sha512: managing revenue with pricing school of hotel … · 2015-03-06 · sha512: managing...

SHA512: Managing Revenue with Pricing School of Hotel Administration, Cornell University

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In this course, we're going to be looking at pricing, and also we're going to be looking at implementation issues. And if you might remember, there are two strategic levers with revenue management: There is the length of stay, or duration, and there's the pricing. And so one of the things we're going to look at is, how do restaurants set their prices? Traditionally, restaurants do cost based pricing, but that doesn't take into account what customers want, or customer demand, or even competition. Another way to be looking at pricing is from a competitive pricing. So, you look at what your competitors do and then you kind of copy them. Maybe you say “I should be a little higher than them,” or “I should be a little bit lower than them.” But one of the problems with competitive pricing is that you are assuming that your competitors know what they're doing, and what if they don’t? And then the thing with revenue management that we look at is we look at demand based pricing - looking at, you know, what do our customers want? What are they willing to pay? And then coming up with appropriate pricing. And, in reality we're probably doing a combination, looking at costs - we want to make sure that we cover our costs, obviously - looking at what the competition does, but, you know, when it comes right down to it demand based pricing is what revenue management is all about. One of the things we're also going to be looking at with this is menu engineering. With menu engineering what we do is, is we go through and look at each of the items on the menu, and we look to see how many of them are we selling? You know, what's the price? What are our food costs on it? And by doing this we're going to be able to find the ones that are popular: that have a high profit margin on them. We're also gonna see ones that are not so profitable, and don't, and are, are not very popular. And how do we set our menu up so that we can maximize our revenue? Some of the other things we're gonna be talking about with regard to pricing is the thing called rate fences. And rate fences are the reasons why we charge different prices. So for example, most restaurants will have different prices between lunch and dinner, but can you have different prices by time of day other than just lunch and dinner? The answer is yes. Can you have different prices by day of week? So weekend versus week day pricing? Yes. Can you have different prices for children? Yes. And so we're gonna be talking about, how do you set these rate fences up, and also talking about how customers react to these different sorts of practices.



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And then we're gonna end up with probably the most challenging part of revenue management - that's the implementation. You’ve finished all these courses now, you're going to go back to work, and you're going to tell everybody, “it's time to change, you need to be doing restaurant revenue management.” Well it's not so easy as that. I mean, you've got to first of all be able to quantify what the possible impact is going to be, because you've got to to show it's going to make more money. You've gotta be able to talk people into doing it. So how do you get your servers motivated? How do you get the people in the kitchen motivated? What sort of training should you provide them? What kind of incentives should you provide them? And how best can you communicate this to people so that they get excited about it, so that you're able to implement all the great things that you've learned in this course?

Welcome to Cactus Café, an independent, mid-scale restaurant that specializes in Southwestern U.S. cuisine. Located in the suburbs of a large city, Cactus Café prides itself on the freshness of its food, its informal atmosphere, and its signature margaritas. It has been in business since 1998, and has grown in popularity each year that it's been open.

Cactus Café features a spacious 100-seat main dining room decorated in an understated Mexican-American style that makes business customers as well as casual diners feel equally at home. There is a full bar, where patrons gather to socialize during the restaurant's daily happy hour or to pass the time while waiting for a table. There's also a 30-seat outdoor patio that is popular during warm-weather months.

Cactus Café's menu features a mix of traditional Mexican fare—including fajitas, enchiladas, and tamales—and Southwestern U.S. cuisine such as barbequed ribs, chicken in a seasoned buttermilk coating, and shrimp sautéed in pasilla chilies. All of the food is cooked fresh to order and served with the customer's choice of warm nachos or steaming tortillas.

Over the past two and a half years, Cactus Café has grown from a specialty restaurant catering to a narrow clientele to a regional destination attracting a broad cross-section of the population. There are signs, in fact, that Cactus Café may have achieved more success than it's prepared to handle.

There is frequently a line of customers waiting for a table on weekday as well as weekend evenings, and the line on Friday and Saturday nights has begun to spill over into the parking lot. It's becoming more difficult to accommodate last-minute reservation requests, especially during peak weekend dining hours, and walk-up patrons have begun to complain about the long wait, which now averages 45 minutes during peak dining hours and sometimes exceeds



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one hour. Yet even while people are waiting, there invariably are empty tables in the dining room, and many of the tables that are occupied have empty seats.

