percent higher than during the week.
Once again, the restaurant suffered no while question marks may be possible items
change 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 month
demand-based pricing. The hotel in Malay- and make necessary price adjustments. Of
sia used information on the price insensitiv- course, this necessitates the printing of new
ity of its European customers to change menus, but that cost is generally minimal and
prices 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.
9
underpricing its high-demand periods. set their prices according to competitors’
Menu engineering supports another prices. For example, if they offer a grilled
form 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 grilled
here, must be handled carefully. At no time should a restaurant (or fish is slightly better or if the atmosphere of
any other hospitality operation) be seen as price gouging or taking
unfair advantage of customers by raising prices in times of stressful their restaurant is more upscale, they may
or 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 is
Hotel 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 Restaurant
Administration 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 be
Strengths,” 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. 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 discussing
20 • Cornell Center for Hospitality Research
21. Restaurant Revenue Management
fairness.12 A reference transaction is how The two overarching categories of rate
customers 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 include
much customers think a service (or product) room location, furnishings, and the presence
should cost. Reference prices can come of amenities or a view. Non-physical rate
from the price last paid (especially at your fences include time of consumption, transac-
restaurant), the price most frequently paid, tion characteristics, buyer characteristics, and
and what other customers say they paid for controlled availability. In a restaurant
similar offerings, as well as from market context, physical rate fences include table
prices and posted prices. For example, location (e.g., a better table commands a
customers may know that they generally pay higher price), view (e.g., tables with a scenic
about $25 for dinner at a particular restau- view cost more), and amenities (e.g., tables in
rant, and so their reference price for dinner a private room with fresh-cut flowers cost
at that restaurant is $25. more). Non-physical rate fences might
To assess a transaction’s fairness, include time (e.g., a weekend dinner might
customers often rely on reference prices in cost more, or meals consumed before 6:00
relation to what they are paying for the PM might cost less), transaction characteristics
current transaction. For consumers to (e.g., customers who make a reservation over
perceive the price increases inherent in a month ahead of time might pay less), buyer
demand-based pricing as being fair, guests’
reference prices would have to shift in line
with the restaurant’s variable-pricing sched- The question of which customers pay
ule. This may be difficult for operators to
achieve for two reasons. First, as I just which price is usually addressed through
indicated, the low price used during low- the use of rate fences.
demand periods may become the customer’s
reference price and may make future
purchases at the regular or peak rate seem characteristics (e.g., frequent customers
unfair. 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., customers
to 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 five
to 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, weekdays
purpose 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), and
pay different prices. To be perceived as fair, one controlled-availability fence (i.e., two
fences need to be logical, transparent, up- meals for the price of one).14 We also
front, 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 the
and 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. 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
