Cornell University School of Hotel Administration The Scholarly Commons Articles and Chapters School of Hotel Administration Collection 6-1998 Restaurant Revenue Management: Applying Yield Management to the Restaurant Industry Sheryl E. Kimes Cornell University, [email protected] Richard B. Chase University of Southern California Sunmee Choi Cornell University, [email protected] Philip Y. Lee Cornell University Elizabeth N. Ngonzi Cornell University Follow this and additional works at: https://scholarship.sha.cornell.edu/articles Part of the Food and Beverage Management Commons Recommended Citation Kimes, S. E., Chase, R. B., Choi, S., Lee, P. Y., & Ngonzi, E. N. (1998). Restaurant revenue management: Applying yield management to the restaurant industry [Electronic version]. Cornell Hotel and Restaurant Administration Quarterly, 39(3), 32-39. Retrieved [insert date], from Cornell University, School of Hospitality Administration site: http://scholarship.sha.cornell.edu/articles/460/ This Article or Chapter is brought to you for free and open access by the School of Hotel Administration Collection at The Scholarly Commons. It has been accepted for inclusion in Articles and Chapters by an authorized administrator of The Scholarly Commons. For more information, please contact [email protected]. If you have a disability and are having trouble accessing information on this website or need materials in an alternate format, contact [email protected] for assistance. Restaurant Revenue Management: Applying Yield Management to the Restaurant Industry Abstract The crucial element in a strategy for boosting restaurant revenues may be to relate prices to the length of time guests spend at the table. But, as the Witch of the West told Dorothy, the issue is how to do it. Keywords restaurant industry, revenue management, yield management, strategies Disciplines Food and Beverage Management Comments Required Publisher Statement © Cornell University. Reprinted with permission. All rights reserved. This article or chapter is available at The Scholarly Commons: https://scholarship.sha.cornell.edu/articles/460 Restaurant Revenue Management Applying Yield Management to the Restaurant Industry The crucial element in a strategy for boosting restaurant revenues may be to relate by Sheryl E. Kimes, prices to the length of time guests spend at the table. But, as the Witch of the West told Richard B. Chase, Sunmee Choi} Dorothy, the issue is how to do it. Philip Y Lee, and Elizabeth N. Ngonzi p ■ wk esearch in revenue manage- restaurant operators to gain the ment has heretofore addressed the benefits of strategic revenue man- theoretical and practical problems agement that they currently lack. facing airlines and hotels, among Our objective in this paper is to other industries, but has given little develop the framework for such a consideration to the restaurant in- theory. We discuss the necessary dustry.1 The restaurant business is conditions for revenue management, similar enough to hotel and airline the strategic levers available for rev- operations that restaurants should be enue management, how they have able to apply revenue-management been applied in traditional revenue- principles. Indeed, many restaurants use various revenue-management— Sheryl E. Kimes, Ph.D., is an type practices, but the application associate professor at the Cornell has so far been mostly tactical. We University School of Hotel Administra- believe that a broad theory of rev- tion. Richard B. Chase, Ph.D. , is a enue management would permit professor at the University of Southern California—Marshall School of Business. 1 For a review of revenue-management litera- Sunmee Choi is a Ph.D. candidate ture, see: Sheryl E. Kimes,“Yield Management: A Tool for Capacity-Constrained Service Firms,” at Cornell. Philip Y. Lee holds a Journal of Operations Management, Vol. 8, No. 4 Master of Management in Hospitality (1989), pp. 348-363; or Lawrence R. Weatherford degree from Cornell, and Elizabeth N. and Samuel E. Bodily,“A Taxonomy and R e- search Overview o f Perishable-Asset Revenue Ngonzi, M.M.H., is a master’s degree Management: Yield Management, Overbooking candidate at Cornell. and Pricing,” Operations Research, Vol. 40, No. 5 (1992), pp. 831-844. © 1998, Cornell University 32 HOTEL AND RESTAURANT ADMINISTRATION QUARTERLY FOCUS ON FOOD SERV management settings, and how they, taurants have some flexibility to requires an effective computerized along with some tactical tools, can crowd a table with an additional seat or manual reservation system. be applied to restaurants. if necessary, and the restaurant’s cost Perishable inventory. One of adding additional capacity in the might think of a restaurant’s inven- Defining Revenue Management form of tables or seats (say, by tory as its supply of raw food, but Revenue management is the appli- reconfiguring the dining room) is most of that is not perishable until it cation of information systems and lower than that of many businesses is removed from the freezer or sit- pricing strategies to