In some cases, customers are also complaining that they're waiting too long after they've been seated for a server to appear; and they're waiting too long for their main courses to arrive.

Imagine you're the general manager of Cactus Café and it's your job to figure out how to reduce wait times and serve more customers more efficiently without jeopardizing the overall quality of the experience. How will you do it? The answer is by instituting a program of restaurant revenue management. Let's get started.

Summary

About the Restaurant Cactus Café is an independent, mid-scale restaurant located in the suburbs of a large city and specializing in Southwestern U.S. cuisine. It has a dining room capacity of 100 tables, a full bar, and an outdoor patio with an additional 30 tables. It prides itself in the freshness of its food, its informal atmosphere, and its signature margaritas.

Success Indicators Over the past two and a half years, Cactus Café has grown from a specialty restaurant catering to a narrow clientele to a regional destination attracting a broad cross-section of the population. There is usually a line of customers waiting for tables on Friday and Saturday nights, and frequently during the week. It's becoming increasingly difficult to accommodate last-minute reservation requests, especially for peak weekend dining hours.

The Challenge Despite the lines of waiting customers, Cactus Café doesn't seem to be operating at full capacity. Even while people are waiting, there are frequently empty tables, and many of the occupied tables have empty seats. Customers have begun to complain about the length of time they're waiting before being seated and about how long it takes after they're seated before a server appears. They're also complaining about how long they're waiting between courses, and, after finishing their meal, the length of time they're waiting before the check appears.



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What is Price Discrimination?

Does one price fit all? According to the concept of price discrimination-no! In many circumstances, the seller is able to charge different prices to different consumers for reasons that are not associated with production costs.

Types of Price Discrimination

Price discrimination introduces variations in price that are not reliant on differences in the quality of the product or service. Sellers have various approaches at their disposal to encourage consumers to buy their products.

Among them:

Personalized pricing: Every buyer pays the price he or she is willing to pay, as at an auction or bazaar.

Coupons and rebates: Price-sensitive people are motivated to spend with these incentives, and price-insensitive people won't be motivated.

Group pricing: Buyers are segmented into categories such as students, seniors, and children, and prices are made available to those buyers by category.

Peak-load pricing: When the demand is high for some periods and low for others, the price should vary accordingly. That is, prices can be higher at high-demand, or peak-load, times. Examples of peak-load pricing include matinee prices, early-bird specials, daytime electricity costs, and weekend ski resort prices.

Benefits of Price Discrimination

Price discrimination has various benefits.

Benefits to the seller:

Increases total revenue and profits Helps to off-load excess product Can be used as a technique to take market share away from competitors.



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Benefits to the consumer:

Price-sensitive customers can be "priced into the market" when, with one price, they might not have been able to afford a product.

Conditions Necessary for Price Discrimination

For price discrimination to take place, the seller must exercise some price control over the product or service. Also, the seller must be able to distinguish among customers who are willing to pay different prices or who differ in their responsiveness to changes in price. This allows the seller to charge a higher price to those consumers with a relatively inelastic demand and a lower price to consumers with a more elastic demand.

Conclusion This presentation has shown how price discrimination can allow the seller to charge different prices to different consumers. Remember, price discrimination is based on a consumer's willingness to pay.

What is Price Elasticity?

Demand is the relationship between the price of a product and the quantity that consumers will purchase of that product at that price. If consumers are purchasing large amounts of the product at its current price, demand is high. If consumers are not purchasing the product at its current price, demand is low. The tendency for demand to change with changes in price is the price elasticity of demand.

Elasticity of Demand

The price elasticity of demand is simply the change in the quantity of product purchased as a function of the change in the price of the product. When demand is inelastic, consumers are unresponsive to changes in the price of a product or service. Inelastic demand indicates low competition and highly differentiated services.

Which Products Have Elastic Demand?

When demand is elastic, consumers are more responsive to price changes. Elastic demand indicates high competition and standardized services.



