What is Revenue Management?
Revenue management is the act of applying statistics and analytics to predict consumer behavior and selling the right product to the right guest at the right time. Revenue Management is particularly valuable in any industry where inventory or capacity is inherently constrained and originated with airlines before being adopted by hotels and resorts. Restaurant Revenue Management was pioneered by Sheryl Kimes at Cornell’s School of Hotel Administration [1] in the late ‘90s but has been slow to be put into practice.
The key to restaurant revenue management is understanding that your restaurant has a fixed capacity: there are a fixed number of tables, chairs, and barstools, and a fixed period of time in which you operate [2]. Managing this fixed capacity is where revenue management strategies come into play. Before we dive into specific strategies to increase revenue and drive profits we have to define a few key metrics and concepts.
Key Metrics
To manage restaurant revenue effectively we must be able to empirically determine what the right product is for the right guest at the right time. Average Check, Turn Time, and RevPASH, give us key data points that we can use to benchmark the performance of tables, servers, shifts, and restaurants among and between each other. By using these industry-standard metrics, you can, over time, compare the effect that revenue management strategies are having on your bottom line.
First up, a metric almost all restaurants know and track, Average Check, the easiest of these metrics to calculate. Also known as Per Person Average (PPA), Average Check is a measure of how much the average guest spends in a restaurant. To calculate the average check over the whole restaurant divide the total dining revenue by the number of covers, and for a single table, divide the check total by the number of guests at the table.
Up next is Turn Time. Turn Time measures the amount of time a table is occupied, from when the first guest in a reservation sits down to when the table is ready for a new reservation. There’s no easy formula to calculate turn times, but your Point of Sale or Reservations System should be able to give you this information. Standardizing the collection of turn time is critical for the accuracy of our next metric, RevPASH, I suggest setting standards for opening and closing tables in the systems you use to track turn times.
Finally, putting it all together is Revenue per Available Seat Hour or RevPASH. RevPASH combines the Average Check and Turn Time metrics into a single metric that measures how effectively a restaurant is using its constrained capacity. Having a high average check and a high turn time means your total revenue for the day could be lower than a restaurant that has a low average check and a low turn time. If your guests are spending a lot of money but spending a lot of time occupying the table, your restaurant may be making less than if your guests spent less money but did so while spending less time occupying the table.
Calculating RevPASH for the whole restaurant is relatively straightforward, multiply the number of seats in a restaurant by the hours of operation for that period, and divide that number by the total revenue for the same period. Calculating this number for a single table is similarly straightforward, divide the average check by the turn time in hours[3]. For more detailed analysis (looking at discrete times of the day, different sections, or servers) these calculations lose their accuracy [4], but for the purposes of this series, and your operational management they suffice.
In the subsequent posts in this series we’ll dive deep on how different restaurants can think about applying revenue management. Each restaurant is unique, but almost all restaurants will be able to apply some of the Restaurant Revenue Management tools to drive their revenue and increase profits.
Continue checking back here to read the rest of our series on revenue management.
[1] Check out “Restaurant Revenue Management: Applying Yield Management to the Restaurant Industry” and “Implementing Restaurant Revenue Management: A Five Step Approach” to read some of Sherri’s great writing on these topics — many of the ideas from this series come from her teachings.
[2] while you may add or remove chairs from tables, or vary your operating hours based on the day of the week, the theoretical maximum number of guests you serve is not infinite, and the number of guests you can serve at any given point in time is deterministic.
[3] Technically this isn’t exactly RevPASH because it’s counting the number of guests, not number of seats, but as long as you rarely underseat your tables, this is close enough (table mix is a topic for another post).
[4] Gary Thompson and Heeju Sohn’s papers “Accurately Estimating Time-Based Restaurant Revenues Using Revenue per Available Seat-Hour” and “Time- and Capacity-Based Measurement of Restaurant Revenue” describe the inaccuracies of these measures, and provide effective solutions to these shortcomings.
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