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Revenue Management

With the wide variety of dining options available to a customer nowadays, it is becoming increasingly difficult to attract “enough” footfalls from new or existing patrons. Marketing exercises may prove expensive, particularly for smaller enterprises, while Sales exercises might even be detrimental. In fact, the more bombarded consumers are with sales offers, the more they can sense even the most subtle sales pitch, and the more likely they are to resist it with a vengeance. Therefore all efforts towards increasing footfall and customer retention must additionally be supported by managing price, capacity and time, based on demand. This is where Revenue Management, previously known as Yield Management, can help.

Simply defined, Revenue Management (RM) is the process of understanding, anticipating and reacting to consumer behaviour in order to maximize revenue. This concept has been in use for a long time, starting with airlines, followed by hotels, restaurants and a number of other businesses. Earlier for instance, an airline seat was sold at one single price, while now it is priced differentially. Such decisions are based on differential customer demand supported by criteria such as flight timing, routing, days of the week etc. It is important that the customer sees this differential pricing as fair. For example, a passenger may see no problem paying full fare if he has arrived at the last minute even if he knows that his neighbour’s seat may have been sold at a far lower rate on account of being booked 30 days in advance.

In restaurants more specifically, RM is about selling covers/seats at the right price to the right customer at the right time.

One of the foremost authorities on the subject is Sheryl E. Kimes of The Center for Hospitality Research, Cornell University. The concept she has developed for restaurants is referred to as revPASH (Revenue Per Available Seat Hour). Generally we look at restaurant sales as equal to Average Check multiplied by Footfalls for the Day. In revenue management we look at restaurant sales as the level of Seat Capacity Utilization multiplied by Revenue Per Available Seat Hour (hours that meals are offered). Our objective is to increase revPASH.

The best starting point is to create one-hourly periods of your meal hours for all days of the week. Then study and note the typical occupancy during these periods based on historic observation i.e. the extent of empty seats per hour. Imagine and recognise the potential had they all been full in all periods of the day and week. Realistically, since this rarely happens, one needs to ask oneself – Given my operating constraints, who is the right person to buy my product or a variation of it during these lean hours and what might he be willing to pay for it. The answer to this will be opportunities to consider and implement.

For this one needs to initiate:

  1. Demand Based Pricing: This involves segmenting the market into various types of customers / potential customers and deciding on what price might attract which customer type at which time during under-utilized periods (low demand hours). It is important that this is achieved without the guest perceiving it as unfair, as in the airline example above. In the case of restaurants, an example of a fair differential price offer could be an economically priced executive lunch while dinner pricing remains marginally higher.
  2. Duration Management: This entails containing the duration of the guest’s meal time without compromising on his experience. Such an exercise requires considering uncertainties like the time when the guest will arrive, the time he will spend at the table and the time between one guest leaving and the next arriving at the table. Each of these time periods must be reflected on independently to come out with apt solutions.

Some considerations for decision making on differential pricing and meal duration are:

  1. Table Reservations Policy: For example some restaurants offer a choice of two meal sittings on weekend nights when accepting reservations. Through this policy they are conveying to their guests that “an experience of two hours at our restaurant will cost you so much”. They are further ensuring a minimum of two full table turnarounds with the possibility of more. What they are doing is effectively managing both meal duration and guest arrivals efficiently.
  2. Table configuration: One restaurant wanting to attract groups of 6 to 8 people decided on having most of their seating capacity supported by large tables of this size. On starting the restaurant they discovered that while one part of their client base was indeed groups of this size, around half their patronage was from 2 to 4 people groups. As a result during peak hours fresh guests waited in line while noticing that several 8 seater tables were nearly empty or occupied by 2 to 4 people only. Rather than seeing this as an issue the restaurant management prided themselves at preserving the sanctity of the experience of their seated guests while simultaneously making their restaurant more aspirational by keeping fresh guests waiting.
    The truth is, that had they recognised this as a problem and done a cost benefit analysis they would have realised that the cost of reconfiguring the restaurant with a table mix more in sync with their client base would only cost them less than one month’s earnings while they stood to gain not just more revenue but happier guests with less waiting time. Besides, a full restaurant would certainly be far more aspirational than a less packed one.
    Keeping all tables small, and thus combinable, is not a solution as this will pose a problem. For instance when a large group visits your restaurant, they will have to be kept waiting till all the necessary adjoining tables are vacated. Thus a few large tables especially designated for large group sizes would be necessary. Judgement calls would further need to be taken on a case by case basis when the guests actually arrive about which group to seat first and how.
  3. Table Allocation Policy: Guests nowadays mainly prefer being seated on a first-come-first-serve basis on arrival (despite table reservations in advance). They have come around to accepting a policy of allocating a table to a group who came in after them provided the group size corresponds with the earliest vacated table more aptly than their own. Then again, when celebrities are cleverly allowed to skip waiting in line, most guests resent it, though few complain and even less demand that they be served first, knowing that they are eventually at the behest of their host. One must consider these guest sentiments when making such policies.
  4. Service Response Time: Obviously it is critical that under no circumstance is the sanctity of guest experience compromised while reducing table time. It is observed that the central part of the guest’s meal like main course, dessert etc. is where he likes to linger and enjoy his experience the most. Thus not rushing him during this period is most important.
    On the other hand, when the guest asks for his check it is most likely an indication of wanting to end his experience and move onto something else he has to do, so urgency in presenting the check will suit both him and us. Likewise, the first order of the guest is an indication of his need to commence the experience and he is unlikely to take offence if he is served fairly quickly. He may in fact even be hungry and want the service to be deliberately expedited. Once again a quick pace at this point will suit both him and us.
    So service time can be easily quickened during two periods: The time between which the guest orders his first drink/dish until the time it is served, and the time between which the guest asks for his check until it is presented. Our control is limited in the period between which he places the second & subsequent orders until he asks for the check. Managing this time period would require much more adept sensing and handling on the part of your service staff.
  5. Restaurant’s 100% seating Capacity: While most restaurants pack in maximum seating in the design stage itself, certain scenarios may lend themselves to increase capacity to over 100%, for example a special party where either a stand-up buffet with partial seating, or additional seats laid out may be acceptable to the guest as not compromising on the experience. Typically the cost of pulling this off is just some additional temporary staff that augments your existing team for the occasion.
  6. Operating Style: The way the front or back of the house operates also has an impact on the time your guest will spend at the table. Some styles of kitchen operation like assembly-line menus offering pre-plated food or service styles like cafeteria type self service automatically lend themselves to a quick table turnover. One may consider reconstructing some of these when attempting to enhance productivity of your restaurants underutilized capacity.

There are many other considerations a restaurateur may identify and use to progress his revenue management goals. Some RM practitioners use certain tactics simply because they have seen others use them successfully. Others who have worked on understanding how and why this concept works have a greater edge as they can innovate and discover new ways as they go along rather than following blindly.

Revenue Management is not intended to replace other tools of sales enhancement like employee productivity, customer relationship management etc. Rather, it must be used in conjunction with them to develop a holistic continuous-improvement model. I have found RM to be useful during startups, necessary during development and critical during turnarounds.

 


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