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Variations In Elasticity

Different consumer groups differ in their willingness to pay for a product or in their responsiveness to changes in price. Variations exist even among people at the same income level, and the challenge for the seller is to be able to distinguish between buyers who are willing to pay a high price and those who are not. A moderately expensive restaurant meal, for instance, is a highly elastic selection for a family on a budget. The meal might be viewed as a luxury or special treat. The same moderately expensive restaurant meal would be less elastic for the business traveler who dines in restaurants several days a week-even if that traveler is cost-conscious.

Price Sensitivity and Elasticity of Demand

In the meal example, the availability of disposable income is probably a significant factor. But keep in mind that having that income does not guarantee a willingness to spend! For example, consider a great restaurant in a good location in a busy resort town. It serves excellent food and provides great service, yet it suffers from low seat occupancy and poor revenue. This restaurant guessed wrong regarding the price-sensitivity of the resort visitors! Though the resort visitors have disposable income, they prefer dining at nearby restaurants where the food and prices are both reasonable.

Conclusion

As you have seen here, demand may change with changes in price. This is price elasticity of demand. The danger that enterprises face is that they may guess wrong regarding consumer groups and the elasticity of demand.

Isn't the menu price just determined by food and labor costs?

Well, traditionally that's the way it's done. So we normally go through and look at our food and our labor costs and we add on a certain percentage. But, just because that's the traditional



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approach doesn't necessarily mean it's the best approach, because you also want to be looking at some other stuff such as the demand. So let's say you've got a menu item that's really, really popular—people like it a lot—you might be able to get away with raising the price a little bit. Same thing if you've got Friday and Saturday nights that are really, really busy, perhaps you might consider having a special weekend menu, which might have slightly higher prices on it. And the key thing here is looking at demand-based pricing rather than cost-based pricing.

Won't my customers get upset if I charge different prices?

Well, it depends how you do it: There's been some research done that shows that customers are really quite willing to accept different prices, depending on the way that you frame it and as long as the rules are clear. So, for example, lots of restaurants offer lower prices at lunchtime than they do at dinner, or we offer lower prices during a happy hour than we do during a regular period, or perhaps, during the early-bird special.

I did some research recently in three different countries: we looked at how customers reacted in Singapore and in Sweden and in the U.S., and we found that customers were actually pretty open to different pricing by time of day, and day of the week—a lot more open to it than you might expect. The other thing, too, if you do decide to go ahead and charge different prices, the key thing you want to do is be presenting your prices as a discount rather than as a premium. So, for example, let's say that you have higher prices on the weekend than you do during the week, you don't want to be saying, "If you come on Friday and Saturday night, you'll be paying more."

What you want to be saying is that if you come during the week, you'll be paying a whole lot less. And the research that we've done, we've found that customers are a lot more open to having it framed that way, as a discount, than having it framed as a surcharge.

What is menu engineering?

Well, menu engineering is kind of a way of looking at the different menu items on your menu and figuring out the best price. And when you use menu engineering, you've got to look at several things. The first thing is how much of each of your menu items are you selling; then you also want to look at, well, how much are you charging for each of them, and then how much does it cost you. And if you know how much you're charging and you know how much it costs you, then you can figure out your contribution margin. And so we know the combination of how much you're selling, how much you're making on it, then we can go ahead and look at, there are some items that are so popular, that you might be able to get a little bit higher contribution margin on them.

So perhaps you can perhaps raise the price, you can highlight them on your menu, perhaps you have some items that aren't very popular at all, and you're not making very much money on



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them, perhaps with those you might want to go ahead and take them off the menu. Or at the same time, you might have some items where you make a whole lot of money on them, but they aren't very popular, and with them, you might want to consider, perhaps, changing the name of the item, you might want to consider dropping them from the menu, trying to figure out what's going on. It's a good way of going through and analyzing your menu and figuring out which are the ones that are popular that you're making money on, and, perhaps, raising the price on the ones that are very popular.

What is competitive pricing?

