• Restaurant Revenue Management 103

    Most restaurants are only viable when operating at the capacity they were designed for, yet the current climate indicates that restaurants will re-open at decreased capacity. Revenue management strategies developed to optimize capacity must now also consider the protection of guests and employees.

    Update your reservations policies

    Well-managed reservation books are going to be far more important than ever before. Being able to actively manage capacity through the reservation slots you offer is critical to ensuring that you are serving the maximum number of guests at any given point in time. Because your regulated capacity will be much lower and be more highly policed, you will need to ensure that every ‘body’ in the restaurant is generating as much revenue as possible. For example, having guests wait for their table by the door or in a bar area will reduce the number of guests you can serve at a table, and thus diminishes your opportunity to maximize revenue.

    Implement cancellation fees

    Due to newly enforced capacity restrictions, the historical cancellation-hedging strategies of overbooking and encouraging walk-in guests will no longer be viable. Instead, utilize cancellation fees to increase the likelihood that guests will arrive for their reservation. A great paper on guest perception of reservations by Sheri Kimes from Cornell’s School of Hotel Administration shows that guests are generally accepting of cancellation fees. To reduce the risk of guest-frustration over cancellations:

    1. Ensure that it is easy to cancel a reservation (both OpenTable and Resy support the collection of cancellation fees).
    2. Waive cancellation fees for mitigating circumstances.
    3. If your business is in a position to do so, you can consider donating cancellation fees to your employee relief fund or a designated organization such as The Robinhood Foundation or Restaurant Workers’ Community Foundation.

    Cancellation fees should be based upon the number of guests in a party, and the amount should align with the pricing of your menu.

    Offer ticketed reservations

    If your restaurant’s style of service can accommodate it (e.g., if you have a prix-fixe or tasting menu) consider moving to a ticketed dining experience to have precise control over when and how many guests arrive at your restaurant at any given time. Tock, a restaurant reservation platform founded by Nick Kokonas, is built to make this process seamless for restaurants of any size. OpenTable and Resy also provide this functionality.

    Manage your turn times

    Ensuring that you can efficiently serve as many guests as possible is even more important when your capacity is artificially constrained. You can maximize the revenue you collect with lower turn-times. Reducing turn-times starts before the guests enter the restaurant:

    Consistently update your online menu

    Encourage guests to browse through the menu before they arrive to reduce their time spent at the table deciding what to eat. Many restaurants are successfully utilizing Instagram to advertise daily specials.

    Offer to-go dessert

    Offer a selection of desserts that guests can enjoy in their own home or outside (weather permitting). Cookie boxes, pints of ice cream, slices of or whole cakes, and ‘pudding-like’ desserts (tiramisu, panna cotta, trifles) are all desserts that travel well and can be made in advance and packaged to go. This helps reduce turn times while maximizing your average check.

    An additional benefit of a to-go dessert is the opportunity to spread out employee shifts in your restaurant. If your pastry team can make desserts in the morning, they will have limited crossover with your savory team working in the afternoon and evening.

  • Restaurant Revenue Management 102

    Because RevPASH is the most effective metric at simulating the revenue for your restaurant, it is the most valuable metric to use to evaluate revenue management decisions. It’s important to remember that you can directly impact Average Check and Turn Time while RevPASH effectively combines these two metrics. Revenue Management strategies differ significantly for a busy restaurant, versus a slow restaurant.

    Busy Restaurants and Slow Restaurants

    Slow restaurants are what economists call “demand-constrained” because their revenue is constrained by the number of guests who demand their product. Slow restaurants consistently have empty tables during peak hours or struggle to fill the restaurant on a consistent basis. 

    Busy restaurants are what economists call “supply-constrained” because their revenue is constrained by their ability to supply the amount of product their guests demand. Busy restaurants consistently fill all of their tables during the peak hours of most days, have to run waitlists for their walk-in guests, or have bars that rarely have an empty seat.

    Busy restaurants and slow restaurants require different revenue management strategies because in a slow restaurant there is no opportunity cost to longer turn times: if there isn’t a guest to fill an occupied table, then there’s no benefit to speeding up the guests that are already there. In a slow restaurant, your number one focus should be on growing cover counts. Restaurants work best when they’re busy: employees are motivated by the challenge of a busy service and guests happier in a lively and engaging environment.

    However, in busy restaurants, there is an opportunity cost to longer turn times, if there are guests waiting to fill an occupied table, then there may be a benefit to speeding up the guests who are currently occupying that table[1]. This is true because not every incremental order [2] is profitable. We can compare and evaluate these choices using RevPASH. If the time it takes to execute [3] an incremental order has a lower RevPASH [4] than your average RevPASH, it is (from a revenue perspective) an order you should avoid taking; if it’s the same or higher than your average RevPASH, then it’s an order you should actively encourage. Busy restaurants should aim to serve as many guests as quickly as possible because there are guests who demand their products that they are unable to serve. For example, it may be more profitable to discourage desserts (an incremental order) and seat the next reservation than it is to upsell desserts and make the reservation wait longer for a table.

    It may seem counterintuitive to not upsell desserts, as this is a tried-and-true restaurant sales tactic, but in the following posts in this series, we will use RevPASH to quantify the cost and benefit of different revenue management strategies, providing hard numbers to describe how you can use the powerful levers of Average Check and Turn Time to proactively manage both your top and bottom line.

    Continue checking back here to read the rest of our series on revenue management.

    [1] It’s important to note that revenue is only one factor of running a restaurant that needs to be considered when making decisions. All revenue management strategies should be weighed against the impact they have on other factors that drive success in your restaurant, including your guest’s and employee’s experience. Understanding what the balance between these and other factors depends on a number of factors that only you know, and thus the revenue management strategies we describe should always be implemented on a restaurant-by-restaurant basis.
    [2] An order could be a whole meal, or just a single meal-part, like dessert.
    [3] Take, place, deliver, and consume the order.
    [4] Here calculated by taking the revenue from the order divided by number of seats at the table divided by time it takes to execute that order.

  • Restaurant Revenue Management 101

    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.