allocate the that typically use revenue manage- ting on the receiving dock. Instead, right capacity to the right customer ment. Most restaurants have a fixed restaurant inventory should be at the right place at the right time.2 number of tables, but can vary the thought of as time—or, in this case, In practice, revenue management number of seats depending on the the time during which a seat or has meant determining prices ac- mix of party sizes. In addition, some table is available. If the seat or table cording to predicted demand levels restaurants might increase capacity is not occupied for a period of time, so that price-sensitive customers during warm weather by using out- that part of the restaurateur’s inven- who are willing to purchase at off- door dining. tory perishes. This is the key to our peak times can do so at favorable Adjusting kitchen capacity is strategic framework, and it is the prices, while price-insensitive cus- generally more expensive than add- element we believe has been missing tomers who want to purchase at ing tables, although kitchen output in most approaches to restaurant peak times will be able to do so. can often be increased by changing revenue management. Instead of The application of revenue manage- the menu (e.g., by selling only items counting table turns or revenue for ment has been most effective when that can be prepared quickly) or by a given day part, restaurant operators it is applied to operations that have increasing staffing levels so that should measure revenue per avail- the following characteristics: rela- more food can be prepared. Still, able seat hour (RevPASH). This tively fixed capacity, predictable one can consider the kitchen capac- measure captures the time factor demand, perishable inventory, ap- ity to be relatively fixed because of involved in restaurant seating. propriate cost and pricing structure, the expense of adding equipment. Many restaurants evaluate manag- and demand that is variable and Although service capacity can be ers and servers based on average uncertain.3 Those attributes are increased by adding staff or by re- sales per customer. This is equivalent generally found in some form or ducing meal duration, the limita- to hotels’ measuring effectiveness by another in the restaurant industry. tions of the kitchen and dining ADR without paying attention to Relatively fixed capacity. Res- room may make that change fruit- occupancy. While knowing sales per taurants’ capacity can be measured less. Thus, although restaurant op- customer or contribution margins by seating, kitchen size, menu items, erators can tweak their capacity, it is of menu items is valuable, those and staffing levels. Most restaurant essentially fixed. measures do not provide the infor- operators’ approaches to optimizing Predictable demand. Setting mation on revenue generation that revenue primarily involve filling the aside carry-out activities as a sepa- R evPASH would give. seats to capacity and turning tables rate business, restaurant demand Appropriate cost and pricing as quickly as possible, but that effort consists of guests who make reserva- structure. Like hotels, restaurants can be limited by the kitchen, by tions and guests who walk in. Both have a cost structure that features the menu design, or by staff mem- forms of demand can be managed, relatively high fixed costs and fairly bers’ capabilities. but different strategies are required. low variable costs, although it’s true Seating capacity is generally fixed In sum, guests who make reserva- that an item’s food-cost percentage over the short-term, although res- tions and those who walk in consti- is usually higher than the cost of tute an inventory from which man- opening a hotel room compared to agers can select the most profitable the revenues from that room. Like 2 Barry C. Smith, John E Leimkuhler, and Ross M. Darrow, “Yield Management at Ameri- mix of customers. To forecast this hotels, restaurants must generate can Airlines,” Interfaces•, Vol. 22, No. 1 (1992), demand and manage the revenue it sufficient revenue to cover variable pp. 8—31. generates, a restaurant operator costs and offset at least some fixed 3 Kimes, pp. 348-363; and Robert G. Cross, Revenue Management (New York: Broadway needs to compile information on costs. Nevertheless, restaurants’ rela- Books, 1997). See also: Robert G. Cross, the percentage of reservations and tively low variable costs allow for “Launching the Revenue Rocket: How Rev- walk-ins, guests’ desired dining some pricing flexibility and give enue Management Can Work for Your Business,” Cornell Hotel and Restaurant Administration Quar- times, and likely meal duration. operators the option of reducing terly, Vol. 38, No. 2 (April 1997), pp. 32-43. Tracking customer-arrival patterns prices during low-demand times. June 1998 • 33 Time-variable demand. Cus- unpredictable duration of customer Exhibit 1 tomer demand varies by the time of use, which inhibits their ability to Methods of managing year, by the week, by the day, and by manage revenue.