Well, with competitive pricing—and we see this all the time in the airline industry, where they go ahead and look to see what the other airlines are charging—but basically, it's looking around to see what your competitors are charging, and then charging kind of what they are and maybe adjusting your price accordingly. So let's say, for example, you've got a restaurant nearby you, and your restaurant is actually, perhaps, a little bit nicer than theirs. Maybe you want to have your prices be 10,15% higher than them. Or conversely, you might have a restaurant nearby which is a little bit nicer than yours, and maybe you want to position yourself a bit lower. Of course, the problem with competitive pricing is that you're assuming that your competition knows what they're doing, and if they don't know what they're doing and you end up following them, you could find yourself in a lot of trouble.

Although demand-based pricing is an important strategic lever in revenue management, some restaurant managers have been reluctant to use it. The fear is that demand-based pricing might be viewed as unfair by customers, and restaurant managers know that perceived unfairness can result in a loss of business.

How can this somewhat risky approach—demand-based pricing—be salvaged? The answer can be found in rate fences.

Rate fences are an approach to demand-based pricing that addresses the issue of perceived fairness and provides a way for revenue management to be implemented with reduced risk. With rate fences, consumers segment themselves into market groups based on their willingness to pay, their behavior, and their needs. This method is perceived as fair.

Types of rate fences include:

Physical rate fences. Will customers pay a higher price for table location, view, or amenities?



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Product line rate fences. Some customers may pay more for a top-of-the-line product, whereas others will pay only the low-end price.

Controlled availability rate fences. These fences allow customers with coupons to pay less, provide special prices by direct mail, make discounts available by geographic location, restrict prices based on place of purchase, and/or provide better prices only to those who ask.

Buyer characteristics rate fences. These fences make prices available according to age (for instance, only to seniors), by institution type, by user status (frequent customers might pay less, or get free-of-charge extras), and by ability to pay.

Transaction characteristics rate fences. These fences make prices available according to time of purchase. For instance, weekend dinners might cost more, or meals consumed before 6:00 PM might cost less. Customers who make a reservation over a month ahead of time might pay less.

These fences also may make prices available based on place of purchase and quantity of purchase.

Rate fences offer consumers discounted prices but impose rules and regulations, too. Well-constructed rate fences balance the perceived value for the different market segments, and avoid automatically offering a lower price to customers who are willing to pay full price!

To be perceived as fair, fences need to be logical, transparent, up-front, and fixed so that they cannot be circumvented.

In this presentation, you have seen that rate fences provide an approach to demand-based pricing that addresses the issue of perceived fairness and provides a way for revenue management to be implemented with reduced risk.

Name: John Alexander Title: Former Owner, Coyote Loco, Ithaca, NY, USA

Mr. Alexander is the founder and former chief executive officer of The CBORD Group Inc., a systems integration firm and the world's largest supplier of software for food and nutrition services management. In addition, John Alexander and his wife Elaine Alexander were the co-owners of Coyote Loco Restaurant and Cantina in Ithaca, NY.



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What are some examples of major market segments you serve at Coyote Loco?

Well, Ithaca's a diverse community and presents some interesting marketing challenges with respect to market segmentation. The first and most obvious market that we serve is that of students. The student population varies dramatically throughout the seasons and so one has to adjust one's operations to reflect that. In addition, the faculty and staff of the three colleges in our geographic area affect our business. And then, in addition, we have lots of visitors to campus, who form a wonderful opportunity to cater to the walk-in, who often pays full price, and during the summer months we have a variety of executive education programs at Cornell, that are primarily adult learners and who are looking for interesting places to dine out. So each of these is a separate and distinct market that we try to address through our marketing and through pricing and promotion.

Have you discovered any misconceptions in your approaches to market segments?

One of the interesting misconceptions in the restaurant business in Tompkins County is that because we need to cater to the student population, we need necessarily deal with a very low average check. In fact, the average check from our students is much higher than in any of our other market segments, except for executives in education programs. The students have lots more money to spend and they spend it. As we became more aware of the importance of the student segment, one of the things we had to do in our restaurant was to upgrade the quality of our bar pour liquors, in order to provide them with access to the premium brands that they are accustomed to.

Do you use a one-price approach, or something more complicated?

