An introduction to Restaurant Revenue Management

An introduction to Restaurant Revenue ManagementBy Bruce McAdams
January 12, 2011

Working as a young man at a dinner house in the 1980’s, I became very familiar with the term “bums in seats.” Unbeknownst to me, this would be my first introduction to Restaurant Revenue Management (RRM), a term introduced a dozen years ago by several academics that applied the concept of ‘yield management’ to restaurant seating practices. Fast forward to 2011 and the research shows there is much to be gained by operators taking a closer look at the ‘management’ of customers through their restaurant.

Although research in the field includes such popular topics as ‘demand-based pricing’ and ‘suggestive selling,’ two key components of RRM that are often overlooked by operators are capacity management and duration management. Capacity management refers to the maximizing of customers in the restaurant at any given time while duration management looks at the length of the customer’s visit.

Capacity management

Capacity management in a restaurant starts during the design phase ensuring the maximization of space allotted to the front of house while ensuring an effective seating design that promotes revenue generation. You can add a lot to your top line by creating a variety of table sizes that meet the customer mix while incorporating non-fixed seating for increased flexibility. A study of one restaurant by a Cornell researcher showed a revenue increase of 30 per cent when they changed their table mix to meet that of their customer mix.

Two very controllable aspects of capacity management are reservation and seating policies. While reservations have been standard at most fine dining restaurants, you can now find more and more upper casual restaurants offering them, many using software systems that allow customers to book online. To apply a more ‘scientific’ approach to managing a reservation system, it is important to collect as much data as you can in regards to cancellations, ‘no-shows’, ‘late-shows’, and ‘short-shows.’ Keeping track of this sort of information is how hotels and airlines have been able to overbook effectively for decades.

The accepting of large party reservations is also something to put lots of thought into. Studies have shown that although large parties typically have a higher average cheque, they also spend more time occupying seats in your restaurant. Arrival time is another large party issue with operators having to deal with ‘placeholders’ who show up early and occupy seats. Many operators have since shifted their policies so that they will only seat large groups when all members of the party have arrived. Duration management A key aspect of managing the ‘duration’ of a customer’s stay is proper staffing levels. Research has shown that by increasing the amount of support staff during peak occupancy, labour costs can in fact be lowered, a difficult concept for some operators to grasp. Although staffing levels play a key role in how long it takes to get a drink to a guest, or how long it takes to reset a table, there are other key factors involved in duration management. For instance, menu engineering plays a big part in managing the ‘dining times’ of customers. New kitchen management software systems that have been used for years in QSR establishments are now helping fast casual and even upper casual operators sort orders and deliver faster cooking and assembly times. Developing a strategy There are a few easy steps to remember when incorporating a successful RRM strategy in your operation. The first step is to do some research on all aspects of the concept – not just the ones you think you need to improve on. The second is to involve your entire management team in developing a strategy for improving your revenue management. Be sure to include any key employees involved in the management of the dining area. Last, set yourself up so you are able to measure the effects of what you do, and don’t be afraid to experiment. Not everything you try will work, but the research suggests a stronger top line will be the result of your efforts. About the author: Bruce McAdams (B.Comm, M.A. Leadership) is an assistant professor at the School of Hospitality and Tourism Management, University of Guelph. He is a fellow of the Ontario Hostelry Institute after more than 20 years leadership experience in the Ontario hospitality industry.

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