Center for Hospitality Research

Hospitality Leadership Through Learning
Center for Hospitality Research

Restaurant Revenue Management


Vol 4 No 2
By: Sheryl E. Kimes Ph.D.


Executive Summary:

The principles of revenue management can be applied to restaurants, given that the restaurant's unit of sale is the time it takes for a complete meal cycle, rather than just the meal itself. Moreover, restaurants have classic characteristics that invite revenue-management strategies (those characteristics being relatively fixed capacity, perishable inventory, a demand inventory, time-variable demand, appropriate cost structure, and segmentable customers). When a restaurant's operation is gauged by the time-related measure called revenue per available seat-hour, or RevPASH, managers can analyze operations and menus to improve that statistic. Using RevPASH allows managers to capture more of the restaurant's actual performance in their analysis than does average check or typical food- or laborcost percentages.

Restaurateurs have available two general sets of strategic levers to build RevPASH, which is the goal of restaurant revenue management. Those key levers are duration management and demandbased pricing. Pricing approaches involve setting prices according to customers' demand characteristics, such as whether they are willing to dine off peak or whether they are not as concerned about price as they are about the dining experience. Pricing strategies must be approached carefully to avoid the appearance that the restaurant seeks to gain at the expense of customers (which customers view as unfair). Typically, this means adjusting menus to offer discounts and specials that, while they offer more value to the customer, may well make as strong a contribution to revenue as other, higher-price menu items that cost more to serve. That is the province of menu engineering.

Duration management helps restaurateurs gain control of the most erratic aspect of their operation, which is the length of time customers sit at a table (including the rate at which customers will arrive to occupy that table). Among the tactics available for duration management are reducing the uncertainty of arrival, reducing the uncertainty of duration, and reducing the time between meals. Whether the restaurant accepts reservations or serves customers as they arrive, its manager needs to have a sense of when customers are most likely to appear. That is a matter of creating a forecast based on the restaurant's history and of carefully managing reservations (if the restaurant accepts them). Although a restaurateur cannot directly control the customer's use of a table, careful process control and analysis can make the restaurant's operations (including menu design, kitchen operation, and service procedures) as effective as possible for moving the meal along, and perhaps indicating to the customer when it is time to leave.

As an example, Chevys Arrowhead, a Phoenix-area restaurant, used revenue-management levers to improve its revenue through process control. Seeking to augment revenue and also to improve customer service, the restaurant analyzed its operations and its customers' characteristics. It found that its table mix (mostly 4-tops) was inappropriate for its customer base (mostly singletons and couples). It also found that it could tighten up its post-meal procedures, particularly those involving settlement. The restaurant was reconfigured, servers were retrained, and certain key positions were added. The result was an increase in revenue (from higher occupancy) that paid for the increased capital costs in one year. The revenue improvement in this instance was to guests' advantage, since menu prices were not changed as part of this revenue-management implementation.

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