We do use something more complicated and one of the approaches that we use is the traditional happy hour. Since the beginning for our restaurant we did not want to offer two-for-one drinks, and so we began offering a drink with a wooden nickel, that would allow you to then redeem the nickel at a later time. This didn't encourage the drinker to necessarily consume both drinks in the same visit. And this has worked well over the years. During the time when New York State was revising its laws with regard to happy hour, we had to tweak this several times and in the end, we found that the wooden nickel was probably the best approach if you want to offer drinks at a significantly reduced price. However, we also found that our happy hour periods were in fact our hot periods for several days of the week. And, by offering such a deep discount we weren't really accomplishing a good financial performance because we were unable to get enough people into the restaurant in order to generate a suitable profit. Combination of the increased price of tequila over the past five years due to both shortages in Mexico and changing demand patterns for tequila has made it virtually impossible to sell a margarita for two dollars and fifty cents to make any money on it at all. And when you're during a hot period where the consumers of those beverages are taking up valuable seats where diners could otherwise be enjoying a full-price entrée, you've created a situation that is self-



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destructive. So, we have restrategized with respect to happy hour, and we are now offering a variety of different happy hour specials, featuring reduced prices on individual drinks, considerably lower reductions-perhaps a dollar off-as well as providing food specials during happy hour. So we've tried to liberalize the meaning of the word "happy hour" beyond the traditional approach of just reducing the price of drinks. And so far that's paid off very well.

Have you had success creating effective rate fences?

It's certainly true that we only have a limited number of levers that we can tweak in the restaurant without incurring great expense of rewriting the menu and printing new menus each and every day. We have specials, and then you have happy-hour-type promotions. So one of the rate fences that we have used effectively in recent times has been limiting happy hour pricing to beverages consumed in the cantina only. And at first many of our customers would say: Well that's not fair. We should be able to drink wherever we wish. But in fact, tables and chairs in the dining room are in short supply during hot periods, and so we simply limited the premise to the cantina, and said that the happy hour pricing applies to drinks consumed in the cantina. That rate fence allows us to get better table turns in the dining room, to get a higher average check in the dining room, and ultimately to maximize our RevPASH, which is the uber-objective.

Do you offer specials?

When you look at revenue management in a restaurant, you have to consider not only pricing, and rate-fence-type issues, but you need also to consider the critical path that a food product must go through in order to reach the customer. And one of the challenges we experienced early on with respect to revenue management, was that the specials that we were creating were indeed very special. Very complex, very difficult to prepare, and they slowed the kitchen down during our peak periods. Worse yet, we thought the best time to offer those specials would be on Friday and Saturday nights. So what this created in fact was longer lines, longer table turns, and lower profitability, and lower RevPASH for the times when we had the greatest opportunity. So, since then we have learned that it's much more productive to come up with simpler specials, to assure that, while they are simpler, they are sufficiently special to garner a premium price, and to offer these on Friday and Saturday nights.

When a restaurateur thinks about what to offer as a special you have to keep in mind that it has to be special to two different constituent groups: one is your customers, and the second is your shareholders.

What challenges have you faced in implementing variable pricing?

When one uses techniques such as happy hour, and special entrée promotions in order to attract new customers, one of the risks that one runs is that customers will discover and



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understand your strategy and will carefully show up for dinner during happy hour, splitting an appetizer and two drinks for the price of one and calling it dinner, while occupying a table for anywhere from one-and-a-half to two hours. These customers are a bit of a challenge for us, particularly during our hot periods.

What are your reservation policies?

Once we began to learn about the principles of revenue management, one of the biggest changes that we made that had a positive impact was the change in our reservation policy. Previous to revenue management at Coyote Loco, we would accept reservations at any time for any party. And we learned that parties of five or fewer were problematic because quite often they would not show up, or they would show up considerably later than they had anticipated, and we would have customers come to the door looking for a table, observing that a third of the tables in the dining room were empty, and being greeted with the information that, I'm sorry we have no tables available for you. By changing our strategy to accept reservations for only parties of six or more, and instead using a call-ahead, or a priority-seating strategy for groups of five or fewer, we've been able to clear that bottleneck and fairly dramatically increase our table-turns, and our overall RevPASH.

Do you offer freebies?

