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The Main Factors Of Restaurant Revenue Management

The Main Factors Of Restaurant Revenue Management

Research in Revenue Management has traditionally addressed the theoretical and practical strategic problems facing airlines and hotels, among other industries, but it has given little consideration to the restaurant industry. The restaurant business is similar enough to hotel and airline operations that restaurants should be able to apply revenue-management-type practices in a strategic fashion, but the applications have so far been mostly tactical. A broad theory of revenue management would permit restaurant operators to gain the benefits of strategic revenue management that they currently lack.

How To Defining Restaurant Revenue Management Factors?

Revenue management is the application of information systems and pricing strategies to allocate the right capacity to the right customer at the right place at the right time. In practice, revenue management has meant determining pricing according to predicted demand levels so that price-sensitive customers can achieve a favourable price by purchasing at off-peak times, while price-insensitive customers will be able to make their purchases at the peak times that they desire.

The application of revenue management has been most effective when it is applied to operations that have the following characteristics: relatively fixed capacity, perishable inventory, a demand inventory, time-variable demand, appropriate cost structure, and segmentable customers. 

1. Relatively fixed capacity: A restaurant's Relatively fixed capacity capacity can be measured by number of seats, kitchen size, menu items, or staffing levels. Most restaurant operators approaches to optimizing revenue primarily involve filling the seats to capacity and turning tables as quickly as possible, but that effort can be limited by the kitchen, the menu design, or staff members capabilities.

Seating capacity is generally fixed over the short term, although restaurants have some flexibility to crowd a table with an additional seat if necessary, and the restaurant's cost of adding additional capacity in the forms of tables or seats (say, by reconfiguring the dining room or seating diners in the lounge) is lower than that of many businesses that typically use revenue management. Most restaurants have a fixed number of tables, but can vary the number of seats depending on the mix of party sizes. In addition, some restaurants might increase capacity during pleasant weather by using outdoor dining.

2. Perishable inventory: One might think Perishable inventory of a restaurant's inventory as being its supply of raw food, but most of that is not perishable until it is removed from the freezer or is sitting on the receiving dock. Instead, a restaurant's inventory is best thought of as time or, in this case, the time during which a seat or table is available. If a seat is not occupied for a period of time, that part of the restaurant's inventory perishes. This is the key to the strategic framework that I present here, and it is the element that I believe has been missing in most approaches to restaurant revenue management. Instead of counting table turns or revenue for a given day part, restaurant operators should measure revenue per available seat hour (RevPASH). This measure captures the time factor involved in restaurant seating.

3. Demand inventory: Demand can be Demand inventory inventoried either by taking reservations or by creating queues of waiting guests. Most industries that employee revenue management use reservations (or advance sales) to create a demand inventory. Reservations are valuable because they give an operator the opportunity to sell and control his or her inventory in advance of consumption (often with advance payment for that consumption). In addition, companies that take reservations have the option to accept or reject reservation requests. During high-demand periods, operators may choose to reject low-value requests, for instance, while during low demand periods, managers may choose to accept such requests.

While many restaurants take reservations, a majority of restaurants do not do so, preferring instead to manage a queue when demand exceeds supply. Indeed, while reservations help a restaurant sell and control its inventory, they are not without problems. As I discuss later, no-shows, late shows, and short-shows are all problems in the restaurant industry, which is why some restaurants choose to rely on walk-in business rather than take reservations.

4. Time-variable demand: Setting aside Time-variable demand carry-out activities as a separate business, restaurant demand consists of guests who make reservations and guests who walk in. Both forms of demand can be managed, albeit with different strategies. Strategic differences notwithstanding, guests who make reservations and those who walk in constitute an inventory from which managers can select the most profitable mix of customers. To do this, however, restaurant operators must forecast customer demand and manage the revenue generated from that demand.

Restaurant demand has two components - namely, the timing of the demand and the duration of that demand (that is, how long the meal lasts). As in most businesses, customer demand varies by time of year, day of week, and time of day. For restaurants, dinner demand may be higher on weekends, during summer months, or at particular times during the lunch or dinner periods.Restaurant operators must be able to forecast time-related demand so that they can make effective pricing and table-allocation decisions.

A special factor for restaurant operators is that they have to reckon with the length of time a party stays once it is seated.This factor is analogous to a hotel's having to forecast the number of guests who will stay an additional night, but the hotel still is selling an integral room-night to the stay over guest and not dealing with the often-unpredictable period that diners will stay at a table. If restaurant managers can accurately predict meal duration, they can make better reservation decisions and give better estimates of waiting times for walk-in guests.

5. Appropriate cost structure: Like hotels, Appropriate cost structure restaurants have a cost structure that features relatively high fixed costs and fairly low variable costs, although it's true that a menu item's food-cost percentage is usually higher than the variable-cost percentage associated with a hotel room. Like hotels, restaurants must generate sufficient revenue from each sale to cover variable costs and offset at least some fixed costs. Nevertheless, restaurants relatively low variable costs allow for some pricing flexibility and give operators the option of reducing prices during low demand times.

6. Segmentable customer:Like hotels , restaurants have some customers who are price sensitive and others who are not. For example, certain customers (for instance, students, families with small children, or people on fixed incomes) may be willing to change their dining time in exchange for a discounted price. Conversely, other customers are not at all price sensitive and are often willing to pay a premium for a desirable table at a desirable time. Restaurant operators need to be able to identify these two segments and design and price services to differentiate them and meet their needs.

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Authored and managed by Augustine, a hotelier with over 20 years of experience in the industry. He has a 3-year diploma with 'honors' from the American Hotel & Lodging Educational Institute and a Bachelor of Computer Application - BCA Degree.