Restaurant Revenue Management

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Technology systems can support restaurant managers' efforts to improve sales and profits through revenue management. By subdividing a meal into its component sections, a manager can determine which systems to apply at a particular stage for the purpose of providing the greatest revenue benefit for a particular restaurant. In adopting technology, managers must first conduct a financial analysis to determine whether the technology's cost will be more than offset by revenue improvements. If that financial calculation is favorable, management must then consider benefits to both employees and customers and must also take into account employees' and customers' perceptions of the technology's utility and ease of use. Without those elements in place, the technology faces dim prospects no matter what its prospective financial benefit.

Keywords: restaurant management; revenue management; table management systems; kitchen display systems; handheld ordering systems

Appropriate technology, when used in conjunction with revenue management principles, can help restaurants of all types increase revenue and profit. In the United States alone, table service restaurants account for approximately $180 billion per year in revenue (National Restaurant Association 2006). If these table service restaurants can achieve the 2 to 5 percent revenue improvement typically associated with the adoption of revenue management (Hanks, Noland, and Cross 1992; Smith, Leimkuhler, and Darrow 1992; Kimes 2004a), overall revenue could increase by $3.6 billion to $9.0 billion per year. Correctly implemented, technology can more than offset its cost with increased revenue. Technologies that support restaurant revenue management range from relatively simple credit card processing systems to elaborate table management and kitchen production software.

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In this article, I discuss how restaurants can apply technology to the dining experience and achieve both increased profits and customer satisfaction. Focusing chiefly on table-service restaurants, I first provide an overview of revenue management with a particular emphasis on the customer dining experience. I then discuss the benefits of using technology for both customers and restaurants and review how technology can be used in each phase of the dining experience. I conclude with an overview of issues that must be addressed for successful application of technology to the dining experience. The intent of this article is to provide a framework for assessing the effect of technology on meal duration and restaurant revenue.

Revenue Management

Revenue management has been widely adopted in the airline, hotel, and rental car industries (Carroll and Grimes 1995; Hanks, Noland, and Cross 1992; Smith, Leimkuhler, and Darrow 1992) but has only gained attention in the restaurant industry in the past ten years (Kimes et al. 1998; Kimes 2004a, 2004b; Kimes and Thompson 2004, 2005). Companies using revenue management have reported revenue increases of 2 to 5 percent.

Revenue management is activated by the following two strategic levers: duration control and pricing (Kimes and Chase 1998; Kimes et al. 1998). Duration management requires control and knowledge of when customers arrive, how long they stay, and when the table becomes available for the next party. If meal duration can be reduced during busy periods, more customers can be served and revenue can be increased. At the same time, however, duration control must be approached carefully because rushing customers may impair their satisfaction. The duration of a meal, which includes the entire time that the table is in use, can be managed by controlling guest arrival, meal duration, and table turnover.

Managing guest arrivals requires the ability to predict when customers will arrive. Restaurants can manage arrivals both internally (by means that do not directly involve customers) and externally (by mechanism that do directly involve customers). Common internal arrival-management strategies include improving the accuracy of arrival forecasts, tightly managing the customers' waiting times, developing overbooking policies that maximize table use but minimize delayed or denied seating, and setting strategy for how and where parties should be seated. External arrival techniques include reminding customers of their reservations by phone or e-mail, or requiring deposits or guarantees on reservations.

The objective of duration management is to reduce variability in customer dining times and, if necessary, to reduce the length of the meal. Like arrival management, duration can be managed both internally and externally. Internal approaches revolve around streamlining the service process (including ordering, meal preparation, and check delivery and processing), while external approaches include giving customers control over the pace of their meal and giving them signals that the meal is nearing an end.

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Turnover management involves reducing the amount of time between the end of one party's meal and the beginning of the next. Anything that can be done to reduce turnover time and speed the process (either by notifying bussers that it is time to clear the table or letting hosts and hostesses know that the table is ready) should increase revenue during busy periods.

While price management is extremely important to the success of revenue management, the focus of this article is on how technology can be applied to better manage the duration of customer's meals, increase revenue, and increase customer satisfaction.

The Dining Experience

The customer dining experience consists of six main components (see Exhibit 1):

  1. Prearrival: from when customers decide they want to come to the restaurant until they arrive at the restaurant
  2. Postarrival: from when customers arrive at the restaurant to when they are seated
  3. Preprocess: from when customers are seated at the restaurant until they receive their first food order
  4. In-process: from when they receive their order until they request payment
  5. Postprocess: from when they request payment until they leave the restaurant
  6. Table turnover: from when customers leave until the table is reseated

Studies have been conducted on how long customers think dinner should last (Kimes, Wirtz, and Noone 2002) and on the impact of pace on customer satisfaction (Noone and Kimes 2005; Noone et al. 2007). Looking at the effect of pace, customers' reaction to changes in pacing varies according to the stage of the meal and the type of restaurant. In casual and upscale casual restaurants, customers prefer a faster pace during the preprocess and postprocess stages but a slower pace during the in-process stage (when they are actually dining). Customers at fine-dining restaurants prefer a relatively slow pace throughout the meal (Noone and Kimes 2005; Noone et al. 2007).

Based on this research, restaurant managers should (1) focus their duration-reduction efforts on the postprocess stage, (2) consider ways to reduce duration during the preprocess stage, (3) avoid duration-reduction strategies during the in-process stage, (4) consider giving customers control over the pace of their meal, and (5) recognize the importance of maintaining a consistent pace throughout the meal.

Technology and the Dining Experience

Technology comes at a cost, but it can also lead to increased revenue and profit. Before adopting a particular technological system, a restaurant operator must assess potential benefits to customers and to the restaurant and compare these benefits to the cost of the system. Potential customer benefits are improved customer convenience and increased control, while potential benefits to the restaurant are increased speed of service, reduced processing costs, increased volume and revenue, and improved service and food quality.

Benefits to Customers

Improved convenience. Service convenience is related to customers' desire to conserve their time and effort. An increase in convenience is associated with an increase in satisfaction (Berry, Seiders, and Grewal 2002). Restaurants can use technology to increase access convenience (by making it easier for to place a food order or make a reservation), transaction convenience (by reducing customers' waiting time), and benefit convenience (by better managing the pace of the dining experience).

Increased control. When customers perceive that they have substantial control over a service encounter, they are more likely to be satisfied with that encounter (Averill 1973; Hui and Bateson 1991; Hui and Tse 1996; Langer 1983). The following three types of perceived control have been proposed: behavioral, cognitive, and decisional.

Customers have behavioral control when they can directly influence or modify what happens to them (Hui and Bateson 1991). In restaurants, customers can exert behavioral control by choosing the time they eat, by minimizing their wait, or by choosing their desired table.

Cognitive control is related to the predictability and interpretability of a situation. Research has shown that providing guests with supplemental information (such as the likely length of their wait) leads to a more positive evaluation of the service. If restaurants can provide accurate wait time estimates, they will give customers heightened cognitive control.

Finally, decision control concerns the control that a customer has over the selection of outcomes and goals. For example, in restaurants, customers who have to wait to be seated can choose to stay at the restaurant, leave and return, or just leave and find other dining options. Paging systems give customers more decisional control because in many cases (particularly with cell phone pagers), customers have the freedom to leave the restaurant and return after being paged that their table is ready.

Restaurant Revenue Management

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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.