In most Mexican restaurants, it's traditional to offer chips and salsa with the meal at no charge. When we first opened Coyote Loco we began to charge for these, and found tremendous resistance. We then tried to offer low-fat, baked chips as an alternative, thinking that the sophisticated Ithaca community would go for this. Virtually no one bought the baked chips. So we returned to free chips and salsa with every meal. One of the problems in providing free chips and salsa is that it discourages people from ordering appetizers. During your slow periods, you'd really like to upsell the appetizers. So one of the strategies that we learned from revenue management was that by removing the chips and salsa from the table during the slow period, we gave the server an increased opportunity to upsell the appetizers. If the customer asked for a bowl of chips and salsa, of course, we'd provide it, but we would try first to upsell the appetizer. The upside of this has been that we've increased our revenue as a result of that upselling, the downside is that there are some customers who do observe that on a Friday night, they're offered chips and salsa, because that's a hot period, but on a Monday night, they're not. And those customers wonder whether or not this is just a lack of training on our part, or simply inconsistency in our service. In fact, it's our strategy, and we've decided that we're going to stick with it.



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It's time to choose a new revenue management strategy. Before you can make an informed decision, you'll need to calculate the financial impact this strategy could have on your operation. Looking carefully at impact will help you decide among strategies and, once you have decided, help you frame your expectations.

To perform a financial analysis, you need to be able to calculate changes in revenue based on changes in the number of seats filled and the amount of the average check. This presentation will show you how!

These calculations will focus on revenue generated during hot hours. Hot hours are the times when restaurant revenue management strategies will have a significant effect. To calculate an increase in hot revenue, first find the current hot revenue, which will be the basis for comparison.

To find hot revenue, use the relationship:

hot revenue = (seat occupancy) * (seats) * (hot hours/avg dining time) * (average check)

This value is the hot revenue generated per week before any new strategies are implemented.

The equation shows that hot revenue is equal to the number of seats filled, multiplied by the number of times you fill those seats during hot hours (that is, hot hours divided by average dining time), multiplied by the average check amount. This makes sense—seats multiplied by dollars! Now put in the values and find the revenue amount.

hot revenue = 65% * 100 seats * (10 hot hours/1 hour dining time) * $20 average check = $13,000

This is the hot revenue before implementation of new strategies.

Looking at the relationship used to calculate hot revenue, it's obvious the final value can be increased by:

Increasing seat occupancy Decreasing dining time Increasing average check Adding seats Increasing number of hot hours.



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Consider the impact of increasing seat occupancy. If seat occupancy is increased from 65% to 70%, the resulting increase in hot revenue is the difference between the hot revenue at 65% and hot revenue at 70% seat occupancy. Hot revenue at 65% seat occupancy was calculated earlier. It is $13,000.

As you can see, the same simple relationship between revenue, seats filled, and price can be used to calculate different approaches to increased revenue. Increases in seat occupancy and average check result in increases in hot revenue.

This presentation has shown how to calculate changes in revenue based on changes in dining time, seats filled, and average check. This kind of calculation will help you evaluate restaurant revenue management strategies. If the strategy won't increase revenue by much, there is little sense in trying it. If the strategy will increase revenue by a lot, then that strategy is probably a good choice—and the costs associated with implementation will be easier to justify!

Before selecting a restaurant revenue management strategy—especially one that could involve significant implementation costs—calculate a return on investment. A return on investment calculation will help you and your team see the revenue-generating potential of the plan alongside the expense of implementation. This will help you make a good financial decision regarding whether or not to implement. As an example, assume that in order to implement a particular strategy, you will incur costs totaling $50,000: about $49,000 in capital expenses and about $1,400 in smallware expenses. This is significant! For management to approve the expense, it must be clear that this amount (and more!) will flow back into the restaurant as a result of implementing the plan. Assume also that hot revenue increases projected for post-implementation are calculated to be about $2000 per week, or over $100,000 in one year. (This is the amount that is calculated in Financial Analysis and Looking at Costs.) At this rate, the restaurant could expect to see a return on its $50,000 investment in about six months—a very good result! Many restaurants will want to see a return-on-investment time frame of one year or less. This kind of simplified return on investment calculation is useful before you implement. It's also important to do a similar calculation with actual figures after the strategy is in place, to see how you're doing! That way, you can see if your projections were correct.



