Revenue Enhancement, Part 4

Abstract

This is the fourth and final article in a series on how hospitality managers can make more money, with this one geared specifically to food and beverage managers. This article discusses maximizing the profit from existing guests (for example, by upselling appetizers, desserts, and beverages) and expanding beyond the restaurant premises (catering and food delivery, as well as partnerships with businesses and special-event organizations). To maximize revenue, restaurant managers must track menu-items' contribution margins and identify the sales mix. Managers also must control seating among different-size parties during peak periods, to ensure fastest table turns and maximum revenue per party. Moving diners away from their table when they are finished eating is also important. Seating control requires a menu-mix analysis combined with a turnover-time analysis of different party sizes. The key to controlling the seating is understanding demand patterns, including how many parties of various sizes want to eat during each hour and how many were refused or walked away. The only way to accurately ascertain demand patterns-total diners and diners per table-is to keep track of all reservation requests.

Competition in the advanced sale of service capacity

“…Hence, while competitive pressure would motivate the firms to sell in advance in order to avoid the risk of lost sales, the reduced profit margins causes them to decrease capacity allocations for advanced sale. Furthermore, the higher profit margins at the time of consumption would also induce the firms to increase capacity allocations for sale at that time (Quain, Sansbury and Quinn, 1999). However, the market price sensitivity to the total capacity allocations at the time of consumption prevents the firms from allocating excessive capacities for sale at that time.…”

Activity-Based Costing

“…As a result, the restaurant industry is faced with a number of specific challenges. For example, restaurants are very labor-intensive with labor costs often representing a large share of total operating costs (Chan & Au, 1998;Quain, Sansbury & LeBrutto, 1999). The control of labor costs is difficult, because service provision is a major part of the product in the restaurant industry.…”

An Evaluation of Guests’ Preferred Incentives to Shift Time-variable Demand in Restaurants

“…2 A revenue-management strategy helps a firm's managers decide how to allocate and price its capacity to capture as much demand as possible given the operation's constraints. To apply revenue-management techniques effectively, the business's operating structure should feature: (1) relatively fixed capacity (e.g., seats, hours of operation); (2) predictable and time-variable demand (i.e., high-demand or hot and low-demand or cold periods throughout the operating day); (3) perishable inventory (i.e., revenue lost due to an unsold seat cannot be recouped during a given meal period or operational time period); (4) micro-segmented markets (i.e., each daypart or slices of a daypart can be desirable to different guest types); (5) fluctuating demand (e.g., 11:30 a.m. through 1:00 p.m. during lunch and 6:30 p.m. through 8:00 p.m. during dinner tend to be much busier than other operating times); (6) advance sales of products and services (a feature that is rare in restaurants, but applies to catering and banquet operations); and (7) low variable-to-fixed cost ratio (in most restaurants, variable costs range from 30 to 50 percent of sales). 3 These characteristics suggest that it is possible to maximize revenue through an understanding of consumer demand relative to optimal operational capacity.…”

“…Revenue management has been recently applied to the restaurant industry, but a limited number of specific strategies to implement these techniques have been offered. 4 To implement revenue management in restaurants-as in the airline and hotel industries-one needs a clear understanding of the menu sales mix, the contribution margin of the menu items, 5 and a direct understanding of the capacity constraints that influence product and service delivery. 6 While the restaurant industry shares many of the characteristics of the airline and lodging industries (in particular, fixed capacity, time-variable demand, and perishable inventory), it is more challenging to implement broad-based revenue-management strategies in restaurants because consumers do not normally prepay for the services, as they do in other industries, and duration of use is far less predictable, as we explain next.…”

“…Revenue management has been recently applied to the restaurant industry, but a limited number of specific strategies to implement these techniques have been offered. 4 To implement revenue management in restaurants-as in the airline and hotel industries-one needs a clear understanding of the menu sales mix, the contribution margin of the menu items, 5 and a direct understanding of the capacity constraints that influence product and service delivery.…”