Rafi Mohammed

Apply Airline Pricing to Restaurants? I Advocate It!

Posted on April 13th, 2011 (3 Comments)

Recently chatting with the manager of a top restaurant in Boston, I noted, “I’m the worst customer that you can have for an 8:00 PM Saturday reservation.” Elaborating, I mentioned “I don’t order bottled water, expensive wine, or fancy cocktails.” While he assured me that I was always welcome, we both knew that a more profitable customer could (and should) have been sitting at my “primetime” table.

Star chef Grant Achatz is focusing on pricing to overcome a challenge faced by many restaurants: demand is high on weekends but slow during the mid-week. His new restaurant, Next, serves a set (no choices) 5 to 6 course menu that will change quarterly. Mr. Achatz’s pricing innovation involves charging less ($65) for the same meal during off-peak times (say a Tuesday night at 6 PM) and more ($110) during more popular periods. As with airline yield management, high peak time entrée prices increase profit margins while discounts generate growth by attracting budget-conscious customers.

While this pricing initiative is a step in the right direction, it fails to focus on customer profitability. Big profits come from the ancillaries (alcohol, side dishes etc), not entrees.

Riffing off of Mr. Achatz’s ingenuity, I have a better pricing alternative: don’t tinker with food prices, instead, vary customer minimums. Popular high-end restaurants, like Wolfgang Puck’s Spago in Los Angeles, should have different minimums based on demand. An 8 PM Saturday reservation can be booked for a per-person minimum of, perhaps, $150. Menu prices will remain the same, but for a table of two, the bill must total at least $300. Lower per person minimums can be offered (or even eliminated) during off-peak times. A customer’s credit card is charged to secure a reservation.

This type of “per-person” yield management can be further refined. If advance demand is running unexpectedly high, the per-person minimum for new reservations can be increased. Conversely, if demand is light, minimums should be reduced. And just like the airlines do, a few prime tables can be held until the start of the evening and made available for the right price. Business people celebrating a just completed deal can be accommodated as long as they order margin-laden Dom Perignon champagne to meet a hefty minimum. Now it will be easier for “price is no object” consumers to secure primetime reservations. Restaurants, of course, reap higher profits and grow by serving additional customers.

So why is my pricing strategy better? First, it focuses on what matters most: profits. A key benefit of this pricing strategy is that it can be employed by every restaurant – not just fancy restaurants serving set menus. A favorite local restaurant that I frequent, the Washington Square Tavern, offers many entrees that are priced below $20. Instituting a $40 minimum for an impossible-to-get Saturday night reservation, for instance, can effectively screen out those ordering an “entrée and tap water” and enable more profitable diners to be served.

So what do you think? Doesn’t it make sense for restaurants to “let the market rule” and earn profits based on demand?

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Readers' Comments on This Blog Entry

From thomas on April 28th, 2011
I am not so sure. Your alternative doesn't feel as fair to me.
From Jeremy D on April 28th, 2011
Hi sir, I'm an avid reader of your blog and have read "The art of pricing" at a time where pricing strategy in my mind was looking as a dice roll. So first thank you for this "niche" blogging on a very interesting but under-documented topic! Regarding the strategy you suggest, it sounds goods and more important can be applied at low risk (you can stop quickly if it doesn't work). As a customer, I assume that my first reaction would not be very good, mostly because you generally don't have a very precise idea on what you are going to eat and the price the meal is going to cost you. Therefore the minimal price should be set very carefully. Did you get anyone to try your strategy out ? Best regards, Jeremy
From Brian Hayashi on May 7th, 2011
Cornell Hospitality Research published a report that suggested that restaurants do something along these lines, starting by rethinking revenue per available seat-hour (RevPASH). I'm working on a concept called Minimum Reservation Pricing which applies yield management techniques to reservations under certain circumstances, using mobile-based flash sales to manage the transaction. Having spent time working with utilities, I see it as a challenge of leveling peaks and filling valleys.