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To measure the financial impact of the revenue management program, one restaurant gathered financial data for the six-week period prior to implementation and the six-week period following implementation. Then, they compared these numbers to similar data for competitor restaurants over the same time period. After implementing its revenue management program, this restaurant showed a net increase in revenue of 7.7%. Meanwhile, over the same six-week period following the implementation, competitor restaurants showed a net increase of only 2.6%. The restaurant concluded that about 5.1% of its total revenue increase of 7.7% was directly attributable to its revenue management program. Was this a sizable enough increase to justify the expenses associated with implementing the program? Let's see. A 5.1% increase on total sales of about $2,000,000 is an increase of $102,000. The cost of the project was about $50,000. The restaurant saw a return on its investment in less than six months! Again, this return-on-investment time frame is very good.

Introduction

You've chosen to implement a new strategy for restaurant revenue management-what now? As you plan your implementation, remember the importance of monitoring the impact of the change. In fact, plan to monitor the impact on an ongoing basis.

In order to see changes that occur as a result of the implementation, it's necessary to gather data on your operation BEFORE the implementation begins. A pre-implementation analysis should be designed to provide the data needed. Then, when implementation is complete, subsequent sets of data can be collected for comparison. Pre- and post-implementation data sets analyzed together should provide a measurement of the impact of the strategy.

Pre-implementation

Let's look at an example of how one restaurant was able to monitor the impact of a new restaurant revenue management strategy. According to this restaurant's action plan, the two goals for implementation were to

Increase seat occupancy to 60% by redesigning table mix



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Decrease meal duration by 5 minutes by making improvements to aspects of the end-of-meal period.

Pre-implementation - Seat Occupancy

Given these two goals, the restaurant manager collected two sets of data pre-implementation. The seat occupancy data shows that the average hot occupancy was about 50%.

Pre-implementation - Time Study

The time study data shows that the average meal time was about fifty-three minutes and fifteen seconds (though it could vary quite a bit!).



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Post-implementation - Seat Occupancy

About seven weeks after implementation, new data was collected. The new average hot occupancy is now 59%! That's a 9% increase.



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Post-implementation - Time Study

The new time study data shows that the average meal time has decreased to fifty minutes and fifty-six seconds. The new strategy has reduced the average meal time by over two minutes, and has resulted in a less-variable duration, too. Both results are good for revenue management!



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Finally, what can we learn from an operation's financial data? In this example, a restaurant compares its financial performance at a point 7 weeks before implementation with its performance at a point 7 weeks after implementation. In addition, data from similar restaurants are used to adjust for changes in the market. In this example analysis, a revenue increase of 5.1% is computed. This is a good result!



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Conclusion

Financial data also contributes to the calculation of the return on investment, which is another aspect of post-implementation analysis. Seeing the impact of the new strategy and calculating the resulting increase in revenue help you to define the success of the project. Remember to monitor the impact early and often, as you hone your revenue management strategies.

Introduction

You've chosen to implement a new strategy for restaurant revenue management. Management and staff will play an important role in making the strategy successful, so remember to include them in your plan.

Management

Get top management commitment! If top management doesn't show a visible commitment, any restaurant revenue management program is doomed to failure. Commitment can be shown by

Attending restaurant revenue management meetings and displaying support. Recognizing the efforts of those involved.

Top management doesn't necessarily have to perform duties related to restaurant revenue management. Instead, it is important that they SHOW they are committed to the ideas.

Sometimes restaurant revenue management is regarded as just a "computer fix," and management fails to consider the role of the team. Without strong management, employees



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and managers may return to their old ways and the impact of restaurant revenue management may be diminished.

A lax approach by management will impact the project negatively. To promote success, managers should receive a bonus based on RevPASH or revenue.

Staff

Motivate the front-of-the-house staff. In American markets, tipping usually serves as a good motivation for front-of-the-house staff. In non-American markets, service charges (if shared with the staff) can also be a good motivator.

Back-of-the-house staff (if they do not share in the service charge or tips) can be motivated by the opportunity for increased hours.

