Restaurants

The key to maximising revenue in your restaurant is to look at maximising the revenue from the capacity. You need to look beyond measuring covers to measure revenue per available seat hour (RevPASH). The two primary variables that you have to deal with in a restaurant are customer demand and meal duration.

Controlling customer demand has its challenges. You do not know when exactly customers will arrive even if they make reservations.

If you do not take reservations, life is even more unpredictable unless you have good history and demand has remained stable. On the other hand a queue gives a steady flow at busy times.

The duration of your customers’ meal is another area which is difficult to control. Some restaurants have taken to advising customers that they can have a table for, say, two hours. This seems a dreadful way to deal with an issue not always in the customers’ control. It is far better to ensure that your operation functions effectively enough to allow for some control over the meal duration.

To do this you need to analyse your process all the way from arrival ? greeting ? seating ? ordering ? wine ? appetizer ? main course ? dessert ? payment ? departure, standardise the procedures and evaluate all the areas where things can go wrong. To maximise your operational effectiveness you will also need to look at menu design and staff scheduling.

Differential menu pricing is difficult to implement although some restaurants do charge more at dinner than at lunch for the same item. I don’t know whether customers are happy with this but the practice is not widespread, so maybe it is not that popular. The one variable that can be used effectively is time. This is why ‘early bird’ rates for anyone eating before 6.30pm work well. The same applies to special lunch prices.

You can do a few things to increase the yield from peak times:

• Don’t up-sell: It is more important to keep to the planned meal duration and have the table reset and occupied.
• No reservations: A queue ensures better utilisation.
• Narrow the menu: Take off some lower-priced items to help average spend, and remove complicated dishes to help meal duration.
• No promotions: Not available in peak times.
• Host: Greeting and seating becomes more important.
• Raise prices: Groups might pay extra for access to a peak time.

 

Of course the benefits of yield management only accrue if you have the demand. But measurement of the RevPASH will give you some idea of where to apply your promotional effort.

Discounting

This is a really emotive subject. I don’t really hold with the principle that what happens in the hotel industry is ‘discounting’ at all. To give a discount you have to have a fixed price in the first place to discount from. What we do is set prices or rates that are appropriate for each particular market segment depending on the time of the year or week. If you charge £ 100 for a Wednesday and £ 75 for a Saturday, have you discounted Saturday?

A recent study by the Cornell Center for Hospitality Research found that discounting doesn’t work. What they established was that hotels that lowered their rates compared to their competition did indeed gain occupancy. What they didn’t gain was higher RevPAR, so that they were actually worse off, even without taking into account the costs of running at higher occupancies.

To me this shows that you can’t just take a blanket approach to prices. Each market segment has its own response to price changes. Weekend guests might respond positively to price reductions and you may well gain more in occupancy than the price reduction (this segment is reasonably price elastic). However a price reduction or discount given to government employees, for instance, is not likely to increase the volume of travel at all; revenue will then be less than before (price inelastic).

What the study also found was that holding rates when your competitors are discounting theirs might help solidify your revenues. Even raising your prices relative to your competition may lose you some occupancy but you will make up this loss by an increase in RevPAR.

To me all that this confirms is that you are on a slippery slope if you start to look at price as the main driver of business. Setting appropriate prices is vital, but this has to be based on an evaluation of your competition and your value relative to similar competitive establishments. Sometimes we can be very sensible and then along comes some very stupid competitor (often a chain property that has its price policy set at head office, usually a long way away). There is nothing that we can do about someone else’s business plan. We just have to be confident in our own proposition and keep plugging away at it. Although your RevPAR is not sacrosanct, it can take years to get back to where you were if you become involved in severe discounting.

Key Points

• Sometimes you have to have a strong nerve when chains make strange pricing decisions.
• The hotel business is about long-term relationships so try to avoid too much discussion about price.
• Try to keep your rate schedule as simple and realistic as possible.
• A great deal of third party internet selling is on price, mainly because there is little opportunity to establish value by differentiating on location and facilities.
• Yield management is a relatively simple concept but is always based on having useful historical information.