Developing a Restaurant Revenue-management Strategy Part I
Propounding theories is one thing, but too often the intended beneficiary hasn't the time or tools to check their usefulness. Here's a case where researchers worked with a local restaurant to test their ideas, make recommendations for improvement, and track the results.
As explained in a paper published last year in this journal, the goal of restaurant revenue management (RRM) is to maximize revenue per available seat hour (RevPASH) by manipulating price and meal duration. In the first paper of the current series discussing the steps of RRM, co-author Kimes discussed how RevPASH can be measured and used to evaluate restaurant performance, and she presented a five-step approach for implementing RRM. In this paper we explain how we developed a revenue-management strategy for a 100-seat casual restaurant in Ithaca, New York.
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. Revenue management, or yield management, is commonly practiced in the airline industry and, to a somewhat lesser degree, the lodging industry. Companies implementing revenue management report increases in revenue of 2 to 5 percent over the results of prior procedures.
Restaurant operators can manipulate two main strategic levers 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). More-sophisticated manipulations of price include day-part pricing, day-of-week pricing, and price premiums or discounts based on party or table size. Managing meal duration (i.e., speeding table turns) is a bit more complicated, as we discuss in a moment. For example, meal duration depends in part on the efficiency of the restaurant's service cycle, as well as on the idiosyncrasies of customer-arrival patterns and diners' deciding to linger (or not) after the meal.
To develop an RRM program, managers should establish the baseline of performance, understand the drivers of that performance, develop a revenue-management strategy implement that strategy and monitor the strategy's outcomes. In this paper we discuss and illustrate how to establish the baseline and understand its drivers, and how to develop a revenue-management strategy In the next paper we will discuss implementation and evaluation issues.
The Study Site
The menu comprises fewer than 12 appetizers, 30 to 40 entrees, and about half a dozen desserts. Servers are assigned stations that consist of approximately four tables. Coyote Loco uses a Micros 2700 POS and maintains an electronic journal of all transactions. The kitchen is small and employs four line cooks (including one manager), two dish-machine operators, and three food runners. Food-preparation work is performed during off-peak hours in a basement work area. The main restaurant has 72 seats (two 2-tops, fifteen 4-tops and one 8-top). The bar area, which is used for dining on busy nights (and which also serves as the de facto waiting room for not-yet-seated diners), has 27 seats (nine 2-tops and nine bar stools). During Ithaca's warm-weather months, an outdoor patio provides seating for an additional 66 customers.
The owners and managers of Coyote Loco agreed to help us obtain the data necessary to begin an RRM system. Moreover, they met with us regularly to discuss implementation alternatives and concerns. We began our work at the restaurant in September 1998 and have been able to track its performance over time. We followed the five-step approach discussed in the first RRM paper to develop a RM system and strategies for Coyote Loco.
In the next section we describe the types of data and analysis necessary to establish a baseline, the tools that can be used to understand actual service-cycle performance, and operational tactics that are part of a revenue-management strategy. We use our experience at Coyote Loco to illustrate the discussion.
Step 1: Establish the Baseline
Level of detail. At a minimum, managers must collect arrival, meal- duration, and revenue data on a day-part basis. Without this level of detail, RRM will not have the necessary information with which to work. Hourly data can help the operator to understand demand and revenue patterns, and they can help provide sufficient information to fine tune the RRM system. Quick-service or family restaurants with short meal times (i.e., service cycles) may prefer to capture data for 15-minute periods. Such detail can be helpful; however, the operator must be sure that the additional work required to collect this information is worth the added benefit. (In general, operations with short dining times will benefit from more detailed analysis.)
Sources of data. Data can be collected from the restaurant's POS (point of sale) system, through time study or actual observation, or by customer surveys. POS systems generally collect a myriad of transaction data such as arrival time, meal time, and customer spending, but converting that POS data to a usable form is often difficult and time consuming. Time study or observation can provide detailed data on arrival time, course timing, meal time, and revenues, but requires substantial time to train observers and actually to collect the data. Surveys can be used to gauge customer reaction and sensitivity to price, service quality, and overall atmosphere, but administering surveys properly and deciphering the data take a lot of time and careful training.