Set up incentives so that when employees are working in a way that serves their best interests (e.g., toward the highest tips or service charge), they are also helping the restaurant achieve maximum revenue.

Train your staff in new practices implemented with restaurant revenue management. For instance, time standards for each service step should be developed and measured. Answer questions like: how long should it take to greet the guest? How long should it take to deliver their entrée?

All employees should be trained in the basics of revenue management and should be familiar with the concept of hot and cold hours. Training should include:

Strategies to employ during hot hours and during cold hours Hot and cold strategies relevant to each position How to know whether you are in a hot or cold hour. (Often, a simple approach is best,

e.g., all Friday and Saturday nights are hot and all other nights are cold.)

Staffing and Management

As you plan your implementation, remember the importance of management and staff in making the strategy successful. Inform, motivate, and train!



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Did your staff adjust well to the changes introduced by revenue management?

I think we've always focused on service; we've always focused on building the check average and on service beyond expectations. As far as our staffing and their tip revenue, I think we really had to fine-tune that area; we had to really focus our staff on. . . it's not an option—we have to be so much better because we are going to be moving faster, we are going to be turning tables quicker, so you will have smaller stations because of this, and especially, initially, because we did not know what was going to happen with the new floor plan.

And, I think just in our overall training on being the best, we really, really focused in that area with our staff. Their biggest concern, I think—with adding all the tables and the new sections and changing things—was their pocketbook, which it always is with tipped employees.

And, I think, we addressed that initially and, really, we focused on coaching and developing our staff—the older staff and definitely the staff coming in.

Did you develop job aids to help people adjust to the changes?

You know, we did do some laminated sheets, we did some role-playing, we do our super sales. We have these great meetings on Friday, in the morning and in the evening, because that's our largest staffing day. And we really. . . we bring all our staff in early and we have these wonderful meetings that can. . . we go probably 30 minutes on these meetings, and they're just little training seminars, which we tend to forget, in the restaurant business.

And we do two a week, and I think that has really helped the staff. I think it helped them adjust to what was going to happen, what was happening at the time, and definitely calmed their fears about not making as much money or being busier, or, you know just, there was a lot going on in the store with the construction, and it definitely gave everyone a chance to talk and ask questions and answer questions.

Was change difficult for the staff?

We were really a training store in this location here, and we are used to having multiple management trainees in this store. And, like I said, we do have a long-term staff, and so changing the store is just something they take in stride.

And once we calm the fear about the pocketbook—you know, looking at what is going to happen to their livelihood, their money—everyone was very happy about it. We got a partial



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remodel, which really gave us a face-lift, along with the new floor plans, and it really, it excited everybody.

New is new: it's like wearing a new outfit, and everybody kind of got a new sense of pride with this program, and we see it in our sales.

How did you justify the expense of implementing these changes?

We looked at it as an investment. And, although we did have some extra hours incurred that were specifically directed at this program, it was ongoing training through the shift, too.

I mean, we talk about it all the time—we, as a management team, we definitely stood back and just kind of reviewed what was happening in the restaurant and where we could change things for the better. So, I don't think the investment was as costly, as far as training in this store.

And I think it's an investment: I think when we get done with the end of this year, it's definitely going to. . . it definitely benefited this unit.

Are you anticipating any particular challenges as a result of implementing the changes?

I think the last five, six months. . . I think that has definitely set us up for this season. Like I said, there probably will be some surprises, but we are definitely staffed and we're expecting those, so nothing will knock us off our feet, we hope.

We definitely have set ourselves up for success, just in case there are some changes or staffing needs, or, you know, things to be moved around. I think—something I might add is, talking about this—is that, you know, this was a building that was already in business when the revenue management program came about.

So, certain things, we have our kitchen staff and our kitchen building that is limited—you know, there is only so much space without doing a remodel. So, we have definitely gotten creative on positions in the back. And I think through the Christmas holiday, we will have to accomplish more in less space, and I think we're looking forward to that challenge.

But I think in a new unit—even the revenue management program in a store or a restaurant that has not opened—taking these results and starting out from day one, knowing that you would have to have more space, or, it may even make the process that much easier.

sha512: managing revenue with pricing school of hotel … · 2015-03-06 · sha512: managing...

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